"Social media marketing suits me perfectly..." (illustration by Shane Clester)

If this is the social media revolution, wake me when it’s over.

Social media was supposed to forge stronger relationships between companies and customers. It was also supposed to provide a massive improvement over traditional advertising, since social media doesn’t “interrupt” people when they’re trying to enjoy their favorite reality shows set in New Jersey.

In this revolution, customers aren’t pestered by marketers; rather, they give “permission” to marketers by visiting their websites, signing up for their newsletters, or following their social media accounts. It’s an idyllic marketplace where companies and customers all like each other and swap +K’s in exchange for “value” and “utility.”

Too bad it doesn’t exist.

Plus, we all remember what lurked in that other Garden of Eden…

In Twitterland, amidst the chirping blue birdies and plummeting whales, a new creature has emerged from the undergrowth: the Twitter Stalker (a Twalker?). He won’t interrupt your valuable stream of tweets about where you had breakfast, the deaths of celebrities who haven’t really died, or retweets of articles talking about other people’s thoughts about Twitter.

No, interrupting all that would be sacrilegious.

Rather, the Twitter Stalker just follows you. He doesn’t attempt to send you a message or even comment on your tweets. He just saw that you tweeted something about, say, SEO, and since he works in SEO but isn’t very good at it, he decided the best way to sell you his services would be to simply follow you…

Silently…

In hopes that you’re one of those tweeters who mindlessly follows everyone back, so that you might see his tweets about algorithm tweaks. And then, maybe, you know, hire him.

It didn’t have to be this way…

Had he done any research, he might have learned that you have no interest whatsoever in search engine optimization — indeed, you don’t even have a website — and that you meant to type “SFO” at the airport, but the damn autocorrect changed it.

But he’s a Twitter Stalker. He don’t do no stinkin’ research. ‘Cause everyone told him “Twitter is revolutionary” and “all you have to do is start an account and start following people.” He was told not to try to sell anything — that would violate Twitterquette — but to just build relationships.

But they never explained to mediocre SEO guy how to start and maintain relationships with thousands of people at the same time. Indeed, he turned to the Internet in the first place because building relationships in real life wasn’t his thing, either.

So he just follows. And follows. And waits. And if you don’t follow him back, he might unfollow you… wait a few weeks… then follow you again, so that you might respond to the second notice that you’re being followed. And somewhere in the background, you hear The Police singing, “Every breath you take…”

You may think I’m exaggerating, but some guy from something called Social Media Marketing Magazine kept doing this to me again and again and again. Given this demonstration of his social media prowess, I ignored him. But he kept trying and trying and trying. A regular Energizer Bunny of Twitter stalking.

But he’s not the only one. I also have all these tango schools and instructors and nightclubs following me, failing to note that Atomic Tango is a marketing agency, not an explosive new dance program. They all follow. They never say a word. I do like the image of being stalked by tango dancers, though.

And the stalking isn’t limited to Twitter.

LinkedIn seethes with stalkers who barely have anything on their profiles, and who invite you to their networks by claiming that you’re a “friend.” I’ve messaged a few of them with a, “Sorry, my memory cells are toasted. Where did we meet?” but they never respond. Some are obviously spammers. Others are apparently startled that their stalking generated an actual human conversation. “Wait, you mean we’re supposed to talk to people in our networks? I thought we just connected with them, and they would offer us jobs and money…”

To all these people, I just want to say, knock it off. If you want to sell me something, fine, just go ahead and interrupt me already. Look up my contact info and drop me an email or a letter with a thoughtful offer based on my interests. I have actually responded to some of those.

And just run some freakin’ ads already.

Particularly clever and creative ones. I’ve responded to more than a few of those, too. Really.

In fact, lots of people do. For all the claims of social media’s superiority as a marketing tool, there’s far more proof that traditional advertising drives conversations and sales, and that social media rarely sells anything but kogi tacos. (Hint: “friends,” “fans,” “followers” and other f-words do not necessarily translate into sales.)

What I don’t respond to: silent lurking in the background of my social networks. When it comes to marketers like that, I don’t want a relationship — I want a restraining order.

