Ellison Chair in International Floriculture
Ellison Chair in International FloricultureTeaching, Research, Extension and Service

What businesses should learn from Netflix

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Excellent commentary below from MDM about what business owners and managers can learn from recent Netflix snafus.

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I was one of the millions of Netflix subscribers that received an email earlier this week from the CEO of the popular DVD-by-mail and streaming service Netflix apologizing for the way the company handled a recent price increase and explaining how it is going to move forward with two separate companies – Qwikster for its DVD sales and Netflix for its streaming.

The company has been lambasted for its handling of the situation, and this combined with a number of other factors including the loss of key content contracts that has limited what it can offer its customers, may mean Netflix – in the words of a blog by KK Bold, an advertising and branding agency  – is about to become a case study in “what not to do in business classes for years to come.”

Here are some lessons, based on commentary around the Web and our own MDM content, that can be learned from how Netflix has handled the situation:

1. Make value, not price, your priority. Easier said than done, perhaps, but if you lose 1 million subscribers over a price hike as Netflix did, it seems you were selling on price all along, and the value of your service was secondary to subscribers. Subscribers are looking at a $6/month price increase for DVD + streaming video options to $16 (in a culture where someone will regularly pay $4 for a cup of coffee several times a month), while leaving cheaper options for DVD-only or streaming-only plans. Are there areas such as streaming where Netflix can improve the value they offer their subscribers, which could result in less price sensitivity?

2. Know what’s really irking customers. Price increase aside, after the company announced the DVD-streaming split, Netflix is now losing or is at risk of losing customers who liked the convenience of having their streaming and DVD accounts in one place, as this blog argues. Customers are complaining that they now have to pay more and do more – meaning Netflix has made it more difficult to do business with them. Another reason some customers are mad: because they don’t receive even a nominal discount for subscribing to both the DVD and streaming services.

3. Do something for loyal customers to ease the transition. As this blogger from the Washington Post points out, the people complaining about the changes are there for a reason: They love the service and don’t want it to change. Netflix has received tens of thousands of comments on their website and social media pages. Reward that loyalty, she writes, by giving long-term customers a few months of free service or, even better in my mind, giving them a way to manage their now two accounts (due to the splitting up of the DVD and streaming services) in one place. Or provide a discount for subscribing to both. Tell them what’s in it for them when you make the change.

4. Scope out and track your brand online. It’s easy to discount social media and the Web when creating a marketing plan as many do in B-to-B markets, but you shouldn’t. Turns out that Qwikster, the new brand for Netflix’s DVD service, was already being used as the moniker for a foul-mouthed Twitter user. Not a great association for a new brand name that was already off to a rocky start. This would have been easy to find out with a quick search.

Tracking your reputation online is not a difficult task and requires little more than setting up a Google Alert for your brand names and conducting a regular search on the main social media sites for mentions of your name. You may not be able to prevent negative things being said about you online, but being aware of those things will help you better respond. Read this blog – Twitter: Not a Tool, a Real-Time Mindset  – for examples of how other companies have used social media and blogs to effectively and not so effectively respond.

5. As your company evolves, continually assess the competition to ensure you are still filling a market need and meeting that need effectively. As this article points out, Netflix has moved from a DVD-only model to one that was increasingly focused on streaming as a priority. But streaming video has a lot of competition these days, including cable company on-demand platforms, Amazon, Hulu, Google, Dish Network and so on. That doesn’t mean that you can’t survive with a new service in a new marketplace, but it does change how you approach the market and should result in a change in strategic plan. One thing I believe has hurt Netflix as it has attempted to make this shift: Netflix notoriously has a weak streaming library. Case in point: I regularly rent streaming videos on iTunes through my Apple TV for up to $4.99 a movie because they are new releases that aren’t available on Netflix, and I don’t want wait for a DVD in the mail. I’m willing to pay for that value a couple times a month, and my price sensitivity is not as high because of that.

