The New Business Mantra: Customer Retention

The New Business Mantra: Customer RetentionOver the weekend I perused a recent blog post by our fearless leader, Tom Dibble, titled “Why Netflix Continues to Reel in New Subscribers Despite Price Hikes.” Reeling in new subscribers is certainly important to Netflix as every business has to get new customers in order to grow. However, I pondered over these two lines from Tom’s post:

“Netflix lost more than 800,000 subscribers in a few months by raising prices up to 60 percent and dividing up its streaming and DVD rental services into separate products under different brands.” And, “Netflix is applying the [new price] increase to new subscribers only, giving the existing customers what amounts to a ‘loyalty bonus.'”

While Tom’s article rightly focused on Netflix’s new customer acquisition, Netflix’s customer retention plans could also be illuminated. The old model of business focused on acquisition and then re-acquisition, both of which are very similar. Acquisition followed by a very long period of retention is the new model for the recurring revenue world. Obviously acquisition is step one and should get a large amount of attention, but retention is step two for as long as a company can manage to keep that particular customer roped into a recurring service.

Netflix’s past mistake was hiking rates in-flight for their entire customer base. They did not grandfather anyone into their old service levels or prices, causing nearly a million customers to jump ship. Perhaps, at the time, their billing solution wasn’t able to run multiple rates for the same offering or wasn’t able to keep existing accounts in a separate provisioning group from newly-created accounts.

The ability to retain customers is important for all businesses; repeat business is the lifeblood of every business from your corner store to Boeing. However, for a business based on recurring revenue, customer retention is even more critical. Because of how infrequently I visit McDonald’s if they lose me as a repeat customer they may not feel it for a few weeks.  If Netflix loses me as a customer, they’ll be notified right away. They’ll feel the revenue hit immediately as they will be forced to issue a pro-rated refund on money they’ve already collected.  Even if they organize their system to halt service at the end of my current billing period, my cancellation has revenue recognition implications and it represents one fewer invoice in the next billing run.

For decades, even subscription businesses have focused on customer acquisition rather than customer retention.  There’s a business school adage that’s drilled into new students that “it’s five times cheaper to retain an existing customer than it is to acquire a new one.”  Businesses seem to have misinterpreted this to mean that customer acquisition is more difficult, and therefore should take five times as much of their time and energy. This should not be the case.

Growing up, my father would cancel his Sports Illustrated subscription every year. Just before his renewal date, he would call them up and cancel his subscription. The next month, he’d buy the magazine off the newsstand and use the card inside to get himself a new subscription with (insert italics) the current “new customer gift.”  Football phones, oversized sweaters, DVDs of championships of years gone by, and swag of all kinds were given away, stashed in his office, or thrown in the back of the car. The question though is why. Why did he have to cancel his subscription and then manually re-start it to get the “appreciation” gift that all new customers were offered by default in every TV commercial and billboard featuring the product?  Why did the football phone not show up at his doorstep automatically with a note saying “thank you for being a 35 year subscriber to our magazine, use the included card to give a friend or family member half-off their first year”?  That would have retained a valued customer with an enormous lifetime value, and potentially gotten them a new subscriber, for cheaper than obtaining a single new customer.

It’s customer retention that Netflix is focusing on for their second foray into re-pricing their service. Cowed by the loss of nearly a million subscribers, they’ve apparently updated their system or their business methods to ensure that current customers are given more than 700 days’ notice of the price increase while they’re guaranteed their old pricing.  This also ensures that each of these customers will always feel valued and special when discussing Netflix, as they’ll be able to brag to their friends about paying the lower monthly price for years.

It’s this focus on customer retention and customer lifetime value that I believe we’ll continue to see as we move beyond the subscription economy. Whether customers choose to purchase items one-at-a-time, or opt for the myriad of pay-as-you-go models, businesses need to be able to cater to their needs. These days customer’s pricing and packaging preferences can met with a multitude of options like flat pricing, tiered pricing, pay-per-use, volume pricing, etc. Plus services offered should also be flexible enough so customers only pay for what they really want. There’s no reason for customers to tolerate being roped into subscribing to something they don’t need just to get something they do. Splitting service offerings into independent subscriptions and allowing their customers to subscribe to different levels of each is the success model that Netflix discovered.

To be successful companies must have the flexibility to give the customers what they’re looking for – easier said than done.  Yet, the return is customer retention and lower churn, which is crucial to the long-term success of any business, especially a subscription-based one.  It’s a lesson Netflix learned the second time around.

Dan McAloon, Aria Systems