An uncut industrial diamond ready for hyping. (photo by Shieldforyoureyes Dave Fischer, via Wikimedia Commons)

When I was fresh out of college, I met this millionaire who made his fortune selling diamond jewelry through supermarket tabloids. You may be wondering, what kind of jewelry sells through the cheesiest rags on the planet — newspapers that you wouldn’t dare use to line a birdcage lest you kill the bird?

That’s a good thing to wonder.

These were genuine diamonds — genuine industrial diamonds, that is, worthless in the general jewelry market. Yet the tabloid readers saw the word “diamond” and their eyes lit up and their mouths watered and their hands reached for the telephone as the words “my precious” escaped from their lips…

Of course, we poke fun at these tabloid readers, even though many of us consume a giant digital tabloid, 140 characters at a time. And we roll our eyes at their gullibility when it comes to jewelry, because we know that even gem-quality diamonds are mostly the product of marketing and monopolization, right?

(Tip: look up Australian brown diamonds, which were worthless until a massive marketing campaign recast them as “champagne” diamonds. Yes, we marketers can sell anything.)

Seeing that I was a business newbie, the millionaire taught me that some people will believe anything — you just have to find the right people and feed them the right magic words. He also advised me that if something sounds too good to be true, it’s too good to be true.

And that doesn’t just apply to shiny rocks…

Faux Facts About Facebook

Fast forward a couple of decades. That advice came back to me a few weeks ago when I read a headline on AllFacebook.com proclaiming, “96% Of Small Businesses Are On Facebook“.

Hmm, that didn’t sound right to me. Most of the small businesses in my neighborhood aren’t on Facebook, and this is a busy part of West L.A. I also know that most of the businesses (small and large) in my hometown of Roseburg, Oregon aren’t on Facebook, either, which I’m guessing is true of most small towns. So 96 out of 100?

Odder still was the attribution: “These figures from engagement marketing company  come in higher than anything we’ve seen yet…” (sic). In addition to the awkward phrasing, that sentence contained an extra space where the name of the “engagement marketing company” should be. That’s some odd editing.

Finally, near the end, the article acknowledged that the stats came from a study by email-marketing firm Constant Contact of 1,972 organizations, “ninety-five percent are Constant Contact customers.”

Really, AllFacebook.com? You’re hyping the fact that small businesses who employ an email marketing service are on Facebook? Why not go a step further and tell us that they own computers and use electricity, too?

Let’s play with numbers a little more…

That 96% is only 1% more than the number of Constant Contact customers in the survey. That tells us that, among the NON-Constant Contact customers in this survey, a very small percentage (as low as 25%) are on Facebook — and that still sounds high to me.

Like the diamond-hungry tabloid readers, today’s social media zealots see any remotely shiny factoid about their industry and their eyes light up and their mouths water and their hands reach for their keyboards as the words “my precious” escape from their lips…

They seldom dig deeper, and even when they do, they refuse to acknowledge that the shiny nuggets they dig up are actually worthless junk. To validate themselves and their efforts, they spin marketing tales in hopes of convincing us that imperfection = champagne.

Now Facebook can be a useful tool for small businesses, but exaggeration and misdirection will only turn off savvier small business owners — the ones who could actually create success stories worth talking about. Until more of those stories emerge, just repeat what that millionaire told me: if it sounds too good to be true, it’s too good to be true. And if you meet anyone who still believes the hype, let me know, ’cause I can get them a great deal on some diamonds…

Why would anyone be dissatisfied with this? (photo by BrokenSphere via Wikimedia Commons)

So I’m reading IMC The Next Generation by Professor Don E. Schultz, the father of integrated marketing communications. This seminal book offers up brilliant approaches to marketing management (such as value-based customer segmentation and goals-based budgeting) with a large side-order of raw naiveté (the nonsensical customer-centric marketing mix).

But what inspired me to blog is not Schultz’s ivory tower tendencies but his Golden Arches slam on pages 167-168…

“On any given day, 11 percent of McDonald’s customers are dissatisfied. About 70 percent of dissatisfied customers are further dissatisfied with the way their complaint is handled. More than half of all dissatisfied customers visit McDonald’s less frequently as a result and tell as many as ten other people about their unsatisfactory experience… While the company is still a fast-food giant, it loses an estimated $750 million a year as a result of this marcom inconsistency. Even for McDonald’s, that’s a lot of money.”

