Will you be ‘Netflixed’ by your marketing decisions?

Mass customer exodus analogous to a run on the bank

As this story goes to press, Netflix stock is trading at $74.88 a share — down from this summer’s price of $300 a share. The stock tumble came after the company revealed it has lost 800,000 customers since June. Customer defections came as a result of two bungled marketing decisions: a 60 percent price increase in July and a failed attempt to spin off its DVD-by-mail service.

What makes Netflix’s fall from grace so frightening is the speed of its collapse. It is analogous to a run on a bank. Netflix Chief Executive Reed Hastings has already begun rolling back changes and hopes to lure back customers. Unlike Netflix, however, regulated entities may not have time to make vital course corrections. As of today, 84 banks and 13 credit unions have been closed by regulators during 2011 alone. In any event, few businesses of any type can afford the kind of staggering customer losses facing the video rental giant.

“Too many people think marketing is simply creating clever catch phrases and ‘getting our name out there.’ That’s the fun part, but real marketing requires tedious legwork. They fail to do the research, undertake thoughtful planning or make an emotional connection with audiences,” says COCO+CO. President and Chief Executive Officer Tim Coco. “The Netflix fiasco is the latest example of CEOs and marketers failing to understand customers’ mindsets and executing without a rational plan,” he said.

Netflix, like others, actually has valid reasons for its decisions. Price increases were needed to pay for greater movie and television rights, and streaming videos rather than sending DVDs through the mail is more efficient and convenient. Unfortunately, the company didn’t adequately explain its rationale and then went on to confuse customers and complicate their experiences with separate websites and user accounts.

“It is simply too dangerous not give marketing issues serious consideration at the earliest stages of business decision-making,” Coco says.

Finiracle Special Report

Look at BofA’s debit card fee from two perspectives
Discussion of risk and opportunity should take center stage

(Editor’s Note: Bank of America has since caved in to public pressure on debit card fees—a lesson in itself. However, the principles discussed here remain valid during any future fee discussion. This is not the end of fees—albeit the ones that follow may not be as highly visible.)

Bank of America’s decision last month to charge a flat $5 fee for use of debit cards drew widespread public rebuke. The bank, like many of its peers, claims it needs the extra money to offset reduced retailer swipe fees.

There are two ways to look at the bank’s fee. First, widespread adoption of such fees could force customers to sacrifice the convenience of plastic and return to widespread paper check use. This could actually cause costs to rise at financial institution as more tellers are needed and processing costs rise. Bank of America — and now Wells Fargo, Chase, Regions Financial and SunTrust, among others — may have it right that consumers are willing to pay more for convenience. It is still a risky proposition for community banks and credit unions whose depositors may differ demographically.

Long term market share growth a consideration

On the other hand, community banks and credit unions can trade possibly increased revenues from debit card fees for gains in market share. These institutions though must carefully evaluate the option by looking at Bank of America’s deposit market share at branches in their communities. Outside of major metropolitan market areas, there may not be enough low hanging fruit to capture.

Even if growing market share is possible, the cost of grabbing and servicing that money may not be profitable. Advertising Age’s Jack Neff explains one reason why:

“Five years ago, banks profited even from customers who had modest checking or savings balances, because they could make enough money on the spread between low or no deposit interest rates and loans. But post financial collapse, that’s not really happening.”

Of course, a long term view is required. At some point lending will again increase and the cost of money will be adjusted as the Fed deals with changing realities. Is it worth sacrificing a bit of capital now for a stronger position later? Every situation is different.

A hybrid solution may work at smaller institutions. That is, adopting increased fee structures for one or more unprofitable categories of customers, but keeping those fees modest compared with the large banks. It is also important to keep in mind the large banks are not your only competitors. Another community bank or credit union may not find it worthwhile to draw deposits away from shrinking Bank of America branches, but profitable to take them away from you.

Be careful.

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