Discussion of a current marketing problem - Essay Example

? Marketing Problem: Netflix BY YOU YOUR SCHOOL INFO HERE HERE Marketing Problem: Netflix Netflix is a leading video and feature film provider modeled somewhat after the Blockbuster model with an online dimension to inject convenience into the business model and satisfy consumers. Fortunately, Netflix provides opportunities for mass market consumers as the company carries relevant products with themes that are diverse to potentially satisfy a very broad volume of consumers with different lifestyles and income demographics. Up until the end of 2011, Netflix had built a great deal of brand loyalty from consumers for its low cost model that gave consumers a positive perception of value. Netflix, prior to 2012, had few brand-recognized competitors (other than online streaming video providers) since Blockbuster had entered bankruptcy and many other smaller competitors (yet holding market share in North America) had been driven out of business as lifestyles were changing from the 1980s in which video movie renting no longer required consumers to have to visit their local rental stores. Kiosks were being installed in major retailers at this time period, online services were becoming more relevant and lifestyle-centric while also improving service speeds and low cost registrations. This had, until 2011, given Netflix a significant brand advantage that translated into common stock value at nearly $300 in August 2011 (Yahoo! Finance, 2013). In 2012, however, competitors such as Hulu and other online video providers were making it very cost effective to pay small fees (such as $.99) to watch a favorite video or experience other film-centric productions. At the same time, major retailers such as Wal-Mart were providing kiosks with very relevant and new movie releases which could easily be procured by mass market consumers for a very low cost. 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 toward having physical optical discs delivered to their doors. It was expected by the company that as lifestyle toward using the Internet for social media and for lifestyle fulfillment, that consumers would embrace streaming video opportunities at a lower price than at-home disc delivery. This was not the case and consumers turned away from Netflix for the high costs and irrelevancy of forcing Internet viewing of its films when it was not desirable or lifestyle-relevant for consumers that wanted the experience of physical movie rental. Netflix was cutting off its proverbial nose to spite its face in this process, which further angered consumers in many different markets and with many different demographic characteristics. Unfortunately, Netflix set itself up as a business that would have to pay high licensing fees (which are fully in control of the supplier) and building a business model that could serve customers through physical film distribution. Since the mid-2000s, Netflix was a leader in providing convenience at very affordable prices. However, as subscribership increased in many markets, Netflix did not take into consideration that it would be a company with very high demand, thus the business did not invest into expanding its handling and distribution philosophy. The implications in this situation are cost increases not justified by service improvements (only to offset their own irresponsibility and lack of strategic foresight) and trying to tell customers to forget about their home delivery options and watch videos online. Netflix had been positioned against competition as a cost and convenience leader, both of which were damaged quickly when consumers were being asked to pay 60% more (in just one month) than when they first signed up for the service. Netflix needs to examine their operational costs and return to the original pricing structure with more emphasis on home delivery if the business wants to succeed and keep a positive brand reputation. The only solution is for the business to determine how to establish a more moderate pricing structure and create incentives for using the online service which is not, yet, desired by many mass market consumers. 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. References Pepitone, J. & Smith, A. (2011). Netflix stock plunges as subscribers quit, CNN Money. Retrieved May 24, 2013 from http://money.cnn.com/2011/09/15/technology/netflix/index.htm Sanger, S. (2011). Netflix 60% Subscription Rise causes Outrage amongst Subscribers, WorldTVPC. Retrieved May 24, 2013 from http://www.worldtvpc.com/blog/netflix-60- subscription-rise-outrage-subscribers/ Yahoo! Finance. (2013). Netflix, Inc. Retrieved May 23, 2013 from http://finance.yahoo.com/echarts?s=NFLX+Interactive#symbol=nflx;range=2y;compare= ;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefi ned; Read More