Sublime Behavior Marketing CEO Neale Martin in an open letter response to Netflix CEO Reed Hastings’ customer letter distributed earlier today. In Hastings’ letter, he apologizes for Netflix’s bumbling of their latest price hike and discusses plans to split the company into two separate entities: Netflix, which will focus exclusively on delivering streaming video content, and “Qwikster,” a new company solely dedicated to Netflix’s legacy DVDs-by-mail service. You may find Reed Hastings’ letter here.
Dear Mr. Hastings,
I cannot stress more how wrong I think you are in the strategic direction you are taking the company. After 12 years of brilliant strategic marketing, your recent moves and calamitous messaging are putting the entire enterprise needlessly at risk.
Netflix began as clever concept for using the web and postal service to rent DVDs, and evolved rapidly by moving to a subscription model and abolishing the dreaded late fees. Blockbuster never stood a chance. When Netflix launched video streaming to complement its DVD rental service, the company was, again, far ahead of the industry in understanding the evolving relationship customers were developing with video content across multiple platforms. By adding this service without extra cost, you dramatically increased the perception of value attached to the iconic Netflix brand. By integrating DVD and streaming, you created a nearly unassailable bulwark against competitive incursion. You built a thriving business with more than 23 millions customers and a stock price that any CEO could point to with pride.
And in a scant three months you’ve put all of that success in jeopardy.
For the past decade, I’ve researched customer behavior based on our rapidly improving understanding of how the brain works. It turns out that the vast majority of behavior is the result of unconsciously motivated habits. Counter-intuitively, the best customers think about you the least, automatically incorporating your goods and services into their lives without a glance. The price hike announced last month disrupted this habitual behavior and drew the conscious attention of many Netflix customers. Disrupting the habits of your customers is marketing malpractice—as you’ve seen, over a million of your former habitual customers decided that, upon reflection, the value of Netflix was not worth the price paid, despite the nominal increase equating to only a few dollars more per month for most customers.
The good news was that habits are a default state, and your customers would have likely settled back into unconscious use of Netflix in a few months. Consciousness in the consumer space is a bit like a tuning fork: a single hit will emit a vibration for a short period of time, and then go silent. The mind does not want to consciously consider every purchase decision, and Netflix would have returned to a habitual choice, silently billing credit cards each month while delivering a reinforcing user experience. Unfortunately, you stepped in too soon. By splitting the company into two parts with separate websites and billing systems, you are again massively disrupting the customer habits it took ten years to build. The tuning fork is ringing louder, and more customers will begin jumping ship, either for competing services or no substitute at all.
Somehow you’ve gone from marketing genius to anti-marketing villain. Even if the company survives and returns to previous levels of success, this risk is far too high to justify. Because, right now, nobody knows what the future will be, and the immediate reaction has been catastrophic. I do not know the underlying cost structures that necessitated the rate increase or the particular view of the future that induced you to split the businesses, as an expert in consumer behavior, I can tell you that fundamentally and unilaterally changing the relationships with your customers is very bad management. A post hoc letter rationalizing your decisions demonstrates a disconnect from your customers that should terrify investors. Qwikster? Really?
I tell my clients that the goal of marketing should be to become your customers’ habit, not their choice. In trying to position for the future, you are forcing your customers to make a conscious choice, and I fear many will choose to leave Netflix behind. I became a Netflix customer when I bought my first DVD player. I recommended your service wholeheartedly to hundreds of people since then, a large number of whom went on to become customers. I cannot imagine recommending your service to anyone today.