6. And finally, when you are communicating with customers about a problem, be careful to hone in on the customers’ concerns – and don’t go much beyond that. Leadership expert Dr. L. Todd Thomas said in a press release I received earlier this week that Netflix CEO Reed Hastings’ email to subscribers had the following faults: he said too much; he over interpreted his importance; he misdiagnosed the problem; he spoke down to his audience; and he reminded us what everyone was mad at Netflix. You can read Hastings’ email in blog form here: An Explanation and Some Reflections

Netflix may come out of this one alive, if injured. The idea of splitting the business into two – one for DVDs and one for streaming – is certainly not receiving great reviews. Maybe Netflix can turn this one around and become a positive case study for business schools. Either way, it’s worth taking notes.

Source: http://www.mdm.com/article/print?articleId=27793

Guest Post: Viewpoint on availability and quality

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I received this from an industry contact who preferred to remain anonymous, but agreed to let me share this on Making Cents. They make some excellent points regarding the availability turnaround that has occurred in the industry (from oversupply to shortages) and regarding plant quality.

Over the last two plus years I have purchased from 65 nurseries and toured about 130 nurseries.  I talk with plant brokers, propagators, and other nurserymen about plant availability, quality, and pricing in the market.  I also attend several trade shows during the year.  Geographically I am in contact with California, Oregon, Florida, Georgia, Alabama, Mississippi, Louisiana, Texas, Oklahoma, Tennessee, South Carolina, North Carolina, Virginia, and Maryland.

In general, plant availability is greatly reduced going into 2011 from 2010 levels.  I have already seen this shortage on some items start this fall of 2010.  Locating material to book for 2011 is more challenging.  Plant quality may be in even greater decline.  With the decline in plant numbers and quality, pricing is starting to go up.  The rise in pricing will contribute to the shortage of plants available in the short term.

Plant availability across the industry has reduced for several reasons.  Nurseries, from large to small facilities, are going out of business altogether.  The ones that remain have planted smaller crops or no crop at all during 2010.  I have not toured a nursery that has a larger or equal quantity of inventory at this point compared to last year.  At best an individual nursery is down 30% in inventory numbers.  Some are down 80%.  This range holds true across those growers that are still operating.  Many plants have remained on the growing location too long and have passed salable quality.  Dumping significant numbers of old material has been common in 2010.  In some cases the nursery did not have the labor remaining to dump the plants and have simply turned off the water.  Those plants are dead in the growing space.  In several nurseries small areas of ground cloth have been removed and vegetable gardens now occupy that irrigated space.  Nurseries that specialize in propagating and selling liners are reporting lower than expected orders for material to be delivered in the 2011 planting season.  This will contribute to a possible continuation of the shortage well into 2012.

Plant quality is of a bigger concern.  Plants have been held too long in hopes of making a sale at some point in the future.  Those plants are no longer viable for the retail trade and in many cases simply need to be dumped.  Some growers have planted, yet not fertilized for various reasons ranging from lack of labor to put the fertilizer out to not having the money available to buy the fertilizer.  Those plants will not be ready for sale in spring of 2011.  Older and unfertilized plant material will result in fewer plants that can be purchased for 2011 retail sales.  In one case the plants have been fertilized with chicken manure.  This may result in additional weed pressure and an unpleasant odor.  Speaking of weeds, they are abundant in many nurseries.  Some plants cannot be purchased due to the overwhelming weed pressure at the grower.  Again, lack of labor and money to hand weed and or put out herbicide.

Some growers whom are sensing the shortage are already quoting higher pricing.  This phenomenon is beginning to spread.  In recent weeks I have visited several nurseries that now have no hired labor and only the principles remain.

“I am not going to plant anything until I see the market turn.”
“We are not going to spend the money to fertilize until someone orders the plants.”
“I need several days notice to load a truck so that I can find some help, we do not have any labor left.”
“I am sorry for the weeds, we just do not have the labor or money to take care of them”
“We are too late planting anything this year and as a result will be basically out of salable plants during 2011”
“I went out to tour some of my plant sources and the first three I tried to tour were all closed and out of business.”

These quotes and more are quite common this day and age.  I have no doubt that in 2011 there will be plant shortages.  Some plants may not be found at all and some we may have temporary outages.  Prices are going to go up.

