Today Netflix announced that their new pricing strategy (announced in July) will generate the company’s second-only quarter-on-quarter loss of subscribers. With sharp increases in the price for physical delivery of DVD and a modest reduction in the streaming-only option, more than a million subscribers are leaving the company. Bad news some say.
Good news I say. For Netflix. What Netflix is doing is bold but strategic. It is obvious that delivering physical media is far more costly then streaming, and if you care about your bottom line, reducing cost is good. The bold part is that they use the most underused and misunderstood tool in the toolbox – pricing – to encourage and condition customers behavior.
I don’t think any of us doubt that DVDs and BluRay eventually will go the way of 8-track audio cassette and VHS tape. To be replaced by streaming video services. And Netflix wants to help the market accelerate that transition. Why? Well, streaming is more accessible and convenient for customers and the cost of huge warehouses, handling and postage needed for the physical media is substantial.
There is another twist here. Netflix killed Blockbuster and the video rental stores. Amazon and Apple are building out streaming services as fast as they can. If Netflix did not lead that transition, there is a grave risk they also would be superseded by companies with far greater resources. A risk they decided not to take. The only competition you need to eventually kill your existing business is yourself. Because if you don’t do it, somebody else will.
So stop and think about this for a second. Do you, in your company, use price strategically to drive customers to your desired product or service? Something more profitable, maybe? Something strategic, maybe? And if you don’t why not?