Netflix’s dismal third-quarter earnings report revealed the extent of the company’s vulnerability in the wake of its much-maligned price increase. Pseudo-competitor Redbox seems primed to benefit.
Immediately identified as a haven for disgruntled Netflix customers since word of the price increase came out this summer, Redbox, the dominant force in kiosk-based DVD and video game rentals, recently decided to get aggressive in seizing the market opportunity. According to AdAge, Redbox has hired Camp & King to plot its first national branding campaign after almost ten years of impressive growth.
While the campaign will not be overtly inflammatory towards Netflix, it will appeal directly to the issues that prompted that company’s rare, intense customer outcry. AdAge says the campaign "is expected to revolve around the idea that Redbox is consistent, cheap and, most importantly, hassle-free," and "demonstrate that it introduces products based on what customers want, and for that reason, customers love the brand."
Even though Netflix, in theory, could still prove more cost-effective for movie-lovers than Redbox, Netflix faced an image disaster when it abruptly announced a net-60% increase in pricing without demonstrating just cause. Redbox’s system is simple, clear and convenient, and at $1/day/DVD, it does not come across as taxing on the wallet, especially when compared to the fees of as much as $5/day at the few brick-and-mortar video stores that still exist.
True, Redbox cannot compete with Netflix’s streaming offering, but for those more interested in physical DVDs or simply looking to "stick it" to Netflix for its arrogant price changes, it represents a viable alternative. Its honest, simple branding message will only further highlight that viability.
So, this should be an open-and-shut case, right? Redbox’s national branding should reinforce its reputation with loyal customers, and even if it does not, the fact that Netflix, a key alternative, is under such fire should keep its faithful from developing wandering eyes. Netflix’s customers, meanwhile, will see a brand with an honest, no-BS approach to pricing and if not turned off by having to actually drive or walk to a Redbox kiosk, they will have another reason to feel comfortable leaving Netflix in the dust.
The issue is not, however, so clean-cut. Shortly after its parent company Coinstar reported a 90% Q3 profit increase and 22% Q3 revenue increase, Redbox announced that it was raising the price of its standard DVD rental to $1.20/night.
In essence, Redbox will be going to market with the message of consistently acting on the voice of the customer (a trait customers are alleging is no longer true of the Netflix brand) when it, in reality, is making a sudden change that is unfriendly to customers.
As if the timing were not unfavorable enough, a report the same day suggested that the major movie studios were looking to further delay allowing new releases to be distributed through means like Netflix and Redbox. So, despite joining Netflix in increasing its prices, Redbox, too, could actually end up delivering a less-valuable service to its customers.
Following the announcement, some negative comments did emerge on blogs and social media, but the "outcry" (and the use of that term is very suspect) was minimal. In fact, on ZDNet’s widely-read story on the price increase, many of the comments actually defend Redbox.
Given the initial reaction, both from media and customers, it does not appear Redbox is about to replace Netflix as the "go to" example of customer disconnect. It does not appear Redbox’s branding message will be viewed as particularly-hypocritical or misleading, and customers will still largely accept Redbox as more friendly to their demands than Netflix and not abandon it purely due to resentment.
Obviously, a 20% price increase is not as steep as a 60% increase (which helps Redbox’s cause), but it is not totally insignificant. So why does it appear Redbox will get through the price increase relatively-intact?
How Customers Define Value
In some respects, Netflix was hoisted by its own petard by very much "creating" its own business model. In its widely-criticized letter discussing the pricing increase, Netflix stressed that even at $16, its combined streaming and DVD-mail services still presented the best value in the business.
Technically, that might be very true. But Netflix was forgetting one very important detail about its claim: it, by virtue of being the pioneer in the space, had already defined the value of its offering at $10. So customers were not going to think, "Well, if I combined 8 Redbox rentals a month with Hulu Plus, it would cost $XX and add an extra inconvenience burden." Instead, they were going to think, "This product now costs 60% more, even though the value I, the customer, receive is the same." That is frustrating.