How will the current retail environment affect green industry sales in the spring?

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Quick overview of some of yesterday’s December retail data (no real surprises):

Wal-Mart cut fiscal Q4 earnings target about 10%.
Costco posted a 4% drop in December same-store sales.
Family Dollar gained 8%; Same store sales gained 6%.
BJ’s Wholesale had 1.6% sales growth; the lowest in a year.
Sears (the largest U.S. department-store) sales fell 7.3%.
Target same-store sales fell 4.1%.
Macy’s December sales fell 4%.
Gap stores sales fell 14%.
Abercrombie & Fitch fell -24%.
Neiman Marcus reported a 28% drop off.
Limited Brands reported a 10% drop.

Also, a recent DJN press release states:

Food retailers are girding for a “battle” with vendors in the first half of the year as grocers push for lower prices to help shoppers through the recession and food manufacturers resist, Supervalu Inc. (SVU) Chief Executive Jeff Noddle said Wednesday.

With commodity and ingredient costs falling sharply in recent months, supermarket chains have been pushing for lower prices on everything from coffee to soups to help increase sputtering sales. In recent months, both Supervalu and competitor Safeway Inc. (SWY) have switched to a pricing strategy that sells more products at “everyday low prices” rather than relying on coupons or other promotions.

But food manufacturers have been reluctant to roll back their price increases, taken to offset higher input costs, despite some consumer product categories experiencing declines in sales volume of between 3% to 5%, Moody’s Investors Service said in a recent report on the sector.

Lastly, from Wednesday’s Business Week:

Shoppers are getting used to those 75 percent off sale signs, and that’s bad news for merchants who worry they will also have to quickly slash prices on spring goods to attract customers.

Anxieties about how rampant discounts have affected shoppers’ psyches and stores’ profits are running high…The deep price cuts are making shoppers question the true value of items.

My Commentary:

Obviously, all of the trends above begs the question of whether or not we are “training” consumers to be more price (discount) oriented that they have been in the past. Or, as a friend of mine put it…what is the longer-term psychological impact of the drastic price reductions of the holiday and post-holiday sales periods going to be on the going-forward consumer expectations and purchase behaviors?

Obviously, people are currently spending less than normal; certainly less than justified according to their actual incomes (they are saving more which is good in the long run but bad for the economy in the short run). They are also shopping smarter, focusing on the “value” they derive from each precious dollar spent. So as we have discussed before on this blog, those retailers that have their value proposition clearly delineated will be in a much better competitive position than those who don’t.

Without a doubt, several leading lawn & garden retailers are already positioning themselves for price-oriented competition this spring. We have always had a segment of consumers that are price-conscious shoppers and this will obviously bode well for them. Today’s economic environment may increase the number of these price-oriented consumers and the real question is by how much.

But the majority of our core lawn & garden consumer base have other things besides price in their value equation. The question is whether or not retail firms have successfully identified what THEIR key customer base truly values and are differentiating themselves accordingly.

Another key point to remember is that even though unemployment is at 7.2% (from today’s labor report), we’ll still have 93% of the workforce earning a wage. The monies not being spent now will eventually burn a hole in people’s pockets (if historical behavior holds true). It will probably take a few more months of spending declines for this hole-burning to take effect, so the economy will likely hit its low point this spring.

The key question then is whether “spring fever” will induce our core customer base to let go of those discretionary dollars burning a hole in their pockets. And, if so, will they be willing to pay the prices we must charge to cover the cost increases we’ve incurred in the last 2 years? Again, they are much more likely to do so if we appeal to their value equation.

It will also be very interesting to see how President-elect Obama’s yet-released-but-being-revamped stimulus plan is eventually structured and even more interesting to see how much of it is actually spent (historically only 20-40% of a stimulus is spent — the rest is saved or used to pay down debt). But fortunately, many folks will be receiving their tax returns about the time spring season kicks off, which means another influx of funds to burn a hole in their pockets!