And that statement is a lot of bull…

Now, I’m no fan of McDonald’s, but it’s not because I’m dissatisfied with their service — I’m actually impressed by McD’s clockwork operations and consistency. I just happened to see the documentary Super Size Me, and I’m not interested in putting any of McDonald’s products in my mouth.

But I will defend the chain against superficial thinking. Schultz’s “estimate” (not proof) that McD’s loses three-quarters of a billion dollars annually because it dissatisfies 11 percent of its customers is not only a hasty assumption, it could be completely wrong. Why? Because he fails to ask the key question:

Who are these customers and what the hell are they complaining about?

Customer-centrists like Schultz rarely acknowledge the existence of a creature called “the bad customer.” Anyone who has ever worked as a waiter has probably met more than a few bad customers, and has probably had the urge to throw them out (or worse). Indeed, smart businesses do throw bad customers out and, even smarter, encourage them to patronize their competitors.

Who are these 11 percent and what could they be unhappy about? Consider this possibility…

McD’s Employee: “Welcome to McDonald’s! How may I help you?”

11 Percenter: “Yes, I’d like a Big Mac, cooked medium-rare, without pickles, and double the cheese.”

McD’s Employee: “Uh, sorry sir, all of our Big Macs are prepared the same way.”

11 Percenter: “That’s bullkaka! Then give me a Quarter Pounder, but double the cheese and…”

McD’s Employee: “Uh, sir, all of our food is prepared the same way.”

11 Percenter: “What?! That’s outrageous! It’s the age of the customer, and I’ve got a B.S. degree in customer centricity! I demand to get what I want how I want when I want! Or else — or else — or else I’ll tweet about it!”

He then demands to see the manager, and won’t budge out of line until he does, and when the manager says nothing can be done, he bangs out a steaming email to corporate, which ignores him. He’s thus further dissatisfied, so he posts a music video about his complaint on YouTube in hopes of scoring some gift certificates and maybe a record deal.

Can you imagine some of the other people who might be dissatisfied with McDonald’s?

• “What do you mean I have to vacate my booth? I’m a paying customer! If I want to sit here for three hours without buying anything more, then I will sit here for three hours without buying anything more! Where’s your manager?”

• “OMG, this bun has wheat in it! I’m allergic to wheat! Why didn’t you tell me this bun has wheat in it?! I’m so gonna sue… unless you give me $100 right now for my pain and suffering. Where’s your manager?”

• “Don’t you dare tell me how to raise my kids! If they want to run around screaming and throwing french fries, that’s their First Amendment right! Where’s your manager?”

• “Why is there a line at lunch? I’m in a hurry. Why aren’t the McRibs ready already? Damn, this place is slow! Where’s your manager?”

• “Don’t tell me you’re out of apple pies. I come by here every day to get my apple pie, and I always get it! And no, don’t try to push that cherry pie on me. Where’s your manager?”

• “Damn, you’re cute in that uniform! What time do you get off? And by ‘get off,’ I mean, ‘get off’! Get it? What’s your phone number?”

Any of those could be possible. We don’t know, because the book doesn’t tell us.

The real issue here is that mass-marketing and efficiency are anathema to customer-centrists, who fail to understand that not all businesses can or even should satisfy all of their customers, since trying to please everyone can lead to failure.

McDonald’s has spent more than six decades honing a system that works worldwide, and it works by emphasizing uniformity and efficiency. Catering to individual requests would either throw that system out of synch or drive up McD’s costs (and prices). And either of those outcomes could cost the company much more than $750 million.

And what’s so bad about the number 11? Is that dissatisfaction percentage unusual for a large business? And what would happen if those 11 percent went away forever? You know the answer: McDonald’s customer service satisfaction rate would reach 100%. That’s right: the key to satisfying all of your customers is to make the unsatisfied ones go away.

There’s a reason McDonald’s is “still” a fast-food giant after 60 years, and that it still satisfies an impressive 89% of its customers. How many businesses can claim to do that?

So as you read business books and articles, beware of undercooked statistics and sloppily assembled estimates. Numbers without hard questions are just junk food for the mind.

