Punished by the the popularity of cheap DVDs, video-on-demand, and the Netflix DVD-rental-by-mail service, Blockbuster announced further price cuts on its subscription plans. These plans allow consumers to rent and return videos at stores or by mail. The added ability to rent something immediately in the store, or return to a store, should provide additional value over and above the Netflix mail-only plan. However, Blockbuster has a much narrower range of movies, and they don’t really have expertise in rent-by-mail. Even mighty Wal-Mart gave up on competing with Netflix.

If Blockbuster thinks that offering a plan for $16.99/month instead of the $17.99/month that Netflix charges will move the market significantly, I have a movie I’d like them to invest in. That kind of incremental pricing just drains profit. You have to be much cheaper or much better to take significant market share from a competitor, and if you do, the competitor will usually drop prices, too. Leave it to the Motley Fool to point out that this is not healthy for the bottom line.

Instead of trying to take customers from Netflix, Blockbuster should improve its existing customer experience (stores are often dirty, cluttered, and generally unappealing), then extend the store experience into a “clicks-and-bricks” experience for its existing customers. This might include putting kiosks in the stores. When a customer logs in, they can see the list of movies they want to see, they can browse movies by category, rating, etc, and see movies related to a movie (people who like The Godfather also liked Goodfellas, for example). This would solve one of the problems of going to the video store– remembering what you actually wanted to watch. In the future, it would also allow Blockbuster to dramatically reduce expensive retail space. A set of kiosks could serve up DVDs, or customers could just get the DVD as they leave the store. In theory, you could turn the store into a fancy vending machine.

On the pricing side, they need to recognize that people join Netflix because their friends recommended it, usually with a coupon for a free trial. They should promote free trials with rentals (perhaps they are? I haven’t been to a Blockbuster recently), and encourage customers to sign up friends. These promotions will cost money, but the leverage of a dollar spent here compared with a dollar spent on a price war would be far greater. Blockbuster investors would enjoy that movie much more than the horror flick they’re currently watching.

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