If you are a Netflix customer, you woke up Monday to an email from Netflix CEO Reed Hastings starting with a sentence few business leaders enjoy uttering: "I messed up."
The note, which is a shortened version of a corporate blog entry posted by Hastings on Sunday, goes on to explain the previously unexplained reason behind the company's decision to separate the pricing plans for its DVD rental and video streaming services. That move, which effectively raised prices for many subscribers with no real explanation, has been wildly unpopular and it has wreaked havoc on the company's stock price.
It turns out that Netflix's decision to separate the services was a precursor to the company's planned move to split into two different businesses, a strategy that Hastings discloses in his post. The DVD shipping portion of the business will become know as Qwikster, a name meant to imply "quick delivery."
"For the past five years, my greatest fear at Netflix has been that we wouldn't make the leap from success in DVDs to success in streaming," Hastings wrote. "Most companies that are great at something – like AOL dialup or Borders bookstores -- do not become great at new things people want (streaming for us) because they are afraid to hurt their initial business.
"Eventually these companies realize their error of not focusing enough on the new thing, and then the company fights desperately and hopelessly to recover," Hastings continued. "Companies rarely die from moving too fast, and they frequently die from moving too slowly."
Hastings goes on to reaffirm his decision to separate the two businesses, noting that its DVD rental and and video-streaming businesses have very different cost structures. What Hastings got wrong, he admitted, was in not being transparent.
He acknowledged that he should have communicated the rationale behind the company's evolving strategy when it made its pricing changes two months ago. Or the company should have refrained from making the pricing changes until it was ready to announce that decision.
There are several lessons small businesses can glean from the Netflix pricing controversy.
First, if your organization has a foot in the brick-and-mortar and the online worlds, it is a reminder that they carry very different cost structures. In his note, Hastings points to the pressures that have plagued AOL ever since it crossed the line into print and the clash between online and "real world" bookstores business models that destroyed Borders.
Companies cannot underestimate the need to manage these lines of businesses separately, he said.
Second, be forthright, to the extent that the law allows. Taken in context, the pricing measures that Netflix took earlier this year make sense. I'm not suggesting that customers are going to like the decision any better now that they know why Netflix did what it did, but the context makes the negative reaction a bit less visceral.
Finally, Hastings' decision to assume responsibility for the backlash directly and to apologize speaks volumes to Netflix customers. No one except the guy at the top could hope to make things right in this instance, so don't try to delegate that responsibility if your business faces a similar -- fundamental -- customer-service challenge.
Hastings wrote: "Both the Qwikster and Netflix teams will work hard to regain your trust. We know it will not be overnight. Actions speak louder than words. But words help people to understand actions."
Heather Clancy is an award-winning business journalist with a passion for small businesses, green technology and corporate sustainability issues. Her articles have appeared in Entrepreneur, Fortune Small Business, The International Herald Tribune and The New York Times. Follow her on Twitter.
