What you can learn from Blockbuster's failure

Two days ago, Blockbuster announced that it will close all of its remaining approximately 300 U.S.-based stores (news link). This has been a long time in the making, and there is a lot you can learn from this. Prior to Netflix, Blockbuster thrived due to its use of "bad profits" (a term from Fred Reichheld's book, The Ultimate Question, which introduced the concept of the Net Promoter Score, NPS). Bad profits are a highly disruptive source of negative word of mouth. Blockbuster's bad profits were, of course, late fees. Everyone I know that was a Blockbuster customer - including myself and my wife - hated late fees. You knew Blockbuster "got you" and you felt that you "only had yourself to blame" because you were the one that was late on returning it. Sometimes you would plead with the in-store associate to have mercy on you. It became the primary source of Blockbuster's profits. Anytime bad profits are your primary source of profits, you are due for a hard-knock. That hard-knock came from Netflix. Their original ad campaign, "The end of late fees", was pretty much all they needed to say. Their business model was designed very differently - leveraging the Internet and network economic effects (a nod to another favorite book: Net Gainby John Hagel III). When Netflix said, "The end of late fees", word of mouth took care of the rest. This is why NPS has become so important to companies as a form of measurement for their most important external stakeholders - their customers. It is used by thousands of companies, including many Fortune 500 companies. Brad Smith, the CEO of Intuit, said, “Thank goodness for Net Promoter. It provided a framework for thinking about—and managing in this social media world… our teams call it the love metric”. Tony Hsieh, the CEO of Zappos, said, "We use NPS every day to make sure we are wowing customers and employees."

This second quote is really interesting to me as it pertains to company culture. I attended this year's Conscious Capitalism CEO Summit (my favorite leadership conference of this year and last) and Fred Reichheld talked about how he is on a new mission to help companies drive more engagement with their team members with the introduction of his TeamTru metric and methodology. I look forward to seeing how it positively impacts companies in that much-needed area. I very much believe that company culture drives performance, and that starts with hiring the right people (you can read what I wrote about hiring in this Lucky7 post).

I wrote a four-part series on the Bazaarvoice blog starting in February of 2006 about what could be learned from the Netflix vs. Blockbuster battle. My goal for writing this was to move our industry - still a very nascent one today - to think hard about the power of word of mouth. This eventually led to our mission statement, "changing the world, one authentic conversation at a time", as we saw companies change the way they operate based on the customer data (authentic word of mouth) and insights that they were accumulating as a result of deploying Bazaarvoice. There is a lot to be learned here, and there is no doubt that books like The Innovator's Dilemma help all of us think about not using bad profits to be vulnerable to someone coming along and disrupting our business model. In this case: to Blockbuster's ultimate extinction. Blockbuster used to have 8,500 stores located across 29 countries, and it was worth $5 billion at one point. But they were addicted to bad profits - the majority of their income - and that caught them in the downward spiral that only The Innovator's Dilemma can best explain. What could they have done differently? A lot, and it is best explained in Clayton Christensen's follow-up book, The Innovator's Solution.

Here is my blog series if you would like to read it - and absorb the insights - from the beginning:

  1. Feb. 2006: Bad Profits and the Incredible Power of Word of Mouth
  2. Dec. 2006: Netflix vs. Blockbuster: Round Two
  3. Jan. 2007: Netflix vs. Blockbuster: Round Three
  4. Mar. 2009: Netflix vs. Blockbuster: Round Four (Lights Out?)

Have you or the company you worked for used bad profits before? What happened as a result? Did you or they have the courage to change in the gut-wrenching way that books like The Innovator's Solution detail?