Netflix’s Pain Is Blockbuster’s Gain

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Editor’s note: Guest author Tien Tzuo is the CEO of Zuora, a subscription billing company. Previously, he was chief strategy officer and employee No. 11 at Salesforce.com.

For years, I’ve pointed to Netflix as one of the shining examples of the Subscription Economy. But in two painfully long weeks, Netflix has taken a huge misstep, violated the trust of its customers and even opened the door to its supposedly long-vanquished elder, Blockbuster!

Few remember this. Netflix started out as DVD by mail, but with the same restrictions as a retail Blockbuster experience (e.g. late fees, etc.). Then Netflix realized something important that changed the company forever. Success wasn’t tied to the number of DVDs it shipped. It was the number of customers they had and could hold onto. Rabid customer loyalty was key to its success then and it still is today.

That’s what the Subscription Economy is all about: building and monetizing long term customer relationships. And customers need to feel as though they are in control of the relationship, not the provider. If the provider makes unilateral changes to the relationship, and pricing is a big one, you have violated that relationship and violated the customer’s trust. If you don’t give me a choice, then it’s not a relationship.

Netflix knew this price increase and division of streaming and DVD-by-mail was going to be disastrous. As a provider, you cannot take the customer relationship for granted, and that’s just what Netflix did.

Netflix’s move also has opened the door for Lazarus (i.e., Blockbuster) to jump back in as a legitimate player. Streaming and DVD-by-mail for $10/month for Dish subscribers? Looks like Blockbuster just taught Netflix the power of packaging and pricing in the Subscription Economy. They just gave Netflix’s 24 million customers another choice.

Sure, Blockbuster is nowhere near Netflix in terms of a library of titles, devices and availability. But Amazon Prime is. While everyone is writing that Netflix dodged a bullet, the clock is ticking. Choice is a click away and Netflix better be concerned with how to rebuild trust with its customers.