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Do Netflix subscriber headwinds hold lessons for retailers?
Netflix reported a drop in subscribers for the first time in over a decade on its latest earnings call. This experience raises questions for retailers developing their own membership plans, among them: is subscription fatigue setting in, and is inflation cutting into how many subscriptions consumers take on?
Netflix’s subscriber drop is somewhat misleading. The service initially added 500,000 members before deciding to quit the Russian market and its 700,000 subscribers, causing a net loss of 200,000.
Current membership remains strong at 220 million, but the shortfall to Netflix’s forecast of 2.5 million subscriber growth is troubling. Several factors are likely at play.
Netflix in January raised the price to $19.99 for its premium membership, up from $18.99, at a time when rivals offer less costly alternatives and consumers are being forced due to ongoing inflationary pressures to increasingly weigh discretionary purchases against their everyday needs.
Retailers should consider taking a position against price hikes during the current inflationary time. Old Navy recently paused increases on kid’s basics through the back-to-school season. Aldi pledged to keep its prices low compared to its many grocery competitors.
General subscription fatigue may also be setting in. There has been a recent notable increase in ads for budget apps such as TrueBill and Billy which provide visibility to a full list of subscription charges and allow for easy cancellations. Messaging from these apps highlights that, although each subscription may be a low figure, charges add up quickly to a large total.
Retailers with paid subscription plans including Amazon, Bed Bath & Beyond, Best Buy, Costco and Walmart should keep a careful eye on signs of membership fatigue at a time when consumers are increasingly aware of the need to stretch their dollars.
Lastly, with the lifting of pandemic restrictions, less time at home translates to less time streaming. This also marks an incremental shift back to bricks from clicks at retail. Merchants should shift accordingly to support physical operations while reevaluating product mixes based on ongoing changes in consumer behavior, such as more out-of-home activities.
Discussion Questions
DISCUSSION QUESTIONS: Do you think consumers are going to scrutinize their retailer subscriptions as inflation affects their daily lives? What lessons do you think retailers with subscription programs can learn from Netflix’s recent experience?
Poll
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Yes, with inflation running so high all kinds of discretionary expenses are going to be scrutinized and rationalized. While Netflix’s situation is unique, the cautionary tale for retailers is that loyalty can’t be taken for granted. Consumers expect that retailers will keep working to earn/maintain their business.
Absolutely…when all are the same, price is the only differentiator. Amazon has been raising the price of Prime membership while other retailers like WM are expanding benefits such as the gas benefit. Thanks for the comments on my first article here!
Yes, we’ve gone subscription crazy and many are not consumer-friendly, instead designed to “set it and forget it” as a somewhat sneaky revenue stream for brands. Consumers are not asking for everything to be a subscription or be automated. The numbers are quickly adding up, and consumers will be simplifying as a result of inflation.
It’s worth noting that in the UK, they are evaluating regulations around being more transparent with subscriptions, particularly monthly/auto renews, as a form of consumer protection.
Totally…It’s even gotten to the point where you have subscriptions on top of your subscriptions, such as Instacart to delivery Costco merch. Out of control. Thanks for the comments on my first article here!
There are the “must-have” and the “nice-to-have” subscriptions. As disposable income diminishes because of other routine expense increases, some people will cancel or suspend their subscriptions. Subscriptions are one more place where some people can save. The interesting question is whether or not those same people will renew when the economy stabilizes at a comfortable level.
This may lead customers to swap their subscriptions over to those with more savings benefits with inflation pressures, such as trading convenience of an Instacart over to just a WM+ due to all the savings features. Thanks for the comments Bob!
Households are assessing all kinds of expenditures, but regular recurring payments to subscription services are coming under particular scrutiny as budgets are squeezed. Retailers either need to ensure these services provide really great value (which something like Amazon Prime does) or have benefits people really use (which Walmart+ is trying to achieve with gas discounts). Anything outside of this is liable to be cut – and there are a lot of underused and unnecessary subscriptions that fall into this category.
