Bentley College Marketing- Honors

This blog is for MK 402-H01 and the greater Bentley College population.

Tuesday, February 14, 2006

Netflix Nabbed for Neglecting Rampant Renters

This week I chose “Netflix’ Not-So-Unlimited Plan” by Jason Dowdell on Marketing Shift. In this posting, Dowdell explains that Netflix came up with a plan that allowed them to manage their seemingly too good to be true internet DVD rental business. The policy was that the most frequent movie renters would be automatically placed at the end of the waiting list for the most popular titles and delivery of their movies was intentionally slowed down. Dowdell explains that he was a former member, and wondered why after a few months his movies took much longer to arrive.

According to the Associated Press, Netflix has since changed their terms of use to include the message, “In determining priority for shipping and inventory allocation, we give priority to those members who receive the fewest DVDs through our service". Their CEO has since acknowledged their nondisclosure of the so called ‘fairness algorithm’, and has said that few customers have complained about it. Netflix has a customer base of 4.2 million people and by many accounts has extremely high customer satisfaction.

The interesting part of this article is that Netflix is a company that can alienate its heavy users in the name of the less frequent renters by this process called ‘throttling’. In the world of unlimited memberships, the optimum revenue stream comes from the people that pay the membership but seldom, or at least less frequently, use the service.

This is quite the opposite of what goes on in most companies who are subject to the 80/20 rule, which approximates that twenty percent of a product’s users account for eighty percent of its sales. If McDonald’s told its most frequent customers that they would have to let less frequent customers pass them in the drive thru line, they would probably see a slack in sales. However there is one big difference, McDonald’s would actually have to ‘tell’ them.

If Netflix was being open and honest about this, they could have simply included it in the terms of use to begin with. They have not been forced to change its ‘unlimited rental’ policy which they founded the company on. It turns out to be another example of a large scale company cutting corners and getting tagged in the process.

The greatest irony of this whole situation is that since this story is public and might make people angry, it is just going to wipe out the most frequent users and give Netflix exactly what they want; an even lower contingent of people who rent an insane amount of DVD’s per month and drive their costs up. The only real downside for them besides the ‘negative press’ is that they agreed to pay $2.5 Million in a class action settlement, but then reconsidered. The case is back in court, and set to be heard February 22nd, according to the AP. Dowdell says that Netflix is doing it self a disservice by poorly treating those who are the best marketing vehicles for the company, but Netflix added 1.6 million new cusotmers in 2005.

This story is marketing related because Netflix openly marketed itself as an unlimited DVD rental business, when in fact there was some fine print… that didn’t exist. This story informs marketing because it shows a situation where the ethically correct thing was not done and sends a message to marketers that in the future the same corners can not be cut. This piece improved my understanding of marketing by improving the definition of ethical practices. If I had to critique this piece, the only complaint would be that it is somewhat brief. Other than that I found it to be very relevant and thought that Dowdell made the article very poignant by linking his own personal experiences in with the presentation of the facts.

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