Netflix’s allocation policy is part of a growing trend.
In January 2005, responding to a class action suit, Netflix Inc., the world’s leading delivery-based DVD-rental company, publicly acknowledged a policy it had practiced since it launched in 1999. The company made it clear that it did not always process new rentals in the order in which they were received, but instead would give priority to the least active customers, thereby occasionally slowing service to the most regular customers. The policy, dubbed by the media as “throttling,” was widely criticized by both online and mainstream media. Nevertheless, Netflix has continued the policy and managed to increase its customer base and profits by maintaining close relationships with its customers and extensive research into their needs. According to P.K. Kannan, the Harvey Sanders Associate Professor of Marketing at the University of Maryland, Netflix is simply at the forefront of something that will become more common in the retail sector — firing the customer.
Long a strategy in business-to-business settings and the insurance sector, firing the customer consists of identifying and purging your portfolio of the least profitable customers in order to increase margins or concentrate on your best clients. In the case of retail, most companies don’t want to actually fire a customer so much as change the customer’s behavior. At Netflix, all customers pay a flat fee for “unlimited” DVD rentals, with the only limiting factor being the number of DVDs a customer can have out at one time, which is based on the membership level the customer chooses. Because revenue per customer is fixed but expenses are variable due to mailing costs, the least profitable customers are the ones who rent the most frequently. This puts Netflix in the unusual situation that its most active customers are not its best customers. Steve Swasey, Netflix director of corporate communications, says the company’s allocation policy was not intended to fire the customer. “The only customer we want to fire,” he said, “is the one that we can never satisfy.” Regardless of what they are called, it is clear that such policies will become more prevalent and advantageous as more companies gain the kind of customer knowledge and intimacy that Netflix has garnered.