I felt a great disturbance in the working force, as if millions of marketing voices cried out in terror over what their new year’s resolutions should be. After all, none of us is really gonna lose that weight or write that novel, so we might as well focus on what we do best: make promises about marketing. So without further ado (or adon’ts), here are some suggested marketing new year’s resolutions in a format we business geeks understand – a slideshow…

Uncommon sense that's 2.Overdue

Seriously thinking about social media? Then think about it humorously first.

Ron Shevlin has written the definitive primer for anyone considering a social marketing campaign: “Snarketing Two Dot Oh: A Humorous Look At The World Of Marketing In The Age Of Social Media” — a must-read before diving in.

What’s so different and definitive about it?

“Amazon carries more than 150,000 books on social media, nearly 2,400 of them on social media marketing…” writes Ron. “There’s way too much bad advice about marketing and management being thrown around out there, often relying on shoddy research and analysis. I want to help you see why it’s bad advice. And — hopefully — do it in a humorous way…”

The Snark Goes Hunting

There’s no “hopefully” about it: Ron succeeds in deliciously skewering the Kool-Aid quaffers and snake oil merchants who have glommed onto social media. While reading the book, I actually LOL’d — not a term I use often. (Based on all the social media posts and comments I’ve read, everyone on the Internet is constantly laughing out loud; we must be the happiest generation in the history of the planet.) His weapon of choice: snark.

You won’t find the colloquial definition of “snark” in most dictionaries, which refer to Lewis Carroll’s imaginary creature in “The Hunting of the Snark.”  Rather, you have to turn to the Urban Dictionary, which defines it as “sarcasm” or (the favorite) “snide remark.”

Now, snark is not to everyone’s tastes. Some consider it too mean, and also a significant contributor to the decline of American civility. To which I say, get over it. Snark constitutes the perfect antidote to the nonsense being bandied about by self-proclaimed social media “gurus” and “thought leaders” — nonsense that could waste the time and money of all the innocent people that these charlatans sucker, I mean, consult, I mean, sucker.

Speaking of “thought leaders,” Shevlin quotes the Harvard Business Review‘s six steps toward becoming a thought leader, from creating a robust online presence to appearing on TV. “By that criteria,” he mordantly concludes, “Snooki is a thought leader.” In a similar vein, Shevlin states that anyone who cares about their Klout score must be named Lou. “I’m just not sure if your last name is Nee or Zer.”

Shevlin doesn’t spare himself, particularly when it comes to his relationships with the women in his life. I enjoyed his conversation with his mother about social media (Mom: “Am I on Twitter? No. What is it? Some kind of drug?”) and his proposed new social network DOODS (Dads Of Only Daughters – “Our minds are controlled by a force 1000 times greater than the forces of gravity and nature”).

Smarts Amidst The Snark

As we fans of Jon Stewart’s “Daily Show” know, sometimes the greatest truths are revealed in humor. Plus, it beats having to read another dreary, bloated textbook.

“Snarketing 2.0″ isn’t just ranting and ridicule; it also contains solid advice drawn from Shevlin’s 25+ years as a marketing consultant and executive (he currently serves as a Senior Analyst at financial services consultancy Aite Group). His discernments about marketing, leavened with an acerbic wit, are the reason I regularly read his blog.

Shevlin’s lists of fictitious afflictions — “Financial Diseases,” “Marketing Maladies” and “Social Media Syndromes” — actually contain more useful insights than I’ve seen in HBR’s blogs. His “Net Promoter Syndrome” mocks the overrated Net Promoter Score, accurately noting that “having customers who are somewhat or even very likely to refer a company to their friends and family is completely worthless unless those customers actually make a referral.”

Elsewhere in the book, Shevlin provides savvy tips on Twitter follower count, customer service hysteria, the three types of metrics, and management religion versus management science. Overall, the book contains 52 articles, one for each week of the year, but given the value of the insights — and how tasty they are to read — odds are you’ll finish all 52 in the space of a cross-country flight. And at $5.95, “Snarketing 2.0″ will deliver a higher ROI than most social media investments (see pages 9-22). And I’m not joking.

They had me at “meow.”
They lost me at “sign up.”

I was flipping through Facebook, unmarking most of the “Top Story” posts (seriously, Zuckerberg, get your algorithm right already). And that’s when it caught my eye — an ad featuring a cat lounging in some Jetsons-age contraption:

Since I’m addicted to furry creatures with pointy ears and tuna breath,  I was hooked. Since I also dig on futuristic design, particularly anything with the word “pod” in it, I clicked…

And that click constituted an act of extreme rarity.