Ok, now that we’ve discussed the retail environment, what does all of this mean for green industry growers? The tougher selling environment at the retail level this spring translates into a need to develop more intensive and collaborative relationships with your customers in meeting the needs of the end consumer – particularly in terms of their value proposition. During the downturn in 2008, those growers that proactively worked with their retailers (and usually these were pay by scan sales) to more closely provide landscape solutions for consumers were the ones who were most successful.

If any of you attended the recent industry webinar entitled, “It’s a Great Time to be in Business” you probably heard lots of great ideas. One of the best quotes that I wrote down during the webinar was “These are the times during which great companies are made.” Bearing that in mind, recall also that there are plenty of companies that have survived the last 50 years, which means they have gone through 11 such recessionary periods. How did they do it? By relentlessly focusing on and emphasizing their value proposition to their key customer base. There’s a great lesson there. What is yours?

Discounting can be dangerous!

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During tough economic times, companies often rush to reduce prices on their products and services. That seems like common sense: People can’t afford to spend as much, so charge less to keep them buying. But discounting has its perils.

To be sure, discounting is effective when done wisely and strategically. It can get consumers excited about a product, encourage them to buy more, and help your short-term bottom line. However, whether the purchase is a hot dog, a handbag, or a stay at a five-star hotel, customers want good value for their hard-earned money. The price of something is often an important determinant of its perceived value, as Dan Ariely points out in Predictably Irrational. Often, the more consumers pay, the more value they ascribe to a purchase. If you discount prices purely to boost sales, buyers may begin to question that value.

Consider Abercrombie & Fitch, which lowered prices by roughly 15% during the 2000–2002 downturn. When the dust cleared, the company realized that it had sacrificed much of its brand’s cachet and lost significant market share. A&F; didn’t recover until 2004—and then only after returning to higher prices. In August 2008, having learned its lesson, the company announced that it was considering another price increase, despite a decline in second-quarter profits. The goal: to enhance what the CEO called the “iconic status” of the brand.

But discounting is so easy that some companies simply can’t resist. Starbucks, which posted its first-ever earnings loss in July, has begun to offer lower-priced options, such as a cup of coffee for $1, with free refills. This strategy may boost sales in the short term, but we suspect that, as with A&F;, it will hurt the Starbucks brand in the long term.

Discounting is not always a bad idea, though—there are safe ways to lower prices. Earlier this year, Chrysler discounted something that does not affect its core brand: gasoline. It guaranteed to purchasers of new cars a price of no more than $2.99 per gallon of gas for three years. The idea was to subsidize the fuel that a new car uses, not the car itself. It’s similar to what GM did in 2001 by discounting its financing rather than its cars. Obviously, the auto industry has more problems than brand deterioration. Nonetheless, this is smart marketing during a downturn: It couples the appeal of a discount with an implicit message about the value of the core product.

So if you’re eyeing a simple, traditional discount strategy during the present slowdown, first consider the potential for damage to your brand and then evaluate the brand insurance that a more nuanced approach may offer. If you inadvertently shatter your brand’s mystique, reestablishing the value proposition to consumers may be tougher than you expect.

Jeffrey M. Stibel and Peter Delgrosso in the latest Harvard Business Review.

Pricing in a downturn

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From the latest McKinsey Quarterly…

Getting pricing right is always a challenge in an economic downturn, as decreasing demand, excess capacity, and greater price sensitivity all conspire to drive down prices. In most downturns, the cost of raw materials, feedstocks, and other upstream supplies—as well as the cost to serve customers (for delivering goods, for example)—tends to stabilize and even decrease as business activity slows. As a result, decreases in downstream prices are at least partially offset by lower upstream costs. But in the current environment, not only is weaker demand from the end user making it harder to maintain prices, but significantly higher and more volatile input costs mean that companies caught in the middle are getting hit from both sides.

What’s a business to do? In this unusual downturn, companies need to manage the profitability of individual customers and transactions with greater precision, develop richer insights into their customers’ changing needs and price sensitivities, and understand more clearly the microeconomics that shape their own industries and those of their suppliers. We’ve assembled six tactics aimed at maintaining the best balance possible between sales volume and profit margins in the current challenging environment.

