That first computer started my 30-year love/hate relationship with technology. Thank you Mr. Jobs for your part in that, and for continuing to frustrate my attempts to change any battery in any of your products.

I’m sad to see you go, and I offer condolences to your friends and family. With the greatest admiration and respect….

Dave Kalman

As home entertainment evolves and subscriber acquisition costs grow, customer loyalty will have a greater profit impact

With more than 3 million subscribers (and climbing), Netflix is the leader in online DVD rentals. Founded in 1999 and rising out of the flames of the dot com bust, Netflix has earned a place among the country’s top home entertainment brands. With its tight focus and flawless execution, Netflix has made me an admirer. But as a customer since 2003, find myself strangely distant from and only loosely engaged with the brand. While the company aggressively pursues new subscribers, it seems curiously nonchalant about customer loyalty in the face of lurking competitive forces that include other DVD rental outlets, DVD sales outlets, on demand cable, broadband video content, computer games, and REAL LIFE, including work, school, family, and live entertainment.

Netflix does provide an enjoyable and useful website, which the company claims (credibly) as the industry leader in customer satisfaction. Yet beyond perfunctory email newsletters I’m unaware of any attempt by Netflix to engage me in other ways. I spend about 40 minutes each month updating my queue and reading reviews, and then I’m gone. I generally ignore Netflix emails, which lack content value. When I watch a DVD (about two each week), I perceive the branding on the mailing sleeve as I remove and reinsert the disc (and then return it to the mailbox), but the movie experience itself is only weakly associated with Netflix. (Where’s the Netflix splash screen?)

As much as I enjoy the service, Netflix ultimately falls low on my priority list. For Netflix this represents a risk in terms of my loyalty. I’m susceptible to both competitive offers and brand apathy. I might switch, or simply lapse as the home entertainment landscape evolves. This kind of weak brand attraction may be what put Netflix in an awkward position in 2004, when in April it announced it would raise its standard pricing from $19.95 to $21.95 and then in November flip-flopped by lowering the price to $17.99 under pressure from Blockbuster and Wal-Mart. When brand attraction is weak and the cost of switching is minimal, then price remains one of the few (and most unforgiving) competitive levers. At the time of the price cut, Netflix stock suffered a decline of more than 40 percent (from which it has recovered nicely).

It’s also possible that Netflix has become somewhat complacent with its apparently low subscriber churn. Netflix pegged its 2Q 2005 average monthly churn at 4.7 percent (vs. 5.0 percent for 1Q), which sounds great but still represents approximately 529,000 cancellations in the quarter. (Netflix, like many companies, has its own “churn” formula, which it defines as “customer cancellations in the quarter divided by the sum of beginning subscribers and gross subscriber additions, divided by three.”) While the company added 707,000 new subscribers in the same period for a net increase of 178,000, the cancellations are nothing to sneeze at. At this level, Netflix churns more than half of its subscribers every 12 months. And therein lies the challenge. Conventional wisdom says that it costs less to keep a customer than to find a new one, yet while Netflix may defy conventional wisdom in the short term through aggressive new sub acquisition, in the long term it must create new ways to strengthen its brand attraction. By its own account, in 2Q 2005 the cost to acquire a new subscriber increased 6 percent versus the same period in 2004. On the operational side, Netflix has the added complication of sensitivity to postal rates, which could rise in 2006 and 2007, depending on the outcome of postal reform legislation in Congress.

My meandering detour through the numbers juxtaposes the facts of Netflix’s astounding success with indicators of potential hazard. The consequence boils down to customer profitability: if pricing remains sensitive to external pressure while acquisition costs continue to increase as the market matures, then customer loyalty, i.e., brand attraction, becomes a key lever for both profitability and the ability to introduce new high-growth products.

The lack of a Netflix effort to engage me beyond the website and a few emails suggests over-reliance on new subscriber acquisition, and perhaps a classic dot-com online-only bias. If Netflix aspires to reduce churn further and increase revenue per subscriber, it must consider specific strategies or programs beyond the website and email. One approach could be to reimagine a Netflix subscription as membership in a club (not unlike the Auto Club), with membership-oriented benefits such as print publications, discounts, and events. Another approach could be to reposition Netflix as a full service media company, offering exclusive and/or original content as a way to transition into broadband delivery. Of course, a growing, tightly focused, and profitable business such as Netflix is an attractive merger or acquisition prospect. But even if Netflix hopes for nothing more than to be acquired, increasing brand attraction can only enhance stakeholder value. END