The click-through rates on Facebook ads have plummeted to such abysmal lows, Facebook’s own head of measurement and insights is publicly disavowing them. Instead, he’s hyping the value of “awareness” and other metrics used by old-school media and previously ridiculed by new-media zealots. (For more on the new media flip-flop on metrics, see my post, “And The Standards Go Out The Browser Window: Banner Ad-Nauseum”).

So call CNN and issue a tweet: here was a Facebook user tearing himself away from his friends’ posts to actually click on an ad.

And just as quickly, I clicked away, pausing only long enough to capture the landing page so I could share it here:

The ad took me to some site I’d never heard before, Fab.com, and there was the Cat Pod that had been promised. The problem? I couldn’t learn anything more about the Pod, or the website selling it, since the site is “by invitation only.” Really? They ran an ad on Facebook to take me to a members-only site?

Ah, but I could gain access: I just had to provide my email address first.

Podded Cat Meets Old Dog

Now, when it comes to these here Internets, I’m an old dog who knows some old tricks. Way back when most of us “information-superhighway” travelers had accounts on Prodigy, Earthlink and AOL, I learned that if you give some stranger your email address, you’ll likely get back stuff you don’t really want. So these days, I give out my email address begrudgingly, even if it involves brands I know well. And I still get annoyed. I recently gave my email address to Groupon, and they responded by bombarding me with discounts on tanning sessions, teeth whitening and other offers I usually leave in my spam folder. At least I could trust Groupon to go away once I unsubscribed (which they did).

But who the hell is Fab.com? Would they be sharing my email address with Nigerian princes or the hucksters behind the “congratulations you’ve won an iPod” talking banner ads? Isn’t it customary to get to know someone, or enable them to know you, before asking for their email address?

So I bailed. I figured my cats could live without $79 pods. I’ll console them with some extra turkey and giblets instead.

And that is a classic example of “friction” in e-commerce.

No, not the turkey and giblets. Friction is anything that makes shopping more difficult for customers. That could be a long registration form, a dysfunctional search engine, or simply too many clicks to get to the products they want. In the bricks-and-mortar world, customers have to put up with some friction, such as essentials stashed in the back of the store, or mathematically illiterate cart stuffers in the “12 items or less” line. But on the Internet, friction lets prospective customers slip away. (Get it — “friction” and “slip away”?) Who needs hassle when there are hundreds of other sites that will happily take our money just a click away?

Now I understand any brand wanting to create an exclusive shopping experience. Stringing up that velvet rope, real or virtual, can make a business more enticing, since it keeps out the “riff-raff” and makes those admitted feel “special.” But before it can do that, the business must make sure people want it in the first place. You don’t want to put up a velvet rope and have no one but the bouncer waiting beside it. And creating that desire requires marketing: you must let people know you exist and that you pack a whole lot of awesome before you ask them to jump through hoops.

Fab.com did neither of those things. Now, as far as I know, Fab.com could be an amazing company run by kitten-rescuing Buddhist nuns with immaculate manicures and masters degrees in legal ethics. But prior to spotting this Facebook ad, I had never heard of them before, and since I couldn’t peek inside their site, I had no idea what else they offered beyond the $79 Cat Pods. They just wanted my email address up front for something unknown that’s by invitation only.

Now, that measurement-and-insights dude at Facebook can talk all he wants about how his ads are best used to create impressions. Ironically, the Fab.com Facebook ad was successful in generating a click-through. It was the impression that was far less than impressive.

It’s predictable: Apple releases a new product, and the devout start camping out at the Temple O’ Jobs to be one of the first to lay their hands upon it.

And just as predictably, people will ridicule these fanatics, usually with aspersions about their sex lives (or lack thereof). Note this tweet from comedian Aisha Tyler…

These same cooler-than-thou critics, though, never mock the thousands of fans who line up for nosebleed seats and overpriced food and even inclement weather at a sporting event, even though the same game is on TV and could end in a depressing way.

Nor do they mock the Hollywood entourages who absolutely MUST see a movie on opening night, even if it’s been ripped by critics and will appear on DVD in three months.