Watch for sudden shifts in price structure

Companies should be vigilant in monitoring pricing policies that reduce revenue—such as volume discounts, rebates, and cash discounts—as well as cost-to-serve, including freight and sales support. In the current downturn, rising costs and declining demand can cause these elements to change more dramatically and quickly than they have in the past. Rapidly increasing fuel prices, for example, are putting intense pressure on delivery costs. Declining demand means that some customers may be collecting volume discounts they no longer deserve. Best-practice companies are reviewing much more frequently their pocket margin waterfalls, which show how much revenue companies really keep from each of their transactions, and adjusting their pricing policies accordingly—for example, by adding delivery fuel surcharges to every order. Without the extra attention and quick action, erosion at all points of a transaction can quickly destroy profits in times like these.

Monitor customer-level profitability

Companies should use transaction-level data to measure precisely the profitability of each customer. By doing so, companies can detect if the cost to serve particular customers or declining order volumes are nudging those customers below target profitability levels. In this downturn, for example, many customer groups are becoming simultaneously smaller and more costly to serve. One industrial company found that more than 20 percent of its customers had fallen below breakeven profitability, forcing it to raise prices selectively and, where possible, lower cost-to-serve by decreasing delivery frequency, reducing sales support, or fulfilling orders through alternate channels.

Adjust to changing customer needs

Downturns always prompt changes in customer needs and in the benefits they value when choosing a supplier. The dynamics of the current downturn mean that such swings can occur even more rapidly. In this environment, the best companies are constantly assessing—through market research and direct contact—how economics are changing for their customers. Even more important, they are reacting quickly by retooling their price and benefit offerings accordingly. For example, one plastic resins supplier that had developed a fast-curing resin (to enhance capacity of injection molders when the economy was strong) has now developed a less costly resin that doesn’t cure as quickly. The new resin helps the supplier’s customers decrease costs, because molders are not running at full capacity during the downturn. With other supplies raising their prices, many molders see the slow-curing resin as an attractive alternative. As a result, the supplier can maintain its profit margins even while selling the alternative resin at a lower price. The combination of lower demand and higher input costs in the current downturn makes it critical to get these kinds of adjustments to the cost/benefit balance correct.

Update price sensitivity research

Dramatic increases in energy and food prices have made consumers much more sensitive to prices across a wide range of product categories. Each price increase for necessities such as food and fuel has cut a little more from discretionary budgets, sharply increasing price sensitivity. Market price tests become obsolete after just a few months. To get price points right, pricing sensitivity research and market price tests should be rerun immediately to track these changes.

Monitor your industry’s microeconomics

Radical shifts in costs and demand have thrown previously predictable market pricing mechanisms into chaos. Responding correctly requires a keen understanding of the microeconomic forces at play at the industry level. In one example, a building materials company found itself in a precarious position as the downturn deepened: a precipitous decline in US housing starts meant diminishing demand, while the costs for raw materials, energy, and transportation were increasing rapidly. In response, the company reassessed the industry’s microeconomics, looking in particular at the latest supply, demand, and cost dynamics. With this new information, managers cut capacity at a plant in an area where the decreased supply would not cause a local shortage. The capacity reduction, which would have had little if any effect on market prices a year earlier, brought about a better balance between supply and demand and kept market prices an estimated 10 percent higher than they would have been without the change.

Study your suppliers

The extreme volatility in this downturn demands that companies reexamine not only the microeconomics of their own industries but also the microeconomics of their suppliers’ industries. Recently, a specialty chemicals company invested in modeling the current industry supply, demand, and cost dynamics for one of its primary raw materials. By doing so, the company predicted an industry-wide, 15 percent price increase for that raw material three months before it happened—a feat of some significance because there hadn’t been an annual price increase of more than 5 percent for that material within the past six years. Suspecting an imminent and unusually large price increase, the chemicals company began adding clauses covering raw-material price increases to its customer contracts, a move that would have met extreme resistance if made after the price increases were announced. Instead, the move established an industry precedent for passing cost increases through to customers.