Sidebar: Breaking the Mold While Keeping the Brand Promise

Netflix has demonstrated remarkable sensitivity to its subscribers’ needs. I receive DVDs the day after they ship. My DVDs arrive in a package uncluttered by advertising. And I receive essential emails only. When a DVD I mailed was lost, Netflix apologized to me for my inconvenience. There was no interrogation or penalty. These high standards provide a competitive advantage, but at the same time, they represent a challenge by limiting the new products, partners, and communications the company can introduce to the brand community. Deviation from the brand promise can trigger brand community resistance or backlash, such as when Porsche introduced its low-end Boxter (sacrilege!), and later its Cayenne SUV (heresy!). (Do a web search for Porsche Boxter or Cayenne, and you’ll see what I mean.) Netflix has an advantage over Porsche in being able to test and refine new offerings over the course of a subscription. The key for Netflix is to use new offerings to increase the value that subscribers receive while resisting the temptation to simply monetize the subscriber database without adding value. – David M. Kalman

David M. Kalman is the president of Terrella Media, Inc. and editor of BrandMagnet.

Related Content

Netflix Q2-2007 Update

The disruptive nature of the smartphone may not be immediately obvious, but as acceptance reaches critical mass we’ll start to see the effects. Consider the list of devices, products, and services that smartphones already duplicate or replace.  (And imagine the world twenty years from now when a super-smartphone fits in a shirt button or in a subdermal implant.)

Replaceable/Replaced by smartphones:

Alarm clock
Assisted listening device
Automated Teller Machine (ATM)
Bar code scanner
Calculator
Calendar
Camcorder/VCR
Content: printed books, newspapers, reference materials, stock tickers, school books
Credit card reader
Game controller
Egg timer
Event tickets
Flashlight
GPS device
Guitar tuner
Handheld game system
Identification card
Lost child locator/tracker
Makeup Mirror
Metronome
MP3 player/CD player
Musical instruments/devices: Theramin, keyboard, drum pad, synthesizer, mixing studio
Notebook PC
Notepad
Pedometer
Personal security device (“alarm”)
Photo album
Pocket pager
Pocket translator
Police scanner
Remote control device
Road map
Rolodex
Radio: broadcast radio, emergency/weather radio
Point and shoot camera
Seismograph
Speedometer/odometer
Store coupons
Strobe light
Telephone/answering machine
Television
Tour guides
Voice memo recorder/dictating machine
Walkie Talkie (PTT)/emergency communication device
Web cam/video phone
Wireless router
Wristwatch

…and many more. Can you add to this list? Leave a comment.

Added 1/15/2012…

Biometric scanner (Fingerprint and iris scanner)
Heart-rate monitor
Hearing tester
Steering controller

Can you think of more?

The Devo interactive approach offers some interesting opportunities for marketers. (Imagine feature films and t.v. series from which users can instantly order the product placements.)

Also, I’m intrigued that Devo’s interactive video format requires features that Youtube currently can’t support. Just when we thought Youtube was the only game in town, Devo launches cutting edge capabilities on Mashable.

Allegedly, when Ms. Gaudio contacted the magazine asking for an apology and compensation to be donated to a J school, editor Judith Griggs offered a flippant “my bad” pseudo-apology, asserted that content on the Web is “public domain,” and then proceeded to suggest that Ms. Gaudio should pay the magazine for having cleaned up her article.

When Ms. Gaudio went public with this incident on her LiveJournal account, the story went viral and all-out war has been declared by the online community with hundreds of blog posts, an acid rain of comments on the Cooks Source Facebook page, a new Wikipedia entry, and a Google bomb that displays the new definition griggs or to be griggs’d, meaning:

1. To use content on the web without permission, then request payment from original author for rewrites and editing.
2. To remain ignorant of plagiarism, ethics, copyright, and asshat behavior.

It doesn’t appear this incident was an oversight (we can forgive mistakes). Instead, it looks like this is the Cooks Source business model, as clueless as that may seem. One blogger has created a Google spreadsheet that ostensibly documents more than 100 examples of articles in Cooks Source copied from other publications. Another blogger seems to have confirmed several instances where the copying occurred without permission.

Having worked in publishing for more than 30 years, I’ve seen mistakes, miscommunications, and some legitimate disputes regarding publication rights. I’ve never seen a publisher flat-out steal content as a matter of course, and then reveal such a complete lack of awareness.

Consider somewhat of the inverse situation. A young woman shared 24 songs via Kazaa, and was recently hit with a $1.5 million judgment in a suit by the RIAA.

