The business value of a promise

In 2004, Blockbuster announced that it would no longer charge late fees for movie and game rentals. Good news, right? Well, not exactly. As droves of customers turned in rentals late, they found that they were assessed a new fee—a restocking fee. As customers became angry at how the company marketed its new policy, its reputation took a serious hit, damaging the Blockbuster brand for years to come.

While Blockbuster was busy alienating customers, Netflix was building loyalty due to its added convenience and its ability to deliver on its brand promise. There were no restocking fees, no hidden charges, and no deviations from its promise. The company simply delivered what it promised—and its brand value began to soar. At same the time, Wall Street began to take notice. In August 2003, the stock price for Netflix was on the rise $16.67 while Blockbuster was still holding strong at $20.49.(1) In May 2008, the stock prices for Netflix and Blockbuster were $31.21 and $3.32, respectively—demonstrating the connection between brand loyalty and financial performance.(1)

Why did Blockbuster heavily promote a no-fees approach while charging customers with hidden stocking fees? CNN reported that Blockbuster might lose up to $300 million without the late fees.(2) As a result, the company attempted to recoup some of the losses with hidden fees—and this type of short-term thinking ended up costing the company more in the long-run with unhappy customers, decreased brand value, and lower stock prices.

Companies looking to succeed in an increasingly competitive marketplace must take a long-term that focuses on building customer loyalty and brand equity. It starts with creating a brand that is believable. It continues with building a brand that is defendable. Netflix simply made a promise and kept it. Blockbuster, on the other hand, failed to deliver on its promise—and its brand continues to suffer. As both companies jostle for market share, which company will you find more believable in future marketing ads? If you’re not sure, you might want to check with Wall Street first.

1. http://news.moneycentral.msn.com
2. http://money.cnn.com/2004/12/14/news/midcaps/blockbuster_latefees