Indeed, I know people who will spend hours in line for a food truck.

So what’s the difference between the Apple fanboys and those who line up early for rock concerts, conventions, sporting events, autographs, theme parks, Black Friday shopping, hot Christmas toys, a new designer line at Target, or some trendy nightclub?

The answer: the hardcore techies actually provide value to the rest of us.

The faithful wait to enter the shrine (photo by Rob DiCaterino from Jersey City, NJ, via Wikimedia Commons).

1. They test the waters. Any new product, whether it’s a car or Broadway play, usually has glitches when it first hits the market. I dig Apple products, but usually wait three months so Apple can kill the bugs. But someone has to go first, and ideally it’s someone with the tech savvy (and enthusiasm) to identify and explain the glitches. While the rest of us blow gaskets when our tech toys develop problems, the techies not only don’t get flustered, they relish the opportunity to flaunt their bug-hunting savvy. We count on these unpaid product testers to write the early reviews on Amazon and CNET that guide our delayed purchases.

2. They serve as influencers. Early adopters, particularly hardcore fanatics, help spread the word as other consumers seek out their insights. Whether we’re talking a new phone, horror movie, or restaurant, marketers have always leveraged influencers to spread the word — early religions called them “preachers” and “evangelists” — since that’s far more efficient and cost-effective than targeting millions of consumers one-by-one or running a Super Bowl spot. Influencers are particularly valuable in social media, since they rush to issue their passionate verdicts on blogs, YouTube, and message boards, where followers await their word from on high. Their early enthusiasm or disdain also tells marketers whether a product is worth further investment or should be quietly shelved.

3. They initiate the buying that leads to economies of scale. New tech products are expensive to begin with, since they haven’t been manufactured in enough quantity to reduce costs. Some companies intentionally cut their margins (or even take a loss) to have a low “penetration price” from the get-go. But most companies need to charge full price at launch, and the early adopters willingly pay those “skimming” prices to be first (they’re the fashionistas of tech). Because they get the ball rolling, providing essential early profits for the company, the rest of us can wait. Without a sizeable crowd of early adopters, the rest of us only get a lower price when the company dumps its remaining inventory (see “$99 HP Touchpad”).

4. They raise the bar. Those queues in front of trendy clubs are a form of marketing, since they signal to passersby that there’s something inside worth wasting hours of your life. However, in order to ensure that fanatics will line up not just once but on every occasion, a company needs to consistently innovate and conjure up something OMG-worthy. When the lines disappear (or fail to materialize), you know your products have become commodities, right Dell?

Now, I love Apple products, but I won’t camp out for them or even wait in line. (I’m generally allergic to queues, particularly if they involve velvet rope.) However, I give serious iProps to those who do. These tech adventurers go out of their way at their own expense to facilitate and popularize our favorite toys — technology like smartphones and Twitter that some comedian will later use to ridicule them.

Now if I could only find someone who’d wait in line for me at the grilled cheese truck…

How business terminology is cooked up.

My friend Nina writes…

“I’m reading this article, and I can’t help but wonder: who comes up with the names for various consumer groups, like Millennials or, as in this piece, ‘X-fluents’? How do they gain traction? I think ‘X-fluents’ is stupid. It sounds too much like ‘effluent.’”

My response…

You remember the commercials that used eggs to symbolize a brain on drugs? Well, terminology fabrication is like that, but think of some mighty big brains and a drug called “fame.”

The perps include ad agencies, consulting firms, marketing writers (Seth Godin coins a term every 5 minutes or so), self-proclaimed social media gurus, research agencies, and professors trying to get published in the Harvard Business Review. For these guys, coining a term that gets adopted by society is like recording a #1 pop song or concocting a hit cocktail recipe. Since the theory-class doesn’t actually create anything that everyday people need or use, new terminology serves as their ticket to fame and immortality,

It’s a strategy that we didn’t study in business school (self-promo for wonks), but it’s a contagion that’s spreading. At least, according to us X-fluent wannabes (XFW’s).

“Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma – which is living with the results of other people’s thinking. Don’t let the noise of other’s opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.”

- Steve Jobs, 2005

What were they smoking?

