Blockbuster is traded on the NYSE under the ticker symbol BBI and is a 21-year old company with 8,500 stores located in 29 countries. Netflix is traded on NASDAQ under the ticker symbol NFLX and is an 8-year old company with one website and 37 shipping centers in the U.S.

As of Friday, Feb. 17, Netflix was worth $1.36 billion and Blockbuster was worth $0.73 billion, or roughly half of the value of Netflix. Huh?!

Well, just as Google is worth $109 billion while General Motors is worth $12 billion, there is an explanation for this apparent craziness. And it has to do with word of mouth and what Fred Reichheld calls “bad profits.”

Fred Reichheld, the founder of Bain & Company’s Loyalty Practice and the author of “The Ultimate Question: Driving Good Profits and True Growth”?, describes bad profits as a company’s Achilles’ heel. There are many examples of bad profits and you and I have experienced them. Your hotel phone bill being bigger than your room bill. A $35 returned check fee from your bank. Your cellular phone company giving their best prices to new customers and not to you. Airlines charging you a $100 change fee when there is plenty of availability on the flight. Rental car companies charging you 300% more for gasoline than the nearest gas station.

And, of course, Blockbuster charging you excessive late fees. I was a Blockbuster customer for many years. You could even say that I was a loyal Blockbuster customer. But I always hated Blockbuster’s excessive late fees. I remember driving to the local Blockbuster only 1 hour late and getting that sinking feeling in the pit of my stomach. Avoiding that feeling served as a deterrent to me renting movies sometimes.

I would tell my wife, “Let’s not rent a movie this weekend because I have a busy week coming up and we will probably forget to return it on time.” Remember that? I’m sure you have been there.

Bad profits have the direct effect of decreasing customer loyalty.

And the Blockbuster name became synonymous with late fees. The power of word of mouth cemented their reputation. But Blockbuster’s competitors had similar bad-profit policies, so you learned to live with it.

Then in 1998 along came a tiny company in Los Gatos, California named Netflix. Their marketing platform was “abolish the late fees”. It worked, big time. Word of mouth spread like wildfire. Blockbuster let them thrive because they earned way too much in bad profits (earning hundreds of millions of dollars per year in late fees) to eat their cash-cow. How can a company be so oblivious to a small start-up? Well, there are two reasons for that.

The first is explained articulately in the book “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail”? by Clayton Christensen. This is one of my favorite business books of all time and perhaps the single most important book for entrepreneurs to read. The second reason is that Blockbuster didn’t listen to their customers.

They didn’t listen to the power of word of mouth. And, as a result, they lost almost 90% of their market value in a little over three years, dropping from around $7 billion in value as of Q2-2002 (only one quarter prior to Netflix going public) to their current value of $0.73 billion.

The stock charts below are illustrative of what happened when Netflix went public in mid-2002, and you can see a direct relationship between Netflix’s growth and Blockbuster’s precipitious decline. [Click on the charts to see them clearly.]

nflx_vs_bbi_21.png
bbi_5year_price_chart_3.png

Blockbuster introduced their “End of Late Fees”? program on January 1, 2005. But it was too late and, sadly enough, it was a corporate policy that was not binding on their franchised stores in the U.S. (so only half of the franchisees opted to participate and still half don’t to this day).

And, outside of the U.S., Blockbuster late fees are still the norm. But none of this really matters. Because the bad-profits damage had been done. The Blockbuster reputation had been solidified. And the corporation continues its death spiral, much to the benefit of the rapidly growing Netflix.

At Bazaarvoice, we are teaching our clients how to listen to word of mouth and harness its power. We often get asked about negative reviews. We view negative reviews as an opportunity for action. Since launching with us, PETCO has done a fantastic job of listening to negative reviews, using them as a call to action by feeding them to their Customer Support department.

Imagine how different the outcome may have been for Blockbuster if they had actually listened to their negative word of mouth. As I travel throughout the U.S. to visit many prospective clients, I hear the new corporate mantra is often “customer centricity”. I would argue that negative reviews help companies learn how to be customer centric even more so than positive ones do.

In Reichheld’s book, he goes on to explain that “the ultimate question”? to measure customer loyalty is “Would you recommend us to a friend?”? Reichheld explains that this question probes both dimensions of customer loyalty – the head and the heart.

The head thinks best features, best service, and best price. The heart beats they know me, they value me, they listen to me, and they share my values. I think this is brilliant, and our slant on this question today is “Would you buy this product again?”?

BTW, I met Reichheld at WOMMA’s WOMBAT event and you can download his presentation for free here. If you haven’t gotten involved in WOMMA yet, now is the time. This was one of the best conferences I have been to (at least the content was, not the venue). We are proud to be WOMMA members.

 

10 Responses to “Bad Profits and the Incredible Power of Word of Mouth”

  1. Fred Oswald

    How true rings this article.

    We have just been burned by US Air. My wife wanted to move up her departure date by six days. Not only do they want to charge a $100 fee and charge the new (higher) air fare on this flight, they also want to re-price the return flight (which she did not want to change).

    I understand that Southwest does not do this to its customers. Therefore, Southwest will get new customers (us) next time they are flying to (or near) somewhere we want to go.

  2. Fred Oswald

    How true rings this article.

    We have just been burned by US Air. My wife wanted to move up her departure date by six days. Not only do they want to charge a $100 fee and charge the new (higher) air fare on this flight, they also want to re-price the return flight (which she did not want to change).

    I understand that Southwest does not do this to its customers. Therefore, Southwest will get new customers (us) next time they are flying to (or near) somewhere we want to go.

  3. Thanks Leo. That is good feedback and a good idea. We have been thinking about the right way to implement something like the Net-Promoter Score into our solution.

  4. Thanks Leo. That is good feedback and a good idea. We have been thinking about the right way to implement something like the Net-Promoter Score into our solution.

  5. I used Bazaarvoice at the CompUSA site, and thought it was pretty cool. But I did have a problem with the question “Would you buy this product again?”. It wasn’t a product I would buy again (didn’t need two), but it was certainly something I would recommend to a friend. You might want to consider using Reichheld’s net-promoter approach instead, e.g. “Would you recommend this product to a friend?” If you could go further, and use the 11-point NPS scale on the question “How likely are you to recommend this product to a friend?”, that might give you and your clients even better results.

  6. I used Bazaarvoice at the CompUSA site, and thought it was pretty cool. But I did have a problem with the question “Would you buy this product again?”. It wasn’t a product I would buy again (didn’t need two), but it was certainly something I would recommend to a friend. You might want to consider using Reichheld’s net-promoter approach instead, e.g. “Would you recommend this product to a friend?” If you could go further, and use the 11-point NPS scale on the question “How likely are you to recommend this product to a friend?”, that might give you and your clients even better results.

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