Is online movie rental a commodity?
I got an email from Netflix yesterday that they were reducing my monthly rate: "We're lowering the price of your Netflix plan!". Great news, but I have to wonder why they are doing it? I already had a good deal, because I signed up nine or ten years ago, I have the original plan (4 DVDs at a time) for the price of the 3 DVD plan now. I love the service and I've never had an issue with the price. I was perfectly happy paying $20.99 a month. Or maybe it was $23.99? I don't really know, nor did I really care. The service is great, what matter a few bucks. The convenience and the quality of the service has always been much more important than the price. And in my mind, it's a substitute for paying for premium cable channels. We only have basic cable.
My favorite Netflix feature is the queue (which was around from the beginning). It's great because I can add movie titles whenever I see an interesting movie poster on the side of a New York City bus stop or hear about a cool old movie from a friend over a cup of coffee. I don't have to think back about what I was interested in seeing in order to pick my next movie. I can even add movies that aren't yet available on DVD. A brilliant move... I want to add titles as I think of them and not have to keep another list of things I want to add ("my queue of things to add to the queue") at some time in the future. I probably have 40 or so items in my queue now, many of which are new or recent releases in the theaters.
Netflix has great customer service, too. For example if a movie gets lost, they replace it immediately... no questions asked! A great example of The honor system at work.
So I had to wonder: why drop the price? I think a more typical marketing approach with regard to price cuts is to change the price for new customers, but leave existing customers where they are. Such a change would help acquisition, but not retention. So changing the price for existing customers, must be more about holding off defection to copy cat services. I.e. Block Buster, etc. I haven't tried these other services, but I have to wonder if the industry is really at the point of a commodity, where the key differentiator is price?
The recent Q207 Quarterly Earnings Call for Netflix sheds some light:
Our strategy evolution is shifting some profits into growth investments for as long as our competitor runs their online service at a considerable loss. The tactics of our increased growth investments are higher service levels, lower pricing and slightly less marketing because we believe that is the most efficient combination for Netflix at this point.I hope this strategy works out. I have an emotional attachment, since they were the first in the market. I'm sure the industry will evolve to a download or streaming model. And Netflix will still be at the forefront of that movement. The delivery method isn't critical to this business model. Instead, the important factors are the queue, the recommendations, customer service, ease of use and so on. This evolution will also make Block Buster's one advantage (the ability to swap a DVD at a local store) obsolete.