If I were advising Cooks Source, I’d recommend a heartfelt apology to be accompanied by significant payments for each instance of copying without permission. It appears that Cooks Source is a tiny operation with hardly any money, but unless it comes to terms with its aggrieved authors I suspect it won’t be around much longer.

Author’s Note: You probably noticed my use of the word “allegedly,” and my observation of how this incident “appears” and “seems.” I didn’t interview the primary parties, and I don’t feel obligated to do so (I’m not a news organization); however, I’m cognizant that things on the Internet are not always what they seem… even if lots of people believe them. I’ll update this post if I become aware of any new facts. In the meantime, you can search for “Cooks Source,” and occupy yourself for a week reading the results.

In “the old days,” a publishing operation was mainly a manufacturing process with most of the company resource devoted to production and infrastructure. Entry into publishing required a huge capital outlay.

Today, publishing is becoming a pure marketing relationship process, where content (the sharing of knowledge, entertainment, and enlightenment) binds together communities of buyers and sellers at lightening speed. The financial bar to entry is lower, but the requirement for caffeinated beverages is greater than ever.

So what did I see at the Niche conference? I saw dozens of niche publishers, all passionate experts in their subject areas. (I learned that “tribology” is not about the Tribbles of science fiction, but the science of the troubles with friction.) These publishers shared their wildly creative business models and their enthusiasm for the possibilities presented by digital media. The mood was optimistic, and for the first time in a long time it felt like the beginning of an industry instead of the end.

CB enables business users to publish any piece of content—such as a PDF, office doc, HTML, or other file—behind a gate that requires users to log in or register. CB is for publishers, marketers, and other content creators who need to know who views their content, but don’t want to hire a developer or wait in a corporate queue. Intended for lead generation, audience development, and content marketing, ContentBoxer saves time and money by automating and hosting the functions of a professional publishing operation.

CB requires no technical skill to operate. Upload a file, define your registration form, then click Launch. CB produces a link you can share in email, on your Website, or on social networks. When a user clicks the link, your CB landing page appears with a content preview and registration form. To learn about your audience, click Reports and view real-time data, including users’ answers to your registration questions.

Use CB to deliver white papers, product literature, reprints, digital editions, magazine samples, or even embedded content such as a Youtube video. Here’s a demonstration using Terrella’s “Brand Communities” white paper.

For more information about ContentBoxer, see our FAQ.

Terrella Media’s David Kalman designed the Faire concept for Bay Area remodeling contractor Keycon, Inc., and marketed it with a campaign of print, email, direct mail, and online promotions. For event management Kalman selected social media upstart Eventbrite, which provided the event landing page, registration system, and built-in email marketing for sending invitations and event reminders.

Kalman notes that the Eichler Remodeling Faire wouldn’t be possible without the ability of the Eichler Network (the publisher of CA-Modern Magazine and EichlerNetwork.com) to target the 7,000 Bay Area Eichler households. The Eichler Network continues to prove the value of niche media.

Eventbrite users will have an opportunity to vote for the ultimate MyEventRocked winner. Stay tuned for updates.

Keycon’s Eichler Remodeling Faire 2010 drew more than 600 adults and 40 kids for a fun and informative event at the Mountain View Community Center, May 15, 2010. And once again, the caterer kept the food and drinks coming as attendance surged beyond expectations.

Produced by remodeling contractor Keycon, Inc., the Faire helps Eichler owners “realize their remodeling dreams” in a party-themed venue. This year, Eichler homeowners met with 16 Eichler expert companies and shared some BBQ while the children played in the Faire’s Kid’s Construction and Design Center stocked with Legos, Play Doh, and other creative toys.

As with last year’s event, Eichler Remodeling Faire 2010 was powered by Keycon owner Ron Key’s vision and relationships with Keycon’s expert partners and subcontractors. In support of the event, once again the Eichler Network provided the marketing platform and Eventbrite.com provided online event management.

The Eichler Remodeling Faire 2010

Producer: Keycon, Inc.

Event Logistics: Judy Nakamura, EVENTS

Marketing: Dave Kalman, Terrella Media, Inc.

Media Partner: The Eichler Network/CA-Modern Magazine

Catering: Absolute Barbecue Company

Online Event Management: Eventbrite

For a list of Eichler Faire 2010 Exhibitors, visit Keycon’s Website.

More Faire Photos

Getting some tips from architect John Klopf

Learning about Eichler painting

Lined up at the Keycon booth

h/t to Crooks and Liars.