It might have technically pioneered its kiosk model, but Redbox’s service, on a more basic level, is still compared to the video store: it is an on-demand, physical movie rental service. So, yes, $1.20 is worse than $1, but this type of service has been valued as highly as $5. Redbox, therefore, still represents an attractive deal.
Plus, customers can be one-dimensional and superficial in their reactions. They aren’t going to think, "Well, if I want to see a bunch of movies, my price will go up by several dollars and actually be higher than that of Netflix." They’re going to say, "$1.20 isn’t much more than $1. $16 is, however, a good deal more than $10."
How the Company Presented the Increase
The tone behind Netflix’s announcement was perhaps more damming than the announcement itself. Because the first real explanation came in conjunction with its letter to investors, Netflix had the additional motivation of trying to keep its investors happy. As a result, it was confident and arrogant in assessing its changes, offering little justification and little worry that the business would be negatively-affected by the customer outcry. And so more outcry emerged, as customers felt Netflix was continuing to ignore their supposedly-pivotal "voice."
Redbox, however, posted a Q&A that addresses the motivation for the price hike, as well as some likely customer questions (strikingly similar to the kinds of questions customers felt went unanswered by Netflix). This continued the bridge of trust between company and customer, showing that while Redbox was indeed doing something unfavorable, it knew its customers would have concerns and felt it owed them a fair, simple explanation for everything. While it cannot be established that the Q&A made a positive impression, it certainly did not exacerbate outcry the way Netflix’s letter did.
Of note here is the relevance of the gesture itself. The substance of Redbox’s answers is actually quite thin, and if these types of answers had retroactively been offered to angry Netflix customers, they would likely not have been enough to calm the storm.
Redbox, for instance, acknowledges that customers deserve a demonstration that the 20% price increase will be accompanied by a corresponding increase in the value of the product, but it doesn’t really give any specifics about how that value will be increased (just that it is "always looking for opportunities to enhance our services for you with things like smart phone apps, games product, and more of the top new releases").
And its answer for why it needed to increase prices seems at least remotely-questionable, given Bank of America just added a fee for the exact-opposite reason. Redbox claims higher debit card transaction fees necessitate the 20% price hike, but Bank of America, citing the same legislation, claimed it needed to add a $5 monthly fee for those who make debit card purchases due to limits on the extent to which these fees can be collected from merchants.
How the Company Considered the Market Climate
As noted above, the initial read on Redbox’s price increase is that the timing is terrible. Netflix is struggling, and its customers are looking for a new home. Redbox, which just announced huge profits, is about to go national with its branding campaign, predicated on customer-centricity and consistency. Is that really the right atmosphere for a price increase?
Intuitively, definitely not. But when one considers the overall nature of the business, his opinion will likely change.
Netflix is still dealing with customer outcry over a SIXTY PERCENT price increase, not to mention some blunders (Qwiskter…really?) along the way. Think of Netflix’s situation as the result of a "major" screwup.
With the primary competitor suffering from a major screwup, other market players have some leeway to make minor screwups. Redbox may look a bit worse in the eyes of its customers for raising prices by 20%, but when compared to Netflix, which raised them by 60%, it is still a saint. It is still a more customer-friendly, superficially-economical alternative.
So if a customer walks out on Redbox over the 20% increase, what is he going to do—switch to Netflix? Given the comparative "breaches" against customer-centricity, talk about cutting off the nose to spite the face.
Moreover, by "doing it right" with a clearer, more open, more customer-friendly rationale for raising its prices, Redbox is showing that it learned from Netflix’s mistakes.
Price increases are an inevitability. But there are right ways and wrong ways to introduce them. Netflix suffered by increasing its prices, a new phenomenon for its business, without any precedent for doing it correctly. It undoubtedly could have handled it better, but there is a high-probability it was going to fail, to some degree, by lacking the necessary roadmap.
Redbox had that roadmap, so it knew how to work in the price change without sending a message of abandonment to its customers.
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