February 15, 2006

NetFlix Throttles Its Best Customers

Images_1 Lately, I have been thinking a lot about how customer experiences impact brand perceptions. Businesses spend a lot of money to identify customers who purchase more frequently or spend more money. The idea is, these are your most profitable customers, so they deserve a better experience. And conversely, a better customer experience will translate to more frequent and profitable customers.

But for a company like NetFlix, frequent customers are less-profitable than other users. NetFlix customers who return their movies more quickly, require more service, and incur additional shipping costs, reducing profitability. Each DVD mailed and returned costs the company 78¢ in postage alone. There are other processing, handling, and breakage costs as well.

So what does NetFlix do? They use a poorly named "fairness algorithm" to slow down deliveries to heavy users, preventing them from watching, returning, and ordering even more movies. By reducing interactions with these customers, NetFlix reduces its costs and increases its profits. This is the kind of bottom line thinking that makes accountants proud.

Here's the problem: NetFlix's heavy users are also their most likely heavy promoters. Meaning in addition to the $20 a month they pay NetFlix for unlimited movie rentals, they also evangelize new members, all of whom also pay $20 a month (many of these are significantly more profitable than the heavy users). 85% of NetFlix customers say a friend recommended NetFlix before they joined.

By delaying (or throttling as some users call it) shipments to its biggest fans, NetFlix changes their customer experience. Instead of loving the service, these customers feel like they're being taken advantage of. They know the NetFlix experience isn't the same for all customers, especially them. And they begin to feel like a transaction, rather than a valued customer.

How long will these less-than-thrilled members evangelize NetFlix? I'm not sure. But if I were NetFlix CMO, Leslie Kilgore, I'd be worried.

If your brand story promises unlimited rentals, that's exactly what you should deliver. If the profit model doesn't allow it, change the promise before your customer evangelists lose their enthusiasm for your brand.

Read more about NetFlix's throttling policy here or here.

Feb 15, 2006 9:39:16 PM | Branding, Business, Customer Experience, In The News, Word of Mouth

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