About the Authors

Cheri Eyink is a consultant and Mike Marn is a principal in McKinsey’s Cleveland office; Stephen Moss is an associate principal in the Stamford office.

Solving the cost-price squeeze

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According to Table 10 in today’s BEA report, real disposable personal income increased in July by 1.2% compared to July last year, following a 3.4% annual increase in June and 6.3% increase in May. Both growth rates (May and June) were above the 2.6% average growth in real disposable income since 2001, following 7 months (October 2007 to April 2008) of below-average growth.

Although real disposable income growth showed weakness in the last quarter of 2007 (0.6%) and the first quarter of 2008 (-0.7%), the above-average, year-to-year growth rates of 6.3% (May) and 3.4% (June) contributed to an 11.4% increase in real disposable income during the second quarter 2008 (see Table 6), one of the biggest quarterly increases in history, largely due to the Economic Stimulus Act of 2008.

Couple this increase in real disposable income with the core inflation rate holding relatively steady (see 8/15/08 post) and this means that [a sizable portion of] our end consumer in the green industry has the means with which to purchase our products and services, but do they have the desire — particularly at the prices we must charge in order to cover our current cost-price squeeze?

My friend, Lloyd Traven of Peace Tree Farm, just reiterated to me of how tough it is for growers right now given the “20% increases in pots, film, chemicals, and 30+% for fertilizers, soil, etc—and don’t forget to add energy, labor, etc. BTW, medical just went up again, and let’s not forget tuition.” The recent news of Hines Nursery’s bankruptcy (and the rumors of others pending) also reminds us that no one is immune from the effects of this cost-price squeeze.

But the key question is what to do about it? Logic would tell us there are only two options — either (1) employ the supply side strategy of continuing to shave costs out of the value chain internally or (2) opt for the demand side strategy of increasing price. Anyone who has been reading Making Cents for a while will readily know that I have been pushing for growers to embrace both strategies, but particularly option #2 (click on the differentiation tab on the right hand side of the page to view relevant posts).

On the flip side, however, never underestimate the value of a regimen of lean flow analyses on your value chain activities. Several growers at the Seeley Conference related some impressive cost savings testimonials to the rest of the group. You might want to give Gary Hudson a call if you’re interested in finding out more about lean flow. Also check out recent issues of Greenhouse Grower and GMPro for lean-related articles.

Stay tuned on more on the cost-price squeeze topic later…

Real versus perceived value

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Marvin Miller’s latest musings in the August 18 America in Bloom newsletter is a must read. Click here to view his comments. Pay particular attention to his “perceived” value comments.

Signaling perceived value is a key point in any successful differentiation strategy. The questions you must answer about these signals include:

  1. What mix of quality, price, service, convenience, and selection signals can influence perceived value?
  2. What signals work for your customers?
  3. Are multiple signals necessary?
  4. Does it depend on purchasing behavior, customer segment, or outlet(s) chosen, or all or the above?

Why does it matter? The greater the perceived value that higher the willingness to pay. Period.

America in Bloom is designed to increase perceived value by promoting nationwide community beautification programs through the use of flowers, plants, trees, and other environmental and lifestyle enhancements. AIB does this by providing educational programs, resources, and the challenge of a friendly competition between participating communities across the country.

The end result? Only a few things like improved quality of life, enjoyable end results, greater community involvement, recognition for volunteer efforts, inspired imaginations, beautified spaces, educational opportunities, shared ideas, and new friendships. Sounds like a good way to increase perceived value of our products and services to me.

Gas prices actually do influence driving behavior

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The chart below shows the annual vehicle traffic volume, measured in billions of miles traveled in the U.S., on a moving 12-month basis through February 2008 from the Federal Highway Administration. The flat trend in traffic volume over the last year or more, along with the declines in each of the last four months through February 2008, appears to be the most significant adjustment to traffic volume in any comparable period during the last 25 years. High gas prices appear to be having an effect on driving habits.


Other behavior changes:
More bicycles are being sold.
More folks are taking mass transit.
More small cars are being sold.