I couldn't have been the only Netflix (NASDAQ:NFLX) shareholder to wince when an Associated Press story came out yesterday, claiming that the country's leading mail-based DVD renter was slashing prices again. The company's most popular plan -- which allows members unlimited rentals, with no more than three movies out at a time -- was supposedly being marked down to $15.99 a month.
What? Didn't Netflix lower the plan's monthly tab from $17.99 to $16.99 just last month? The price reduction forced Netflix to hose down its near-term profit guidance. Is Blockbuster (NYSE:BBI) such a cutthroat competitor that Netflix can't slash its prices quickly enough to compete?
As it turns out, the story originally reported by the AP and repeated by Forbes wasn't entirely true. Netflix was only offering the $15.99 price to "a small fraction" of its customers.
Phew? Not yet. Don't you dare sigh, exhale, or relax. This whole episode may be even worse than another ridiculous profit-killing price cut. It's a mistake hand-dipped in buttery blunder sauce.
Now we all know that Netflix is offering special pricing to "a small fraction" of its customers. It's not me. Odds are pretty good that it's probably not you. That has to be bothersome.
One can always guess who the price cut-test targeted. Maybe it was free trial subscribers who were riding the fence on paying up for the service. Maybe it was an offer aimed at its most profitable customers, the infrequent renters who stick mostly to older library titles, freeing everyone else to fight over the limited copies of new releases.
No matter how you slice it, everyone but "a small fraction" of its users suddenly feels cheated.
Personalized pricing in the buff
We board planes and check into hotel rooms, knowing full well that we're paying more or less than our neighbors. We eat at restaurants, accepting that they may offer price breaks for kids, senior citizens, or early-bird diners.
Variable pricing is a part of life, but it doesn't always go down so well when you know that you're the one buying the pricier window seat to La Guardia, or paying twice as much as someone staying two rooms down from you at the beachfront hotel. The key here is that, in nearly every case, you don't know that you're the overpaying party. You're just not privy to the price sheet.
Amazon.com (NASDAQ:AMZN) took a lot of heat several years ago when it was caught testing variable pricing on its DVDs. Despite the patron uproar, at least Amazon had the luxury of pulling strings from behind the curtain. When the decision-making takes place out of view, you never quite know whether you're the one missing out on the good deals.
This latest move leaves little to the imagination. Did you get the $15.99 offer? No? There you go.
It's only business
Netflix is usually a smart company. Even the practice of throttling -- where folks who go through fewer movies a month have a better shot at new releases -- wasn't a devastating nightmare when Netflix was exposed. In the end, all it did was send hyperactive, money-losing accounts to rival Blockbuster.
The $15.99 offer probably makes perfect business sense. The company has years of market data on its hands. It has enough trend-sniffing number-crunching going on to know who's on the verge of bolting, who has abandoned the queue building, and who's given up on rating rentals.
However, as smart as Netflix can be, it's also stupid enough to try to pull off a discreet price cut for a limited number of its subscribers. Tell me that Netflix didn't see this coming. The one thing that all of its 6.7 million subscribers have in common is online connectivity. How could it not see this selective discount making the rounds in cyberspace?
Impossible, right? So the only possible tactical explanation is that Netflix knew that it would irritate "a large fraction" of its subscriber base. However, the company may also have figured that it'd send a clearer message to Blockbuster or anyone else considering diving into the DVD rental market. No one wants to compete against a cash-rich company that doesn't shy away from self-mutilation.
I still don't buy it. There's no point in pleading insanity here. Blockbuster actually raised its rates for new Total Access subscribers a few weeks ago. This move is about as necessary as Ishtar 2. For a company that regularly ranks at the top of customer satisfaction surveys, it's just not like Netflix to make the majority feel like they weren't the chosen ones.
Netflix didn't dodge a bullet here. It went out of its way to stand in front of one.
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Longtime Fool contributor Rick Munarriz has been a Netflix subscriber -- and shareholder -- since 2002. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool's disclosure policy comes highly recommended.
