Netflix Teaches Product Managers Lessons About Pricing

As product managers we all dream of the day that we could muster up the courage to actually raise the price of our product. Just imagine – we wouldn’t have to do any additional work, and we’d be able to bring in even more money! Apparently the product managers over at Netflix had the same idea because they decided to dramatically raise their prices. That’s when things got confusing…

What Netflix Did

So just exactly what did Netflix’s product managers do that generated such a fuss? Well, once upon a time Netflix had a very popular product that they were selling: for $9.99 / month, customers could subscribe to a service that provided them with the option to rent one DVD via postal mail at a time and stream an unlimited amount of online videos. Needless to say, people loved this service and signed up for it in droves.

Then the Netflix product managers listened to what their account manager and / or business development manager told them about boosting profits and they went and changed things. They unbundled this service. That means instead of subscribing to one service, now their customers have to subscribe to two different services: one is a service that will deliver DVDs to their homes and the other is one the will allow them to access streaming video over the Internet. Oh, and each of these services is now priced at $7.99 / month. If you continue to subscribe to both, then your monthly bill just went up by 60%!

What Netflix Did Wrong

So what was the result of this little pricing action by the Netflix product managers? How about the loss of 1 million customers and the company stock dropping by 19%. Ouch – that’s not going to look good any anyone’s product manager resume!

So where are these million lost customers going to go? There are a number of possibilities: Amazon, Apple, and Hulu. However, none of these services have either the scope of Netflix’s offering nor Netflix’s “all you can eat” approach to online streaming.

Which leads us back to our original point: if there is no clear alternative to Netflix, then those one million customers must have been pretty angry at Netflix in order to leave them. What did Netflix do that was so wrong?

The first mistake that the Netflix product managers made was that they surprised their customers. Nobody saw this 60% price increase coming. Secondly, Netflix forgot to offer their customers any additional value. I mean really, if you’re going to boost my price that much, then you’d better be throwing something into the mix that will help me understand why you’re doing it.

Finally, when everyone started to complain about the change, Netflix was strangely quiet – they didn’t really react to the feedback that they were getting from their customers. In baseball, after three strikes you’re out. Let’s hope that the Netflix product managers have learned their lesson.

What Nextflix’s Product Managers Should Have Done

So now that it’s clear that the product managers at Netflix have made a mistake in how they went about changing their product’s pricing, what should they have done?
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What’s missing here is strategic management of a product’s price. The key item to remember when you go tampering with your product’s pricing is that any changes that you make to a price must be done as though you were having a conversation with your customer.

In Netflix’s case, the product managers should have started the process by issuing a series of press releases talking about all of the additional content that they were adding to both their physical DVD service as well as their streaming service. In those press releases they should have also brought up the fact that their costs were going to be going up, but that they thought that it would be worth it for the additional content.

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