Do You Have the Guts It Takes to Fire 800,000 Customers?

Do you have the guts that Netflix has? Are you up to firing some of your low-margin, want-everything-for-free type customers?

Netflix alienated a segment of its customer base last month by raising their prices.  Last week, the results came in. The company didn’t shed the expected 600,000 customers, but 800,000. Well done Netflix!

That approaches the same population Rhode Island consumers! That must be a new record for a customer mass exodus. I heard Bank of America is jealous since it ticked off not quite that many with its recent ATM charge idea.

Now back to Netflix. Too bad Wall Street didn’t like the Netflix strategy, tanking the stock by 36 percent. Funny thing is, the company’s profitability rose 65 percent during the recent quarter. Private business owners drool at that level of profit increase, but Wall Street looks at it differently. Private business owners look at things long term and run a business to succeed. Wall Street looks for short-term gain.

It is still a challenging situation to fire customers. Only time will tell if Netflix lost those customers forever. Will they continue to spread bad press about Netflix? Will the spiral continue to a point of hurting the company long term?

Netflix still has 24 million subscribers, so it’s not crying just yet. The company is betting the farm on streaming video, and lost mostly DVD-by-mail customers. Pretty gutsy move.

Maybe it is time for you to shed your low margin customers and move onto greener pastures?

The ballgame is still not over for Netflix, and we can still learn as this move plays out. Blood is in the water and Netflix’ competitors know it. Management botched a spin-off off the mail-in business and the way they communicated price hikes was awful. The stock is down from $300 a share in April 2010 to $76 this week.

What can other businesses learn from all this?
1) It takes guts to raise prices, but be careful not to fall into the trap of not raising prices and watching your margins go in the tank.

2) Be careful holding onto low-margin customers just to feed the production line. Do not hold onto low-margin business, but instead look harder at selling to customers who appreciate your value add and are willing to pay for it.

3) Planning for price increases can’t be stressed enough. Customers will know. Have a communication plan in place to explain it is coming, when it arrives, and after the fact.

4) Be ready for some fallout, but look at the big picture for the long-term health of the business.

5) Be careful not to take advice from those who are more concerned about their short-term gain vs. the health of your business. I worked for a publicly traded company and weird stuff happens for the wrong reasons. Be careful who gives you advice. Look for the motive behind it.

If you need to raise prices, do so with care; but don’t hesitate if the writing is on the wall that something needs to change. Be ahead of the curve.

Of course, the better alternative is to leverage technology, stay on the cutting edge, drive costs out, and pass on savings to customers by offering more value as you invest thoughtfully. Position yourself so customers seek you out for that new, innovative service, so you are able to drive up revenue and profit together. Wouldn’t that be a nice alternative? I know…easier said than done. But, there are businesses out there doing it.

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