Netflix cannot simply tell consumers that they need to change their habits or pay a price when the foundation of the service was home video delivery with tangible optical discs. A better customer relationship management focus is clearly called for in this case study…
This gives them instant access to tangible video copies (not streaming video) that even Netflix could not provide without a day or two wait for the mail system to deliver videos. As such, subscribership began to drop as Netflix was not providing cost incentives to avoid brand defection by once loyal consumers. This led to media coverage that was very negative in which investor confidence began to fall, along with outlook for continuing subscribership and revenue growth, which plummeted the stock from $236 in September 2011 to only $66 in December 2011. Media coverage showing many negative factors about a business model has very substantial impact on consumer perceptions about a brand.
While all of this negative publicity was occurring, Netflix was also realizing that its operational costs were steadily increasing, therefore the business would have to raise prices in order to offset these concerns. The operational cost increase factors included royalty fees paid to many different film production companies that hold intellectual property rights on many of the products offered by Netflix. With growth in streaming video online, the costs of operations increased from $180 million annually in 2010 to $1.98 billion in 2012 (Pepitone & Smith, 2011). The only way that Netflix could stay in business and regain investor confidence was to raise prices, taking the Netflix service subscription from a previous 2009 total of $5 per month, to over $10 per month in certain markets. Raising prices on this business model created significant consumer backlash and immediate defection to other brands offering similar services. To now be able to get hard copy discs delivered as well as streaming video capabilities under the service, it would now cost consumers $15.98 (Sanger, 2011). Netflix was essentially stating that the high costs of licensing the videos offered (hundreds of millions of dollars annually) and the costs of handling video returns and deliveries were justifying these sudden and significant price hikes. The major problem in this situation is that not only did the company anger its loyal customers with massive price increases, but the business did not realize the consumer loyalty ...
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