Consumer Sentiment: Ignore It At Your Peril; Ask Netflix

By Yi Zhang, Ph.D. & Faith James
November 7, 2011
 
How behavioral science could have turned a multi-million dollar mistake into a multi-million dollar topline growth.
When Netflix imposed a 60% increase in the prices consumers paid for their movie rental and streaming subscription service, naturally, consumers were not happy.
Netflix did the rational math to determine price per subscriber and the percentage of subscribers per distribution channel etc., etc.  The logical math would have shown that only a small percentage of their consumers would be impacted and that they should press on with the increase.  However, underestimating the impact of consumer emotions and not factoring in the degree of those consumers around their willingness to pay more proved to be a critical misstep.
Netflix CEO Reed Hastings has now come to this realization:  “I think it was just a mistake in understanding the depth of emotional attachment to Netflix.”
Ways this could be avoided:
 
Rational predictive modeling
With a simple choice-based conjoint, pricing sensitivity can be tested in a fraction of Netflix’s current subscribers without causing a major stir. A choice-based conjoint study presents a number of attributes such as monthly rate, number of movies/hours of streaming, and the vendor (Netflix, Hulu or Redbox) to allow consumers to make trade-off decisions. In these tests, consumers will be faced with a similar choice that they were faced with after Netflix forced the price hike, such as “would you choose one DVD rental at a time at $7.99 monthly rate with Netflix or one DVD rental a time at $1.00 per DVD rate with Redbox”. Any of Netflix’s subscriber is capable of doing the math to determine the actual cost per DVD for each vendor. While some consumers always score the lowest possible rate, others are willing to pay extra money for the additional benefits of staying with Netflix. The question is how much extra are subscribers willing to pay before they considered the new rate to be too much and walk away from Netflix.  See below for examples of two trade-off scenarios that consumers could be facing.
Choice-based conjoint is a good way to derive the amount of extra money that consumers are willing to pay for a given benefit in a realistic and predictive way. Results like this can be used to identify the price level that maximizes revenue, taking into consideration the operational cost and market condition, without sacrificing huge loss of market share.

The Best of Both Worlds – The Intersection of Rational and Emotional
Behavioral science is the future of market research and by extension, marketing and a key practice for uncovering true consumer emotions.  Its use in real-world business applications has been proven and lets marketers avoid costly mistakes such as over purchasing inventory or damaging to their brand perception.
Over the years we have found that the best method for predicting business growth has been when the rational and the emotional decoders intersect with a brand’s true north.  The combination of the two is the best way to position a brand for success.
Knowing how consumers feel about a brand and what specific emotions drive what specific behavior is critical for any marketer to understand.  So for example it doesn’t take a Ph.D degree to figure out that consumers would rather pay less than more.  However, it does require advanced knowledge to understand that consumers who feel that a brand exhibits traits of Schadenfreude (pleasure derived from the misfortune of others) (interpreted in this context as profits derived from consumers struggling in a recession) will revolt, and pay more for a competing brand that demonstrated sincere care and empathy.
At Sentient we have deconstructed and constructed a Taxonomy of Emotions “The Sentient 26” to identify the key emotions that drive consumer behavior and determine how marketers should position their brands in the market place to avoid the mistakes of Netflix.
To learn more about our Taxonomy of Emotions, download our white paper here.

Archives

Categories

Contact us for more information about Sentient Decision Science and our groundbreaking research.