Netflix Marks a Turning Point in the Subscription Economy Again

By Tien Tzuo June 12, 2020

This is a story that begins with Charles Darwin’s grandfather.

He was an Englishman named Josiah Wedgwood, and he was one of the wealthiest entrepreneurs of the 18th century. He ran a massively successful decorative homeware business (you can still buy his stuff today), but is also famous as “the godfather of modern marketing.”

Wedgwood pioneered concepts like buy one get one free, direct mail, free delivery, illustrated catalog shopping and traveling salesmen. He was the Bezos of his day.

But the craziest thing he did was introduce the money back guarantee. If for any reason you weren’t satisfied, he would give you your money back. This was a revolution. Until Wedgwood, the general retail attitude was caveat emptor, or “let the buyer beware.” I.e., if you buy a dud, that’s on you.

Many of Wedgwood’s ideas would become later popularized by 19th century American department store pioneers like Harry Gordon Selfridge and Marshall Field, who coined the phrase “the customer is always right.” Today you can find all sorts of examples of companies that live and die by their customer service. You can buy three sizes of a shoe from Zappos and send the other two back at no cost. Heck, if you’re really shameless you can wear an L.L.Bean jacket for a year and then claim dissatisfaction and return it for a new one.

These aren’t just nice gestures. These companies are smart, they obviously did the math. They realized the additional sales they generated from taking away the “risk” of getting stuck with an unwanted product. Those new sales far exceeded the revenue lost to returns (there’s also been plenty of psychological research to support the business benefits of money-back guarantees). Why would anyone shop anywhere else?

Which brings me to Netflix.

Netflix just announced that if you sign up for their service, but then for some reason decline to watch it for a year straight, they will now automatically cancel your membership upon the next billing cycle.

“If anyone changes their mind later, it’s really easy to restart Netflix,” says product executive Eddy Wu in a recent blog post. “These inactive accounts represent less than half of one percent of our overall member base, only a few hundred thousand, and are already factored into our financial guidance.”

It was a seemingly small announcement that immediately generated lots of positive press. As WIRED noted approvingly, “Digital subscription services know exactly how much you’re getting out of them. If the answer is ‘nothing,’ they should absolutely give you a tap on the shoulder and point you to the door. The choice to stay is still yours!”

I completely agree, of course. Zombie subscription models suck. In the book, I tear into companies like AOL, whose entire business is based on people not checking their credit card bills (anyone remember Columbia House Records?). If you’re depending on inertia to survive, then you deserve to go down.

Netflix has 183 million viewers, so it can afford to get rid of a few hundred thousand zombie memberships. And by taking the risk away, their ability to attract new subscribers most likely outweighs those lost subscribers. As Eddy Wu says:

“You know that sinking feeling when you realize you signed up for something but haven’t used it in ages? At Netflix, the last thing we want is people paying for something they’re not using.”  Amen to that!

The advent of “the customer is always right” marked a huge inflection point in the evolution of the product economy. As I mentioned, we have Charles Darwin’s grandfather to thank for that.

In a few years, when we all expect our subscription services to cancel if we’re not using them, will we look back on this announcement as a turning point in the evolution of the Subscription Economy? Are we seeing a new kind of natural selection at work?

I think so.

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For more insights from Zuora CEO Tien Tzuo, sign up to receive the Subscribed Weekly here. The opinions expressed in the Subscribed Weekly are his own, not those of the company. The companies mentioned in this newsletter are not necessarily Zuora customers.

And check out his book SUBSCRIBED: Why the Subscription Model Will be Your Company’s Future – and What to Do About It.