Agreed. The subscription has to offer clear value rather than being a ‘me too’. Something like a Beyond+ membership like Bed Bath and Beyond should really reevaluate its features. Thanks for the comment Neil!
It’s a very tough confluence of factors. Fatigue + price pressures + less time at home + competition all add up to less attention available from customers. Automatically recurring monthly payments on discretionary items are convenient during the good times. Discretionary being the key word. When life gets tight, something discretionary must go.
Changing customer mind-set from a subscription being discretionary to necessary is what will breed the loyalty. Thanks for the comment Jeff.
Two things are happening here. First, some consumers are realizing just how many subscriptions they have and getting rid of the ones they don’t need. (I think I have two years worth of razor blades from Dollar Shave Club.) Second, Netflix has more competition than they ever have had.
We can all learn that even the best companies can find themselves being impacted by the economy and increased competition.
I think we can all relate to that! My cabinet is full of Native deodorant and body wash from a subscription. Item subscriptions like Amazon’s Subscribe and Save feature are difficult to get frequency right also, adding to a negative consumer experience. Thanks for the comment Shep!
As a business, I like subscription revenues. After all, your revenue is guaranteed whether people leverage your service 100 percent of their waking hours or not at all. As a consumer, I’m very leery of subscription based services. I can go months without using a service, or sometimes I completely forget I have a recurring monthly charge for a service that I’m not using. When I remember them, the feeling is always that I am being abused – the worst customer association a business wants. The lesson to subscription businesses should be to make sure they stay relevant and positively engaged with their customers.
Rampant inflationary headwinds will cause, and already are causing, consumers to quickly identify discretionary expenses that can be easily curtailed. Subscription services fall squarely in this bucket and will be the first to be cancelled. Retailers with a primary model of direct-to-consumer subscriptions should be wary and prepared to identify means of offering even greater value to their customers.
Differentiation is going to be more necessary for those with the DTC subs model for sure. Many have shifted to brick and mortar but not sure that’s going to be enough and will likely cannibalize their direct mail business. I know I shifted from buying Native personal care products from subscription to in-store where I am sure their margins are tighter.
I have been feeling subscription fatigue for quite some time, and suspect I am not alone. It feels very much like the credit card boom in the ’80s, when everyone kept adding new “free” credit cards to their wallets, until they reached interest fee fatigue. Today, nobody actually wants to pay for five streaming services, but streamers like Netflix have FOMO on their side. In this era of ridiculously bloated product choice, FOMO is very difficult for most retailers to achieve, and I suspect most fee-based loyalty programs will fade or evolve soon.
Customers seem to be shifting to JOMO rather than FOMO now. Who can keep track of it all anymore? Thanks for the comment Dave!
Netflix is in a challenging position and they have two ways to increase revenues; increase subscribers or raise prices. Since subscriber increases has been curtailed by increased competition and shifts in consumer habits, raising prices is their current strategy. Netflix had a great run with limited competition, but now they have a long list of competitors that are vying for a share of consumers’ streaming budget – Amazon Prime Video, Hulu, Peacock, Apple TV, Disney Plus, HBO Max and others. With the strong competition, Netflix will need to be careful on how aggressively they raise their prices.
One other strategy would be to right-set and lower prices, while cutting down on account sharing. They’ve already raised prices significantly and are now higher than the competition, driving a shift. It’s a game of margin $ or margin % and they need to reassess if they lowered prices, could the user increase offset the lower margin. Diversifying to other revenue streams, like the licensing they’ve been doing like The Home Edit at Walmart, could also help. Thanks for the comment David!
As more people are back to the office or some sort of hybrid situation, consumers’ disposable time is trending down, which means less time for viewing screens. Throw in inflation, gas prices, food prices and you have a situation ripe for expense reduction. What gets cut first? Those subscriptions that are not delivering value, not offering daily utility. Retailers beware: refocus efforts on delivering uniqueness and differentiation or you may find your numbers dropping like Netflix.
