How Netflix Killed Blockbuster

[Re-post from April 7, 2009]

As part of the classes I teach in Internet business at Full Sail University, I post up current news and topics every day and ask my students to comment on them, whether it’s Apple’s change to a tiered pricing model for iTunes or the community activism at Etsy.com.

Today I read an article on Fast Company about Blockbuster’s impending demise and it got me thinking. According to its most recent SEC filing, Blockbuster may not be able to get a loan it desperately needs: “In effect, the company is saying it’s within days or weeks of having to close up shop – postal, online and brick-and-mortar.”

Ten years ago, Blockbuster was flying high. It had over 7,000 stores across the country and the world and was growing rapidly. It had put the small, mom-and-pop video rental stores out of business (remember those?).

Blockbuster’s biggest competitor at the time was Hollywood Video, another chain of video rental stores. I distinctly remember in the late 1990s when Blockbuster and Hollywood Video first started stocking DVDs to rent in addition to VHS tapes. At first, the DVD section was very small (just a few rows on the wall). Then, over the next five years or so, DVDs came to dominate shelf space as more and more households purchased DVD players and more people wanted to rent DVDs.

However, Blockbuster and Hollywood Video completely missed the revolution that was happening online: people were signing up for a new service called Netflix that mailed them the movies they wanted. Plus, there were no due dates and no late fees! Blockbuster, and even Wal-mart, came out with their own rent-by-mail service and it appeared that Netflix could be in trouble. Many analysts started signing Netflix’s death sentence, saying that Netflix wouldn’t be able to compete against Blockbuster’s billions of dollars, high brand recognition, and thousands of physical stores.

However, what these analysts failed to appreciate was that Netflix had built a loyal following around a culture of trust and authenticity. Many consumers had been personally gouged by Blockbuster’s ridiculous (and oftentimes hidden) late fees and were reluctant to trust the company again. Even if Blockbuster charged less than Netflix, many people were willing to pay a dollar or two more per month to Netflix (as I was) and, even more important, became evangelists for Netflix.

If you do a search on Google, you will find numerous blogs and comments (here is just one example) about the difference between Netflix’s and Blockbuster’s commitment to customer service and transparency: Netflix has it, Blockbuster does not. This is why Netflix killed Blockbuster.

What do your customers think, and say, about your company? Do you have evangelists? If not, then take some time to consider and then implement ways you can improve your customer relationships so that your customers become evangelists for your products.

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