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It was back in 2000, when a small Netflix approached the market giant, Blockbuster, with this proposal – Blockbuster should use Netflix as its online service. It was such a preposterous idea that such a small and very niche company like Netflix should approach a dominant giant like Blockbuster with a partnership proposal. It was such a crazy idea that Blockbuster “nearly laughed us out of the office,” recalled Netflix’s former CFO, Barry McCarthy.
We all know how the story ended.
Blockbuster filed for bankruptcy just a mere 10 years later and Netflix became one of the largest streaming services in the world.
But how did Netflix grow so quickly, become so popular and retain its customers for so long?
A large part of that answer is that Netflix became obsessed with one thing – their customer.
Customer Obsessed vs Customer Focused
Many companies claim to be customer focused.
But what does it mean to be customer obsessed and how does it relate to churn?
Former Netflix VP, Gibson Biddle, explains the difference between the two:
Customer focused has the central question of “What do the customers say?” It looks at what they say about your product or service right now. The focus is on the present or the recent past.
Customer obsession takes that question and adds one other element – how to delight customers in the future.
“Customer obsession means a healthy preoccupation with customers’ unanticipated, future needs through a mix of research techniques that put the customer in the center of everything you do, so that you begin to see the product through their eyes.”
Customer obsession, then, focuses on the current needs of the customer and then it goes one step further to anticipate their future needs too, all with the added dash of delighting or surprising them.
It’s a monumental shift in perspective — from focusing only on the present or recent past to one that also encompasses the future. And then to raise the bar higher, it’s a future that’s filled with positive experiences.
That’s a tall order.
Let’s break it down.
The Advantage of Now
Using Biddle’s definition, a customer focused business would ask questions or get feedback on how customers like the product as it exists right now. Almost every business has some form of feedback they ask their customers. These include exit interviews or surveys, NPS, and quick post-customer support surveys which attempt to capture what the customer likes or dislikes about the product or service as it currently exists.
If a business is lucky, some customer responses might give an indication of what customers would like to see in terms of new features, improved customer support or a better user experience but getting these types of answers are rare. Most customer feedback is based on a recent experience or the frustration they’re experiencing right in the moment.
Customer feedback is based on what they’re experiencing now.
There are 2 main advantages of gathering feedback based on the product or service as it exists now:
Collecting feedback allows for companies to benchmark for KPIs or other important metrics to allow them to see trends over time. Generally, the longer data is collected, the easier it is to see the patterns of those trends. But even shorter periods of time can highlight trends. For example, here is the monthly cancel rate of Netflix customers by region in 2005:
Netflix was able to identify this trend in Hawaii’s cancellation rate very quickly. An inquiry discovered that the decrease in churn was due to an increase in the speed of delivery of Netflix’s old DVD rental system. Cancellation rates dropped once DVDs were delivered in 1 day versus 3 days in Hawaii.
2. Resolving Issues
Gathering feedback allows for immediate action to resolve a customer problem or complaint. As you know, customer retention, in part, depends on how well a customer experiences help with support issues. If their issues are resolved quickly and simply, customers feel good and are more likely to remain.
The Disadvantage of Now
The main disadvantage of collecting current feedback is that it doesn’t explicitly indicate where customer needs are heading, how quickly they’re changing and how urgent they are.
As you know, it takes a lot of effort to analyze customer feedback.
It takes even more effort to analyze customer feedback PLUS start looking through the data for emerging trends and movements.
Most businesses don’t do it.
And this can be for many reasons, including lack of time, lack of resources, lack of knowledge or even lack of desire by management.
Fortunately, the focus on emerging trends and movements is the realm of customer obsessed inquiry.
The Advantage of the Future
“The future depends on what we do in the present.” Mahatma Gandhi
The advantage of focusing on the future is the possibility of discovering or uncovering new, emerging trends and movements.
It’s easy to see trends when looking back through the lens of history. Big movements in culture and technology jump right out at you. But when these changes are first emerging, it can be hard to see their value or where they’re headed.
Sometimes you get it right, sometimes you get it wrong.
Netflix got it right.
Kodak got it wrong.
Back in 1977, Kodak filed a patent for one of the world’s first digital cameras. In the 1970s, Kodak was an industry giant that produced film and film cameras. At the time, things were going so well in the film camera industry that, despite filing for a patent for a new technology, Kodak didn’t introduce the public to its new technology.
Even as it became clear over the next decade that digital was the future of the industry, Kodak continued its focus on traditional film cameras.
Only when it was clear that film cameras were losing significant share to digital cameras, Kodak slowly entered the digital market.
By then, Kodak was so far behind it competitors that it was selling its cameras at a loss and couldn’t make strong gains against other manufacturers who had been producing digital cameras for years.
