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Learning from Netflix’ Disaster

by Langdon on March 30, 2012

This is a blog post about managing the customer’s experience, a critical component of business model innovation.  For the intro, Netflix will play the role of poster child for how-not-to. United airlines will then step into that role a bit farther down.

In Netflix’ case, it looked the company was heading for another brilliant year in 2011, until it stumbled over its own honesty, and managed to make a huge percentage of its customers quite angry by promising to raise prices.

Soon thereafter the company issued an announcement that was an admission of major mis-calculation, but it came across as cold and calculating, and was not particularly well received. And anyway, the price increase stayed.

The stock market wasn’t impressed either, and Netflix tumbled from a magnificent high of about $300 per share down to a mediocre $70, thereby wiping out about 70% of its market cap.  (It’s sitting at $115 today, so a respectable recovery, but still nowhere near the previous altitude.)

If Netflix had been a bit more subtle about its plans it might have avoided the bloodbath, or certainly lessened the impact, so it appears that the lesson is, “If you’re going to hack your customer experience model to shreds, do it quietly.”

United Airlines has apparently taken this message to heart.

As it completes it merger with Continental, United’s frequent flyers are discovering that the airline is quietly cutting perks and advantages that it offers to its elite flyers.  So quietly that no notice is being given; if you’re a customer, the rules today are simply less favorable today than they were a month ago.

(This is something that I am experiencing personally, as I’ve flown more than a million miles on United over the years.)

This is an interesting choice for the airline to make, given the general understanding that the top ten percent of the company’s frequent flyers probably generate a massively disproportionate share of its profits.  Along those lines, the CEO of hotel conglomerate Starwood (which owns Sheraton, Westin, and W) recently commented that the top 2 percent of its customers are responsible for 30 percent of its profits.  Rather a stunning statistic!

Piss off your frequent flyers at your peril, it would seem.

Yet this is exactly the path that United is embarking on.

But what would you do if you were CEO of an airline?

The threat of sharp cost increases for jet fuel hangs like a guillotine over your neck.  The IATA, trade association of 230 global airlines, recently downgraded its forecast for industry-wide profits for 2012 from $3.5 billion to $3 billion.  The association noted, however, that a spike in fuel prices could spin that profit into a multi-billion-dollar loss faster than Iran can threaten its Gulf neighbors.

So what would you do if the global oil market forced you to live your life standing on the precipice of major disaster; you’d figure out lots of ways to make more money to offset the potential for disaster.  Ergo, the merger between United and Continental is a defensive attempt at profit-maximizing, and the rather dramatic downgrade of the perks the merged companies offers to its most important customers is another stab at recouping more cash.

But clearly it is a very risky move; any organized backlash of the most profitable customer segment could leave the airline quite badly bruised.  Hence the lesson from Netflix’ awful year:  stealth!

While all this was going on, the new CEO of United took it upon himself to star in the company’s “welcome aboard” videos, in which he talks glowingly of the great work he’s doing to make the airline better.  To the now-jaded frequent flyer, this appears to be a smokescreen, and rather 1984-esque at that.  Tell them how we’re making things SO MUCH better, while we’re actually making them somewhat worse.

Today, another chapter in the saga arrived email in boxes everywhere – an apology from United execs, a mea culpa for the very lousy job the airline has been doing since the merger occurred.  In case you hadn’t noticed, United’s phone lines are badly jammed up with frustrated travelers whose reservations were bungled, and wait times sometimes exceeded 30 minutes.  My personal experience was that a set of reservations that would have taken minutes to make a few months ago required more than 2 hours a few weeks ago.

Another dimension of the post-merger change is the company’s brand image.  In this regard, I do grieve for the company’s marketing department.  As the old United, the company spent years developing its brand image, all the way down to the look and feel of its web site.  On merger day, earlier in March, all that was unceremoniously thrown out the window, and the old Continental web site became the new United web site.

To say it’s a bit of a loss is an understatement.  The design standard of the old Continental/new United site is circa 1990; ugly, clunky (at best), and tired, and the brand image of the company is much the worse for it

Alas.

So what was the lesson from Netflix?

Part 1 is that if you’re going to make your customers’ lives worse, don’t make a big deal of it, and maybe they won’t notice.

Think so?  Get real.  Of course they’ll notice!  But will they notice and not object?  That’s unlikely too.  Will they notice but not defect to another airline?  That’s the real question.  How much worse can United make it before there’s a big backlash?  This is the fine line that the airline is walking these days.

So back to our favorite topic, innovation.  Yes, the pursuit of innovation is all about balancing risk and reward; in this case, it appears that United’s leaders are pushing very hard to find out just where that balance is – how much can they damage the customer experience before they pay for it in lost customers?  As Netflix learned, the punishment can come swiftly, hard, and carry permanent consequences.

Of all the places to look for more profits, this would seem to be the riskiest area in which to play.  If 2% of the customers really account for 30% of the profits, then messing with the 2% seems a bit too much like playing with a live grenade.  Not the choice that I’d make …

 •••

Are you a United frequent flyer and you’ve noticed things getting worse with the airline?  I’d be interested to know …

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