Whether you call it stagnation or double dip recession, it is no secret that the U.S. and world economies are in trouble. Unemployment is on the rise and all companies are tightening their belts. It is my experience that in tough times one of the areas where companies look to save money is market research. Companies "save" money by cutting their market research budgets and bringing the work in-house. It is not too difficult to guess the logic behind this decision. After all, "in tough times, companies need to focus on making quarterly sales and profit targets. The benefits of market research are more often long-term so let's cut back. Also, we can save even more money if we stop hiring outside vendors and use our own employees to do the work. After all, they know market research and there are low-cost tools like SurveyMonkey they can use to implement the projects." This line of reasoning is very risky. In a future post I will explain the flaws and associated risks with this logic. Today, I want to focus on a recent blunder by a well-known company that apparently followed this "cost-cutting" strategy.

For the past few years Netflix has been one of the hottest stocks to own. From January 1, 2009 through July 14, 2011 Netflix stock had soared nearly 900% compared to a modest increase in the S&P 500. The chart below shows how well Netflix stock performed.

Then back in July Netflix announced a major change to its business. It was splitting its unlimited streaming and unlimited DVD-by-mail plan into two plans. Moving forward, instead of paying $9.99 a month for unlimited streaming and unlimited mail-in DVDs, subscribers were forced to choose one of these plans for $7.99 or pay $15.98 for both. This translates into a 60% price increase for customers wishing to retain both services. In addition, the two new services would require separate accounts, making the service less user-friendly. How did Netflix customers respond to this astounding price increase in these hard economic times? Well, let's just say that Netflix has received the type of publicity that is every marketing manager's worst nightmare. Customers were incensed by the enormous size of the price increase. Tens of thousands of members vented their outrage in the blogosphere. A survey by another research firm indicated that Netflix will eventually lose between 10% and 30% of their customer base as a result of the change. Netflix was forced to revise its third-quarter guidance downward by 1 million subscribers. Not surprisingly, the stock price has been tanking. This next chart shows the price of Netflix stock compared to the S&P 500 over the past two months.

Netflix fell from a high of $298 a share to just $128 a share. This 57% decrease in value represents a loss of nearly $9 Billion (yes billion with a B) in market capitalization in just two short months! Netflix managed to wipe out most of the goodwill it has built up over the years with one huge mistake.

Why do I bring this up? Because I find the only possible explanation for Netflix to make such a huge blunder is the absence of a well-designed quantitative market research study. This whole nightmare was created by poor implementation. Those who follow Netflix have known for years that its business has been shifting from DVD-by-mail to streaming video. Given the cost structure of Netflix's business, it is not too surprising that there would eventually be a price increase. After all, how much more do you pay for movie theater tickets today than you paid two years ago? A well-designed conjoint study would have clearly shown how the market would reject the changes announced. It could also have identified alternative product-line changes that would have been more appealing (or at least less repulsive) to its customer base. The investment in a conjoint study would have set back Netflix about $100,000. How does this $100,000 investment compare to a loss of $200 million to $600 million in annual revenues and a loss of $9 billion in shareholder equity? For the past two months Netflix's CEO Reed Hastings has been apologizing for this mistake and modifying strategy in an attempt to appease customers and investors alike. Next time he sits in a staff meeting discussing budgets, he may want to invest a little more in market research.