Peter hit the nail on the head when he said in his recent post that saying you’re sorry just doesn’t cut it. With third quarter results just out, Netflix lost 810,000 customers between Q2 and Q3. That’s a lot of customers. Although the company increased its revenues this quarter, the real effects of customer loss won’t be seen until the 4th quarter. If that weren’t bad enough, the company has also lost billions in shareholder wealth with the stock down to about $93/share from a high of nearly $300. So what is the real reason CEO Reid Hasting’s plan to split the company failed so miserably? It may be because either he never really understood his customers or he was simply arrogant enough to think that he knew best what they wanted. Either way he sacrificed the long-term value of loyal customers for for bad execution of a questionable plan.
Too many companies are still making important strategic decisions based on market segmentation strategies that no longer work. For years companies have relied on market demographics like age, education, and income as well as behavioral and psychographic data to figure out who their customers were and what they needed. That’s how we got age-based consumer categories like the Millennials, the Gen Xers, the Baby Boomers, and the Greatest Generation. Researchers spent time studying these groups and came up with broad generalizations and stereotypes that made it easier to talk about each group. Companies like Netflix got lazy and didn’t realize until it was too late that you no longer can place consumers into neat little boxes and expect them all to respond alike.
With the advent of social media and a more culturally diverse consumer population, traditional segmentation has lost much of its power. Today non-demographic factors—values, lifestyles, attitudes, and preferences—are much more effective as segmentation tools if they’re explored within the context of buying decisions. Why? Because to really understand your customers on this level, you have to get into their minds – you need empathy—you need to stand in their shoes a while and see things from their perspective.
Hastings didn’t seem to understand that Netflix customers, regardless of their demographics, appear to be the kinds of consumers who want to find what they need in a one-stop shop. And it also looks like they prefer the ability to choose between DVDs and streaming at will – what a concept! The point is today’s consumer markets are not static but rather in constant flux. Consumers have lots of choices and when the switching costs are low, they’re not necessarily loyal. So companies have to revisit their consumer segments on a regular basis to make sure they’re still in touch with customer needs.
Now, let me give Netflix the benefit of the doubt for a moment and assume that Hastings really did understand his customers. If that is the case, then it would appear that he decided to completely ignore their needs in favor of a purely financial decision that he thought would benefit shareholders. In reality, it cost them a fortune. I agree with Peter; that decision to ignore customers (even though he reversed it) may be the turning point in what might have been a bright future for Netflix.
The lesson from all of this? Customers drive revenues; customers determine the product offering; and customers will tell you when they think you need to make a change.