When the Customer is Wrong (gasp!)
Maxxwell A.R. is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
One of the rules of business is that the customer is always right. It makes sense. The customer drives business by choosing your product or service over a competitor’s. Anger the customer and you may find yourself losing market share and explaining an “Oops!” to shareholders.
The rule, while simple and useful at times, can also lead to an overreliance on market studies that claim to know what customers are feeling. Surveys sometimes get misinterpreted when the results from a small sample of opinions are extrapolated to a company’s entire customer base. If management fails to identify its product or service’s place in the market the customer can be perceived as right, when in fact the customer is wrong.
The folly of sip tests
In his book Blink: The Power of Thinking Without Thinking, Malcolm Gladwell explains the disastrous consequences of one such instance. In the early 1970s a study showed that 18% of people were exclusive Coca-Cola (NYSE: KO) drinkers, while only 4% showed the same loyalty to PepsiCo’s (NYSE: PEP) flagship product. A decade later Coke exclusivity fell to 12% while Pepsi climbed to 11%. The “market shift” was compounded by the infamous Pepsi Challenge, in which an individual sipped from two unmarked glasses (one Coke, one Pepsi) and inevitably preferred Pepsi.
When Coke set out to dismiss the commercials as creative advertising, they actually discovered that 57% of tasters really did prefer Pepsi. Customers lauded Pepsi for its smooth and rounded taste, while Coke was often described as harsh and bitter. Management at Coke scrambled to find an answer and finally came up with the infamous New Coke, which beat Pepsi in sip tests across the country and was unleashed on the market in 1985. Coke now had a product that the customer wanted. Right?
At the press conference announcing the debut of New Coke a journalist asked “Are you sure this won’t completely bomb?” CEO Robert C. Goizueta responded, “This is the surest move ever because the consumer made it. We didn’t.” Famous last words. Angry customers demanded their Classic Coke back and New Coke was yanked after only 80 days on the market. Surprisingly, Coca-Cola gained market share from the re-release of Classic Coke. The rise of Pepsi, pointed to by the inevitable upward trend in market share and consumer research, never came to fruition. Listening to the customer in the simplest and most direct studies, sip tests turned out to be one of the biggest debacles in Coca Cola’s impressive history.
Why customers are wrong about Netflix
Netflix (NASDAQ: NFLX) had its fair share of blame handed to it by customers after the Qwikster fiasco last year, but it did accurately foresee the future of movie watching. Last July people went crazy after Netflix announced it would separate its DVD by mail and online streaming services. Investors (rightfully) worried about subscriber loss in the short term. But I think angry customers – the minority – got a little too much airtime on the media’s megaphone.
Netflix made the right long-term move and made the majority of its customers’ lives easier. Having just graduated college I can tell you that digital streaming is what makes the world go ‘round. Some of my friends actually subscribed to Netflix in lieu of paying for cable television and even more are skipping cable after graduation in favor of digital streaming. In this case new customers, those who enjoy the convenience of streaming, will more than replace the outdated ones that left with their beepers tightly fastened to their belts. The separation of services and payment plans had to happen eventually, so why not do it earlier rather than later?
A recent study demonstrated the company’s surge in streaming market share. In May 2011 Netflix commanded only 25% of the streaming market, barely beating Hulu. Yet last December the company cruised to 30%, while Hulu fell to just 14% and Apple’s iTunes fell to only 7%.
Source: Citi Investment Research and Analysis from this article.
Foolish bottom line
Market research often leads to amazing products and getting a head start on the demands of the customer, but future plans are not always straightforward or received well by customers. Given the challenges facing Coca Cola at the time it is difficult to see where they went wrong. Management saw their closest competitor getting closer to them, painfully confirmed that Pepsi was preferred to Coke in blind sip tests, and introduced a new product that the customer preferred to Pepsi. The company’s biggest blunder was failing to see that customers liked Coke for being Coke.
Similarly, when Netflix was founded in 1997 it was never intended to offer only DVD by mail services (it began streaming digital content in 1999). Streaming is what makes Netflix, well, Netflix. Did the company create some angry customers? Of course. However, the company correctly identified the shift in movie watching and moved to capture new customers. In this case I believe the old customers are wrong and the new (and yet to be converted) customers are right.
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BlacknGold has no positions in the stocks mentioned above. The Motley Fool owns shares of The Coca-Cola Company, Netflix, and PepsiCo. Motley Fool newsletter services recommend Netflix, PepsiCo, and The Coca-Cola Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.