Kodak ended up closing its doors in 2012.
Kodak originally was on the front wave of the newly emerging digital future.
They had filed one of the world’s first patents for a digital camera.
They had a chance to become a world leader in this nascent industry.
But they missed the chance.
Because they couldn’t accurately predict the impact digital cameras would have on the world from their vantage point of being a world leader in the film camera industry.
See, the biggest challenge in focusing on the future is that it’s unwritten. There’s no guarantee of the outcome.
Unfortunately for Kodak, they couldn’t see the massive impact digital cameras would have in our world. They chose to stay where they were – at the top of the film camera industry, betting that customers would stay with Kodak and film cameras.
Their assumption was wrong.
And it cost them dearly.
On the other hand, Netflix has embraced the uncertainty of the future and chosen to work within it.
One of the reasons for Netflix’s success has been this focus on customer obsession and using it to help define emerging trends and movements.
Netflix has gone one step above collecting customer feedback about its current products and recent experiences of its customers. Netflix constantly creates hypotheses on future customer needs, desires and wants and then tests them rigorously. All with the aim of surprising and delighting customers so they stay longer.
In 2018, Netflix did away with the 5-star rating system and instead opted for a simple thumbs up or thumbs down rating system.
The original hypothesis behind the 5-star rating system was simple. The more higher-rated movies a member watched, the higher member retention would be. In testing this, however, Netflix found the data didn’t prove this hypothesis.
Over the course of a 10-year period, Netflix tested many hypotheses in an effort to find a trifecta of features that what would both increase customer retention and be simple and personalized. Netflix had noticed that simplicity and personalization were newly emerging trends. These hypotheses were based on data they received from customer surveys and focus groups.
This series of creating and testing new hypothesis lead Netflix to the ‘percentage match’ system you currently see. It’s based, in part, on the newer and simpler thumbs up or thumbs down rating system versus the older 5-star rating system.
The newer percentage-match system is ideal. It delights customers with great movie choices. It’s very hard-to-copy as it’s based on the movie tastes of 120 million members worldwide. It improves profit margin by merchandising movies that cost less. And it also retains customers longer.
Netflix also understands the emerging movement that customers want simplicity and personalization. The new percentage-match system, coupled with the new easy 2 choice rating system (thumbs up or thumbs down), is both simple and personalized.
It took Netflix nearly a decade of future-focused inquiry to find and refine the percentage match system. Through customer surveys and focus groups and rigorous A/B testing of hypotheses based on the data collected from those surveys and groups, Netflix found and developed the ideal percentage match system. This system also placed itself on the front wave of a new trend – customers demanding simplicity and personalization.
The Disadvantage of the Future
The biggest disadvantage of focusing on the future wants, needs and desires of customers is getting it wrong.
The business landscape is littered with examples of companies predicting the wrong future or arriving before customers are ready. (Like Hiroshi Ueda who created the selfie stick 30 years too early.)
There is a big financial risk in attempting to guess the future wants, needs and desires of customers. The car company, Ford, discovered this in the 1950s when it created the Edsel car line. It was touted as the ‘car of the future’. But customers weren’t happy with the Edsel. And Ford ended up losing over $250 million dollars.
Simply put – the risk of mis-predicting the future, as seen with the selfie stick and the Edsel, can be very expensive in terms of actual cost or lost opportunity costs.
And a lot of businesses are afraid of making such an expensive error.
The choice to be customer focused or customer obsessed is not an easy one. Each model has its advantages and disadvantages.
For companies like Netflix, focusing on the future wants, desires and needs of their customers in a way that will delight and surprise them has helped Netflix grow into the company it is today. It’s also this obsession model that’s allowed Netflix to keep a low churn rate despite growing competition from other streaming sites.
Customer obsessed companies like Netflix have set the standard for customer’s expectations now and into the future.
Customers want more.
Customers expect more.
While not all businesses can be so customer obsessed like Netflix or Amazon, all businesses can take even a bit of interest in finding out what their customer may want, need or desire in the future. Creating surveys or holding focus groups to discover customer thoughts and feelings are a big start toward shifting perspective from customer focused to customer obsessed. Analyzing the data from these inquiries and creating and testing hypotheses – however simple – can help any business start to understand from the customer’s perspective as it relates to their future wants, needs and desires.
It also sets the pattern of putting the customer at the center of product development.
The great thing is that the shift to customer obsession is available to any business, no matter the size. Any business can create surveys or focus groups to discover what their customers may want. They can also undertake simple A/B testing to confirm the data collected from the surveys or focus groups. And then simply repeat the process over and over.
Customers are happier.
They stay longer.
It all starts with a simple shift in perspective.