Sometimes, as customers, we see things that the company delivering the product or service doesn’t see. While some companies spend countless hours devising business plans that encourage new customers to buy, join or stay, others manage to devise schemes that leave customers with little or no choice but to move to competitive offerings. I call this a blueprint for how to become the next Blockbuster, the next Kodak or the next taxi cab medallion owner.
Streaming is the future in video. But how will customers make the transition from traditional cable to streaming? Customers will likely go where they’re incentivized to go. And incentives can take many forms — economic (via your pricing structure), psychological (image, brand, etc.), ease of use (switching costs, “hassle factor”, etc.).
Let’s examine what Time Warner Cable, now Spectrum, has done to incentivize its customers to leave over the past three to four years.
Phase 1: Physical Boxes
Cable wire to the wall: Originally, in the analog days, most televisions could be connected to the wall directly by cable wire and we would switch channels up and down on the television set itself.
Digital conversion: As cable companies converted to digital services, cable boxes were needed on each and every television in order to receive digital services such as on-demand movies and the like.
Charging for boxes: After a period of time, a per-box rental fee was charged for each television connected to a box.
Forced digital conversion: Shortly thereafter, the cable companies moved to 100 percent digital distribution, which meant that a box was required in order to receive a cable signal. Free conversion to smaller digital boxes was offered and the boxes were originally provided with no monthly rental fee.
Start charging for small boxes: Shortly after customers installed these smaller boxes — one per television in the house — a monthly rental fee of $5.95 per television per box was added to customers’ monthly bills. Some customers (depending upon how many televisions they had) saw a $30 to $40 jump in their monthly cable bills.
Call in for better deal: Many customers then called in to try to negotiate a better deal. Some customers succeeded, some did not.
Bill increases at end of promotion period. At this point the customer had to call customer services back and once again try to negotiate a better deal. For those that succeeded, it was often time-limited from three to six months.
Call in for a better deal again. And again. Rinse, repeat.
It’s important to note that firms and industries are typically disrupted because customers are unhappy with existing providers. Uber would likely not exist if taxi companies had provided better service at fairer prices. If you’re providing a service that rates at or near the bottom of customer satisfaction surveys across industries, it seems that the very last thing you would ever want to do is provide an offering that actually encourages your customers to leave. Yet, that’s precisely what many have done.
Phase II. Streaming Apps
One of the biggest barriers to switching from one service to another is the switching cost. We routinely keep bank accounts that may not give the best interest or terms because of the hassle involved in new checks, auto drafts and the like. We often stay with credit cards that aren’t rated as highly as others because we’d have to switch bill pay and the like. Switching costs (both monetary and time/effort) typically favor the incumbent.
Spectrum (not unlike Comcast’s Xfinity app and similar offerings) has an app that will broadcast all channels you pay for on your iPad, Roku TV, Apple TV, phone, etc., while you’re in your own home, and for a limited set of channels when you’re away from your home. What you can’t do is use the Spectrum app on a TV in any house other than your own.
By charging a monthly fee for the box used for each television in the house and providing an app that can be used for free on each TV, Spectrum is providing a financial incentive to customers to get rid of the boxes and switch to the app.
However, once this is done, there is absolutely no barrier to cut the cord — it’s now easy to switch to any app that’s non-Spectrum and that’s available. Hulu Live, Sling, YouTube TV and others offer streaming services that have live TV and sports and are generally available at lower price points. The customer is now incentivized to choose the best offering. Level playing fields are fine, but when you had an incumbency advantage, why would you ever want to create a level playing field?
In part, the problem Spectrum faced was that the competition allowed the exact same experience on multiple devices. I could have YouTube TV on my TV in Chapel Hill, my son could watch it in his house in Clarksdale, Miss., and I could watch it on my computer in the office. No different than Hulu, Netflix or Apple TV+.
OK, so you’d think this is the end of the story for Spectrum. Incredulously, no. It continues to raise prices.
Here the solution was rather simple. Don’t charge monthly rental fees for the boxes. The boxes actually give a better, more seamless experience than the apps. Don’t raise fees. Don’t require the customer to call in every three to six months to get a fair price. It already had the customers locked in since they were using the boxes in their homes. Why would they ever want to switch?
What did Spectrum do? Just the opposite, providing others a blueprint of what not to do if they don’t want to be disrupted.
Key Lessons for Other Industries:
1. Don’t charge for the device that creates stickiness. By charging a monthly fee for the cable box while simultaneously offering apps (to be used on televisions and mobile devices) for free, you are encouraging customers — indeed, providing them a financial incentive — to take the proactive and time consuming task of removing the boxes and installing/setting up the app on each television. Once this is done, you — at best — are on equal footing with the competition.
2. Listen to customer complaints. Lack of customer satisfaction with existing offerings is the single biggest reason for successful disruptive of competing products and services.
3. Think about what you are incentivizing your customer to do at every step. Here, at each step, Time Warner/Spectrum led the customer — literally paid them — to move in a path that resulted in their leaving for competitive offerings.
William Putsis is a professor of marketing, economics and business strategy at the University of North Carolina-Chapel Hill, and a faculty fellow for executive programs at Yale University. He is also president and CEO of Chestnut Hill Associates, a strategy consulting firm, and founder of the software company, CADEO Economics, which automates his data modeling-based strategy development processes. His new book is The Carrot and the Stick: Leveraging Strategic Control for Growth. Learn more at chestnuthillconsulting.com.
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