Lessons For The Restaurant Industry From The Netflix Debacle

How Restaurants Can Avoid The Marketing Mistakes of Netflix

If You Want To Lose Trust From Loyal Customers, Follow the Example of Netflix

If you don't use Netflix (or perhaps live in a vacuum) then you have probably missed out on all of the excitement around its announcement on July 12 of this last year regarding its change in policy and rates. There has been much debate about whether the price change was legitimate, but what has been less-debated is the manner in which Netflix presented its changes. The social media atmosphere literally exploded over the original July announcement and many (admittedly including myself) threatened to remove or downgrade subscriptions. As a Netflix subscriber myself, as well as a marketing strategist, it has been interesting to analyze the mistakes that were made in these announcements in an attempt to avoid the same mistakes.

As I thought about this, it hit me how drastically my personal (and judging by the majority of social media comments, everyone else's) opinion of Netflix changed overnight. Netflix succeeded in turning numerous loyal customers into frustrated, angry, and sometimes even former, subscribers (and as you know, we at Prima are obsessed with keeping loyal customers). The question remained, however, would all of these angry people actually carry through with their threats or would they (as Netflix believed) simply settle grumpily and move on with life. The financial backlash since the rate change (40% plummet in stock, and a loss of 1,000,000 customers) as well as the announcement from the Netflix CEO yesterday puts this final question to rest with his formal apology and personal explanation. To be fair, I do appreciate Reed's comments regarding the true motivation behind the decisions, however, these were communicated too late to affect the majority of responses to the decision. Because of these things, I believe that Netflix provides most businesses, and specifically the restaurant business, with a number of lessons to be learned from its poorly developed marketing strategy involving these changes.

Lesson #1: You Are Never Too Big To Ignore The True Needs/Desires of Your Customers.

By Netflix CEO's own admission, they were more concerned with basing their decision off of "past successes", then they were on potential customer response. I think this is a great reminder to any restaurant from Olive Garden to the little Mom & Pop Cafe increasing its control over the tiny Iowa town's baked goods market: you are never so big that you can't be brought down (or hey, as the Bible says: "pride goes before a fall"). I think Amazon is actually a good example of a large company who understands that its success is directly tied into its customer satisfaction. Of course, everyone knows this at the top level. We all know that we need to make the "general populace" happy with us, but I think it is actually more rare for that to be transferred over into day-to-day interactions with individual customers. So you own a restaurant and don't want to make the same mistakes that Netflix has, fine... realize that you can't make arbitrary decisions based upon numbers and facts without being concerned about the individual him/herself.

Lesson #2: Social Media Truly is the New Front Porch

Allow me to explain. I am from Minnesota, and when I moved to Louisville I experienced a relatively new concept... the front porch. Unlike where I grew up (where the privacy-fenced in backyard contains the extravagant back deck), the older houses further south have front porch's... and big ones. Like, bigger than just providing enough space to get you out the door, but with swings and seats and even ceiling fans (actually didn't believe this one at first)! The front porch was where the neighbors got together to connect, to talk to passerbyers, to get opinions on the weather, politics, high school football team scores, and what they thought of the newest cafe in town (avoid the meatloaf!). Social media has in many ways, taken over as the new front porch. This of course isn't really news to anyone, I can just tell you that as a marketer it can be difficult to actually measure specific response based upon social media. We know people use it to review us, but it's hard to get an actual "this had x amount of impact on my business." The Netflix decision revealed overwhelmingly that social media is already, and will play a major roll in business decisions that affect the general public. I first heard about it on twitter. I immediately tweeted about it (which also updates my facebook account) and by the end of the day last July, was discussing it with half a dozen friends. From the numbers that people have been throwing around, I was far from alone.

So how does this affect the restaurant industry? Know that your customer service really does matter. You must put your waitstaff under even more scrutiny. You must ensure that your chefs/cooks are not taking those shortcuts. Before, an annoyed customer might tell a couple of friends, which in smaller areas was often enough to shut down a poorly maintained restaurant but not enough to noticeably affect a national chain. Now however (with twitter sometimes being that which informs news agencies of breaking news), social media cannot be ignored. Get on your social media account, interact well with your customers, make sure to genuinely do all you can to solve customer issues in store, ignore the tendency to take shortcuts with customer care because "it's just one customer".

Lesson #3: Be Intelligent with Price Increases.

Since I am involved in marketing for a business that generally likes to make money as part of its practice (otherwise we would have formed a non-profit organization), I understand that price increases are a common and not necessarily-spectacular thing. However, what a great example of a price increase done wrong. As I have discussed this with other Netflix subscribers and have read online reviews/comments, it has become apparent that the manner in which Netflix presented the decision was another factor in the negative customer response. Even in our business at Prima where we face manufacturer price increases on almost a yearly basis, I have never before seen a 60% price increase at one time (though, one time I did see over a 500% increase on an online solution we were using... we are no longer taking advantages of their services). Without seeing the bottom-line cost of the different solutions to Netflix, I am still slightly suspicious that a 60% increase was not needed to keep the overwhelmingly popular company afloat. Regardless, the increase should have included more specific information on the benefits that would be received and not simply a marketing blogpost about "changes" which turned out to be a massive overhaul of rates (more will be said about this in the 4th point). There are many factors that go into these things and I want to be careful to avoid areas that I do not have all of the required information to make a judgement, therefore I will just suggest this for restaurants: Everyone has to raise prices at one time or another. There is always backlash, but the extent of the backlash can be controlled at some level with (1) a legitimate reason for the increase, (2) great communication regarding the specific increase, and (3) a slow increase as opposed to a large initial increase. As evidenced by Netflix, people will complain about the 4% raise as they continue to purchase their latte, but they will drop services in droves when the increase is 60%.

Lesson #4: Communicate With Your Customers.

This last lesson is somewhat of a continuation of the last point, but expanded. The final major mistake I believe Netflix made was in not adequately communicating the decision to their customers. Lest you think I am now making things up, this last mistake is not simply my own opinion. It is actually addressed specifically in Reed Hastings' blog post, from yesterday. Communication is essential in keeping loyal customers. Customers who feel that they cannot trust a business will often leave, even if the price is slightly better! Poor communication fosters mistrust and initial, angry responses to change. I am suspicious that the response would have still been great in social media, but that the sides would have been more even between those for and against if Netflix had done a better job of communicating specifically why they were doing what they are doing. It could have been more of a discussion then a massive, online anti-Netflix rant. Therefore, know that as a restaurant owner, sometimes those hurricanes will play havoc with your orange purchasing (disclaimer: I am making this up because I am not an expert on hurricanes and oranges and if they actually do affect each other, but you get the idea), so when you have to raise the price on your "freshly squeezed" orange juice, try putting a sign up saying something like: "We apologize, but because of the devastation upon the state of Florida from Hurricane _____, we are unable to get oranges at the great rate we were able to before. Thank you for your understanding." Honestly, it's a lot harder for a customer to get ticked at you when farmers in Florida are losing their livelihood. You're not taking advantage of Florida's misfortune, you are telling the truth. As much as is possible, tell the truth with your customers and communicate well and you will gain the trust of those customers.

Hopefully these lessons have been informative. If you like this post, please help us get the word out by tweeting it or liking it on facebook (just use the buttons on the left of this page!). So what do you think? Any other lessons you think can be learned from this Netflix Decision? Or anything you feel they did well?

Until next time...

Disqus - noscript

thank you for the lesson you've given me!!!!

I guess as long as Netflix continues to make the news on this, I will keep updating this blog.  Apparently they lost 800,000 customers and their stock has plummeted: http://www.nytimes.com/2011/10...

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Comments

The good news for Netflix is, except for Redbox, they pretty much own their market. Also, if they can capture some of the game market from Gamefly with Qwikster, they may be able to regain some of those lost customers.

agreed, I don't really expect them to "go under". I personally am still with them for streaming (though I dropped the DVD's) and the fact that they still have 24 million customers doesn't exactly mean they are doomed. I think the biggest issue is that I can't really think of another company that has more successfully turned a large amount of its customers against it for no other reason than poor marketing. The fact that they did not even secure the twitter handle for the new business (Qwikster - it's relatively humorous to read through some of these tweets BTW - though be warned, some are definitely not PG rated) before announcing this (judging by how much Netflix will prob have to shell out for this, I really really wish I had chosen that as my handle when I started twitter;) appears to be just further evidence that things were just not well thought out before the information was released.

Here is a funny comic of Netflix's true intentions.

ha! that's clever.

It's funny because I normally use an example from the tech industry as an example of how to do things right as compared to the food service industry, but this time it is the exact opposite.

In the 2007-9 time frame the cost of raw metals (specifically stainless steel) was increasing at a near exponential rate. Manufactures couldn't raise prices fast enough, and even if they did manage to get their sale prices up to par with their costs, they would find themselves behind again in a matter of weeks, sometimes days!

Still, they never increased their prices more then 7-9% at at time. Even if they had raise prices every month, they kept it small. I think that is a big part of making price increase palatable to the consumer.

Another trick they used involves percentages and people's tendency toward doing bad math :) People hear that there was a 10% price increase followed by a 10% price increase on a $100 item and think that the price increased 20%. Here's the match.
First price increase: $100*1.1 = $111
Second price increase: $111*1.1 = $121
The total increase is 21%, not 20%. This doesn't seem like much, but for many companies 1% of gross sales is the difference between a bad year and a decent year, or a decent year and a good year... Plus, the more small increases you do, the more "unperceived" increase you achieve.

Andy, thanks for the insights. I completely agree that with price increases, it's all about the perception of your customers. An immediate 60% increase in prices shouts at them and scares them. A more gradual increase (even if necessary), helps calm the waters of customer opinion.

I was thinking about this whole thing this morning, and I still can't help but wonder how Netflix could have done this better. I think the single biggest problem with this whole thing was that they literally raised the prices with no legitimate explanation (regardless of if there is one, they did not clearly detail one). I mean, sure they talked about needing to make the two companies separate (for the benefit of the customer, they claimed)... but the only thing that really happened was that everything remained initially the same to the customer and became easier for the company. This is not necessarily unethical, illegal, or immoral (you have the freedom to raise prices if you feel like it)... it just looks really bad to the customer. I think you're correct in identifying the core issue as not being aware of the customer "perception" of this whole change. The perception was "I am getting nothing different as a customer except I have to pay more." If the benefit to the customer eventually is that more is going to be added to the streaming, then my suggestion is that should have been clearly stated and even lauded in the announcement with an either (1) 1 year grace period for already-loyal-customers who had plans with streaming & DVD's so they could prepare for the switchover, or even better (2) a small price increase initially with the "things are now so much better because of these movies you can access NOW (not someday in the future)" marketing spiel, and then another smaller increase a year later if costs still warranted the need for one.

I think, of everything I've seen on this, Conan's take on the whole thing is the most accurate (and quite hilarious):

Again, thanks for your thoughts.

Netflix did the right thing, though their execution could have been better. They needed to cut-off the DVD business as fast as possible, so a swift, clean break was advisable. As their name suggests, I presume their purpose from the beginning was instant streaming, but they needed the customer base and revenue of the DVD exchange system to lay the groundwork for streaming via internet. The infrastructure to deliver instant streaming has come online within the last three-to-five years, including both the physical bandwidth needed along with sufficiently secure/robust digital rights management software. Now that the streaming is well-established and deeply engrained in the American culture, Netflix realized it must divest itself of the DVD by mail "baggage" and focus on the original intentions. Physical media is antiquated--it's a sinking ship. As fewer customers use the DVD by mail service in favor of the instant steaming service, the DVD by mail service will become entirely too expensive to operate. Netflix has taken a bold, forward-looking step to drastically improve their overall profitability, returning a better result for their shareholders. Undoubtedly they will sustain some momentary losses, but the short-term and long-term outlook remains strong, especially since there are no other meaningful competitors in the market.

Stephen, thanks for your comments. I couldn't agree with you more. As a business, Netflix needed to do what they needed to do to get rid of the "baggage" (I like how you put that) which helped get them started way back in the "is live streaming a form of trout fishing?" days. However, as you suggested with the phrase "their execution could have been better", I stay loyal to my original premise which was not whether or not this was a good business move (I agree with you that it was), but that the execution of it was disastrous because of a flawed marketing plan (or lack thereof).

The Netflix story just gets more interesting every week it seems. Just found this release on CNN from this morning: Netflix Abandons Plan to Split DVD Services. Unless there is some broader comprehensive plan in the works behind the scenes by Reed Hastings, it appears that this further illustrates the point that Netflix really, really did not do the marketing work they needed to do before-hand in order to present this as a successful plan to the nation. Was the plan itself a bust? As we've discussed above, I really don't think so. It was the way they went about it that destroyed it. Marketing matters.

The email I received from Netflix yesterday with an explanation:

Netflix email regarding dropping qwikster
Bunn Ultra-2 Frozen Drink Machine - High performance - stainless and white
SKU: 34000.0079
x
Call us at
(888) 810-5043
for your online application and instant credit decision!
47 Cu. Ft. Solid Door Commercial Freezer - Turboair M3F47-2
SKU: M3F47-2
x
Call us at
(888) 810-5043
for your online application and instant credit decision!
True T-49F Commercial Freezer - 2 Solid Door
SKU: T-49F
x
Call us at
(888) 810-5043
for your online application and instant credit decision!