Netflix – It’s not about the price, it’s about the (lack of) choice

The past few weeks have been rocky, to say the least, for media-streaming darling Netflix. First the company announced that it was going to split the DVD rental and streaming plans, effectively doubling the cost if you wished to do both.

When the announcement was made that it would happen, the stock took a mild hit. But then the day came and the new pricing went into effect. Netflix started seeing a backlash that was a few steps beyond “that stings” and instead began feeling “this really hurts”. Fast forward to yesterday, when the company lowered its subscriber guidance for Q3 and the stock today is down nearly 43% from its peak just a few months ago in July.

It’s a case of hero to zero – going from being the darling to the abused step-child. Netflix’s pricing decision is being screamed about in the world of tech and financial blogging, and analysts are wagging their tongues at the opportunity to get their names on a publication.

But it seems to me that nearly everyone who is focusing so much on the price is missing the bigger picture. In short, it’s not just the price, it’s the (lack of) available options.

There’s an adage that goes something like this – When value exceeds price, even by $.01, the customer will buy. With Netflix, we did indeed buy. Many of us pushed toward the streaming-only plan months ago, foregoing the extra buck or two per month for DVDs. Content was a bit limited, but we saw Netflix bringing in new partnerships and life was good.

Until it wasn’t. Because up until a few weeks ago, we all knew that if we really wanted to grab some DVDs we could do so by simply paying a couple of extra bucks toward our membership for a month. No problem. Whether we actually exercised that right or not wasn’t the issue. We knew we had that choice and we were comforted in it.

Until we couldn’t.

There’s an odd duality to Netflix. At $9 per month, it gives us just enough entertainment to ignore it on our credit card statement. But I firmly believe that we only chose to ignore it because we knew that we could have access to more content, more choices, by just spending an extra couple of dollars.

When the Starz fallout was announced, many people claimed that it was the proverbial back-breaking straw for them. I would venture to say though that most of these people don’t actually watch all that much content from Starz on Netflix streaming. If you’ve looked at the choices, they’re mediocre at best with only a few standout titles. What angered the glassy-eyed masses is that Netflix was removing more choice, yet still charging the same price. To top that off, if we want DVD access, it’s now going to double our monthly spending on the service

The price to value ratio has shifted. The customers are feeling like they’re in a bait-and-switch. Netflix has lost its primary value proposition because it has changed the entire picture.

What was once a no-brainer choice in the video market has now become another also-ran. There are far too many choices available in today’s world to take away from your offerings and expect anything less than a near-total backlash. Amazon’s video on demand offering is strong, there’s Redbox and there’s even Apple’s iTunes for those one-off nights when you want to watch a movie but don’t care to be bothered with a subscription.

In short, Netflix has given a lesson to just about every startup in the world. If you have to change your pricing structure, find a way to do it that doesn’t eliminate consumer choices along with your value proposition. Unfortunately for Netflix, it was a situation of far too many negatives in a very short span of time. From a business perspective, I hope the company recovers, but the consumer side of me doesn’t care.