Earlier this week Netflix, the web-based video rental company, announced a price increase of up to 60% for new and existing customers, leaving many people quite upset.
From the vitriolic comments on the blog post announcing the price increase, to social media, industry analysts, and web business media outlets, the blowback has been massive and the damage has been done.
All because Netflix forgot that Pricing is a function of Marketing.
They forgot that customers don’t care if Netflix’ shipping costs and license fees are rising or that customers don’t care about shareholder value, stock prices, etc.
Netflix forgot that customers only want to know “What’s in it for them?”
Like most pricing fiascos, the problem was not the actual price increase – the dollar figure or even the 60% increase – it was in the communication about the change. Pricing is too often thought of as marketing only after something like this happens.
So if you need to raise prices to compensate for rising costs or simply to deliver higher revenue and profits, remember that you don’t have to trade short-term outrage for the long-term benefits associated with the higher prices.
Before moving forward with the price increase, take some time to ensure that you are absolutely clear that this price increase is necessary by asking some questions like:
- Should the price increase be across the board or is market segmentation or the creation of new bundles or versions the answer?
- Can you increase revenue in other ways, perhaps by improving conversions on sales pages or in free trials?
- Can you reengage former customers or those who went through a trial or product evaluation?
Here are three quick rules-of-thumb to keep in mind when raising prices that will hopefully help you avoid a Netflix-style pricing fiasco and move to your new pricing with much less friction:
- Engage your customers early and often – You have two options when raising your prices: engage or alienate your customers. Pricing fiascos, which are far too common in subscription-based businesses, happen because customers who are there for you month after month instantly feel alienated when the public finds out before them about a price change; a virtual slap in the face. The email from Netflix announcing the price increase was sent after they published the price increase publicly. Customers I talked to said they saw the price increase and negative buzz online before being notified by Netflix directly. How much of this fiasco could have been eliminated by telling their customers before the general public?
- Remember it is ALL about the customer – The messaging in the communication from Netflix during this was all about Netflix, not the customer, and that is the first sign of a problem. Perhaps Netflix could have framed this as The Studios wanting a piece of the customer’s wallet and Netflix is the hero, doing their best to fend them off, but is also a victim.
- Always add value - Price objections are value objections and price increase objections are too. Unless you are adding features or services to your offering, it is not always obvious how to “add value” when you raise your prices; but you need to try. In this case, perhaps if Netflix simply took that underdog role against The Studios and made a great case for the increase that was all about the customer, much of this might have been avoided.
Clearly this is not everything that has to go into raising prices successfully and avoiding a major backlash. However, if Netflix had used just a couple of these suggestions, the massive negative reaction would likely have been tempered. I encourage you to explore the Netflix announcement for yourself, the backlash and reactions, and learn from it; don’t let this happen to you.