You’ll find lots of articles and editorials skewering Netflix and its CEO Reed Hastings today, including this one in the L.A. Times, “Once High-Flying Netflix Is Now Stumbling,” which describes all the following events of the past few weeks:

• Netflix’s 60% price increase
• the ensuing defection of hundreds-of-thousands of paying customers
• its subscriber-aggravating loss of the Starz distribution deal
• the impending future of higher content-licensing costs
• the entry of other major competitors, such as Amazon
• Hasting’s mea culpa to subscribers via email
• his decision to make the DVD business a separate service called Qwikster
• and the company’s crashing stock price

The key strategic flaw? Not the 60% price increase — Netflix does need to cover its content-licensing costs. The lethal mistake was grossly underpricing its unlimited streaming service in the first place…

Netflix must have known that Hollywood would demand a bigger slice of the pie. Nobody can offer infinite Hollywood content and expect Hollywood to not pull out the forks and knives. The only outsider who has ever successfully negotiated with Hollywood is Steve Jobs, but he’s capable of walking on water. Everyone else, from Starbucks to Vivendi, Matsushita to Coca-Cola, has found that swimming with sharks is exhausting and can eventually cost an arm and a leg.

So why did Netflix underprice?

Companies often do so to penetrate a market and steal market share. That certainly worked for Netflix, as it acquired millions of subscribers and drove Blockbuster and other brick-and-mortar competitors mostly out of business. Once the competition is destroyed, the victor raises its prices. That’s predatory pricing in action.

But as Netflix discovered, if you grossly underprice to land a customer, you’ll find it extremely difficult to significantly jack up prices on them later. Customers will react angrily and vent their fumes on that social media thing. To avoid this, Netflix should have clearly stated that the low-priced unlimited streaming was just a limited-time introductory offer, while also clearly stating the actual price, which is still an awesome deal (all the videos you can watch ad-free for $8.95/month, which won’t buy you a popcorn and a Coke in most movie theaters).

One finance expert commented that Netflix successfully achieved a 60% price increase at a cost of only 2.4% of its customers — the net result being a bottom line gain. But that’s too limited a consideration. The customer attrition hasn’t stopped, yet, and Netflix’s customer acquisition costs are likely to increase now that the service is priced realistically and the company is perceived as having “ripped off” its past customers. Plus, even at just 2.4%, that’s still too many paying customers (and cash flow) to send to your competitors. I’m sure there are a lot of smiles over at Amazon and Hulu today.

What could be worse?

Hastings had also projected subscriber growth to investors, and Netflix’s stock was priced in anticipation of that growth. Where’s the stock price now? The last time I checked, Netflix was trading at $130/share — quite a drop from its 52-week high of $304 just a few months ago. That’s a market cap loss off about $9 billion. Trust me, Netflix will be hearing a lot more from its investors, who are now seeing red (and I’m not referring to the envelopes).

Above all, the previously gleaming Netflix brand has taken a beating. Once celebrated on magazine covers as the unstoppable startup that revolutionized movie rentals, Netflix is now being depicted as the bumbling opportunist that took its customers for granted, miscalculated the cost of Hollywood content, and issued faulty projections to its investors.

That formerly spotless brand wasn’t helped by Hasting’s hasty launch of a new brand, Qwikster. (Note: see update below.) Social mediaphiles quickly identified Qwikster as the Twitter handle of some stoner (see his original Elmo image above). Again, Hastings looks like someone who jumps without looking.

Going forward, Netflix may stabilize its membership base. It may sell off Qwikster to someone who doesn’t mind all the shipping-and-handling hassles of DVD rentals (hello, Amazon, got a sec?). It may negotiate some exclusive deals for prized content and produce its own content to differentiate from a stampede of competitors. Netflix will certainly no longer be the sensation it once was, but it will exist in some form or another. Kind of like that other once high-flying Internet startup that had millions of paying subscribers, fooled around with Hollywood, and miscalculated the future before tanking on its investors. What’s it called? Oh yeah, AOL.

Hello, Netflix, you’ve got fail.

Update 10.10.11: Admitting that the Qwikster move was a mistake (let me guess — they could find no prospective buyers for it), Hastings has dropped the Qwikster name and plans to keep the DVD and streaming services together under the Netflix name. Perhaps the only person bummed about this latest move is the guy who owned the name on Twitter. On that note, here’s a free streaming video for you: