The Netflix Lesson for Startups

A key lesson for web startups has emerged from the recent bad press and hostility directed at the online movie rentals powerhouse, Netflix.

Netflix provides on-demand movies and shows streamed online to subscribers, as well as a mail-order DVDs delivered by post at a flat rate to customers. The company has over 24 million subscribers and is expanding into countries other than the United States and Canada.

Last week, Netflix announced a price increase. Those who used to pay $9.99 for both the DVD (one-at-a-time) service and the live streaming will soon be forced to pay $15.98 per month for the same offering. They said the increase will be to improve streaming, as well as their collection of material available online.

Subscribers lashed out. Many abandoned Netflix. The company’s stocks took a dive.

The lesson for web startups lies in the ‘how?’.

Technically, $15.98 for the service Netflix offers is dirt cheap. With its offline competitors being cable television and video stores, Netflix is considerably more affordable despite the price hike.

Moreso, maybe they do need the extra cash for the reasons they propose.

However, regardless of how it is looked at, it is a strategic error.

A 37% price rise in one hit is too significant to whisper into a paying subscriber-base of 24 million! They will make noise. They will suspect you of a greedy grab at cash. And they will abandon you.

The strategic error lies in how this was rolled out. I suspect, having been involved in such decisions over the years, that this hike was a necessity to improve the company’s product, service or bottom line.

But the fact that this was not recognized as a potential need at the company’s inception or earlier in the course, meant that Netflix could not spread the 37% rise in price over a longer period and make it more of a gradual hit on its consumer-base rather than one big hammer.

If Netflix hit the market with its price for this service at $15.98 instead of $9.99, would they have suffered as much? I think not.

If Netflix rose $9.99 to $10.98, then to $11.52 six months later, then $12.09 12 months later still, and then to $13.99 after a further six months, before reaching $15.98 over a total of 30 months… would they have suffered as much? I think not.

Startups monetizing with paying customers (by subscription, product sales, etc.) must set their price very carefully at their inception. If necessary, they must then raise their price carefully also. Strategic price-setting and price raising, in accordance with the size of your customer-base, is critical.

The Netflix conundrum has shown this to be true and I hope web and mobile startups price with caution.