Friday, January 4, 2008

Netflix & Blockbuster Square Off In The Ultimate BI Battleground

There have been a lot of case studies published on how business intelligence (BI) tools have helped the bottom line performance for retailers, but few have examined the impact on head-to-head competition between prime players.
The battle ground in the video rental market is shaping up to be a full scale throw-down between the top two players, with BI tools playing a central part in their strategy. The story line features price optimization, customer segmentation, and promotion management-- and how it ultimately plays out could serve a textbook reference for years to come.

Before you write off BI tools as a minor factor in this match, consider the background of the key players involved. Reed Hastings, CEO of Netflix, was a high-school math teacher, and has been a vocal proponent of customer intelligence since the company’s early days. Illustrating its passion for behavioral analysis technology, the company launched the Netflix Prize last year. The contest, which offered a $1 million prize for building the best technology to predict customer preferences, generated more than 12,000 entries.
Blockbuster CEO Jim Keyes is also considered somewhat of a data junkie. While he was racking up 36 consecutive quarters of same store sales during his tenure at 7-Eleven, he reportedly relied heavily on BI tools to drive product assortment decisions. One of Keyes' first moves after taking over at Blockbuster was to shake up the IT staff and bring in Keith Morrow as CIO. Morrow worked with Keyes at 7-Eleven and is considered to be one of the brighter minds in the retail space.


To fully appreciate the complexity of the arena these two are competing in, you have to keep in mind that they are working with multi-tiered subscription pricing that has to factor in the fulfillment cost of serving the customer. The data layers get even thicker for Blockbuster when you add in the fact that Total Access members can return and substitute titles at store locations.
The battle between the two video rental titans has been shifting on a quarterly basis, with the edge apparently going to the company that better adjusts its pricing model based on consumption and customer behavior.
Building on its cross-channel Total Access marketing plan, Blockbuster appeared to be mounting a comeback in the battle by cutting into Netflix’s base of online subscribers. The company's online subscriber base reached 3.1 million by the end of September last year, but then the company abruptly announced that it was changing gears.
The company’s new management did some analysis and realized that those online customers they were spending big bucks to attract weren’t so profitable after all. After raising its prices on high volume subscription plans, Blockbuster lost about 500,000 subscribers and saw its stock price take a hit. However, Keyes made it clear that this was a calculated move, calling the price increase “a conscious effort to prune the tree, and in other words, we were willing to walk away from some of our subscribers, those at the far end of the usage scale who are not willing to pay a higher price for unlimited free exchanges,” adding “we were happy to see them move to the competition.”
Right around the same time Blockbuster was raising its prices for heavy users, Netflix was stepping up its customer acquisition strategy by launching a $4.99 subscription package. In July of last year, Netflix lowered the price on two of most popular subscription packages by $1. The change was expected to benefit the majority of Netflix’s customer database, which consists of more than seven million members, and hopefully stop them from jumping ship and moving over to Blockbuster.

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