Members Only jackets are no longer in style! Great words to the wise David!
People are cutting subscriptions because inflation is up, costs are rising, and they need to cut back. And there is a lot more competition in the original programming space than ever before – so you have to provide a lot of value to justify the spend.
The lesson for retailer subscriptions I believe is less about subscription fatigue and more about understanding that uptake of subscriptions in a bear market will be much lower than a bull market. And you have to provide a lot of value to justify the spend if you want to attract a critical mass. Which will be difficult for many. Perhaps an “airline alliance” model would make more sense for retailers who can’t provide enough value on their own.
Great idea on the airline collab Nicola. Retailers need to be creative to keep driving value. An airline partnership would align with more out-of-home activities and also has a perception of high-value. Thanks for the comment!
As the pandemic accelerated the online experience, inflation accelerated the weeding of people’s subscription portfolios. As several of my colleagues noted, subscriptions are easy to sign up for, but it takes some attention to find the real value of each one. When it is time to pay for each one, the user will be reminded of the lack of value.
Communicating value is definitely key to keep that resubscribe. Thanks for the comment Gene!
For Netflix, it’s content, content, content. With so many legacy IP creators fielding their own over-the-top services, many tentpole movies and TV series were yanked out of the Netflix library. They have to double down on creating or licensing properties they can retain and that’s always a gamble in entertainment. Meanwhile, as a subscriber I have to ask if I’m getting my money’s worth – sure, “Is It Cake?” was fun but am I spending anywhere as much time with Netflix as I am with Disney+?
For retailers, it’s also content, content, content – is your mix of product and customization options easily duplicated by others? Do you have proprietary flavors, fabrics, finishes that are in-demand? Or can I substitute 85 percent of your catalog at a similar price with what I get through my Amazon Prime subscription?
Yes. Many consumers will be thinking about their subscription plans and how to reduce costs, but usually entertainment subscriptions won’t be on the chopping block – partially because they’ve been household fixtures for some time and in most cases are regularly used. It will be the limited-use subscriptions that go first, including magazines and newspapers (online). Netflix has already established patterns around their offering – and have a relatively diverse offering with regularly programmed new episodes and new content. This will keep them in the game. The retailer lesson is that loyalty and usage of the service needs to be established long before it gets brought out onto the customer’s chopping block if retail wants to keep subscription customers. Less than 1 percent of customers seem to be exiting Netflix – any slowdown happened long before this shift. What they do need to do is revitalize their programming now that there are more competitors.
Price hikes without commensurate enhancements in products or services is a questionable move when inflation and competition are rising.
As I predicted four years ago in two blogs I wrote, Netflix will move to a dual subscription structure where a lower monthly fee will be partially ad supported. I believe this will lead to a surge in accounts, accompanied by a surge from eliminating password sharing, and an even bigger surge in profits as their first-party data would be unmatched for brand building advertising. There is no parallel to retail.
Netflix cancellations or downgrades could be seen as “the canary in the coal mine” for all discretionary spending. Households will look at what value do they get out of each of their monthly subscriptions. I know from personal experience we looked at Amazon Prime and compared it to Netflix and as a household considered that the Amazon offer was far better value for money. And this value for money question is what many will be asking themselves. Arguably Amazon provide a very high benchmark — free delivery and video for less than Netflix each month — so other retailers cannot avoid being compared to this.
Consumers are definitely scrutinizing all expenses and cutting out the non-essentials. Netflix should consider testing a 3 month discount for those trying to cancel their subscriptions to help customers through the summer months of high gas prices. Also breaking up payments to $5/week to make the subscription fee seem more digestible could help keep people engaged with the platform.
I feel price hikes in subscription plans don’t go unnoticed. Such events trigger consumers to review their unnecessary expenses on such programs and generate possibilities of creating a negative impact i.e., subscription cancellation. To skip the risk, retailers should focus on adding value to their subscription plans to justify the raised price. Or more, they can offer an upgraded version of their existing subscription plan with additional benefits at a higher price.