There’s no shortage of horror stories about companies that failed to cope with the increasing digitisation of their industry, often featuring competitors waiting in the wings to take advantage of the digital-disruption. Do these modern-day fables simply warn of a vital need to adopt emerging technology? Or do they preach a sermon of keeping customer experience (CX) at the heart of digital transformation?
By 2020, it’s predicted that CX will be the main factor customers use to differentiate between brands and products. We’re entering an age in which the price and quality of a product no longer dominate purchase decision-making processes, and businesses are taking notice, with 72% of organisations surveyed by Forrester saying that improving customer experience is their number one priority.
As organisations look to operate more effectively in an increasingly digital world, the majority are keeping at least one eye on improving customer experience, with 55% of respondents to the 2017 State of Digital Transformation report citing “evolving customer behaviours and preferences” as their top driver for digital transformation.
One example of a business that definitely didn’t do this is the home video rental giant Blockbuster.
Blockbusted
After surviving the death of VHS, Blockbuster’s inability to cope with changing marketplaces in the early 21st century is held up as an example of how not to approach disruptive technology. However, we think it was actually a serious customer experience blind spot that led to their demise.
The emergence of first the rental-by-post and then video-on-demand markets should have been huge opportunities for a brand the size as Blockbuster. Instead, internal disputes over which direction the company should take, saw them stick to outdated business models that did nothing to improve CX.
Despite all the evidence pointing to customers wanting something different, Blockbuster refused to listen and continued to deliver a service that was stale, oppressive, and harshly penalised customers. By the time they did focus on improving customer experience it was too late, and any goodwill consumers may have had toward the brand was exhausted.
But what can you learn from Blockbuster’s failed digital transformation?
Understanding the Customer Journey is Vital
Despite the majority of respondents to the 2017 State of Digital Transformation report claiming they were undergoing digital transformation to better serve customer preferences, only 34% said they’d mapped out their customer journey – which seems like an obvious disconnect.
Surely it's not possible to improve CX without first studying your customers’ journey from prospect to
As Netflix, then a rent-by-post service, reached 1 million subscribers in 2004 and footfall in Blockbuster stores fell, it seemed obvious customers would prefer to avoid traipsing across town to a physical store whenever they wanted to watch a film.
Unfortunately for Blockbuster, its 9000-plus brick and mortar stores across the world made it difficult to see that customers now wanted to browse, rent and buy films somewhere new – on their sofas. Instead of reducing their property portfolio and investing in digital infrastructure to support the development of a video-streaming platform, Blockbuster doubled-down and began buying up smaller competitors’ stores and diversifying their offerings to also include video games.
Eventually, Blockbuster did offer rental-by-post, giving customers the journey they wanted, but they also failed to address another major pain point customers had.
An Effective Business Model Doesn’t Trump Great Customer Experiences
Over time Blockbuster had built a hugely successful and efficient business model, largely because a significant portion of its revenue came from late fees (in 2000 Blockbuster “earned” a whopping $800 million in fees). Effectively, late fees made it possible to double its income on a rental if the film was returned back late, but, of course, as effective as this was, it was never going to be sustainable.
Penalising customers with fees is the opposite of great CX, and ultimately this fostered zero brand loyalty. This was proven to be the case when Netflix emerged as an organisation that was staunchly opposed to charging late fees (founder Reed Hastings has often told the story that he began Netflix after being slapped with a $40 late fee for Apollo 13) and their subscriptions soared – while Blockbuster’s sales plummeted.
Even when Blockbuster did eventually pay attention to the customers' preferred journey and offered rent-by-post, they still continued to lose customers to Netflix because they couldn't let go of late fees.
You Should Always be Striving to Improve Customer experience, even when you're ahead
The world moves so fast that simply maintaining high customer experience standards isn’t enough to ensure loyalty. Instead, a business needs to be constantly evaluating the way they operate and how they can better function in the digital world – this is essentially the basis of digital transformation.
Blockbuster could have used its significant size and brand recognition to address CX issues that were emerging in response to an increasingly digitised marketplace. Yet, even in 2005, there was still a great deal of in-fighting in the boardroom over which direction the business should move. Although many felt they should stop charging late fees and focus on the potential of video-on-demand, these ideas were set aside. At the same time, Netflix was offering a $1,000,000 prize to anybody who could help increase customer satisfaction by improving their film recommendation algorithm.
Not only does this show how important CX is to an organisation’s success, but it also shows how vital it is to have C-suite executives leading digital transformation efforts, as well as the role personalisation has in improving customer experience.
It might surprise you that Blockbuster was actively pursuing video-on-demand technology as early as 2001 but made the decision to focus on its physical platforms instead. Although this seems like an bizarre decison now, at the time it must have felt like the only logical choice to shareholders.
To embrace video on-demand as a platform, Blockbuster would either need to charge late-fees on digital products or turn its back on a large chunk of revenue. Its vast global network of physical stores would also essentially be rendered useless.
At the beginning of 2005 Blockbuster briefly stopped charging late-fees, a move which coincided with new plans to develop its video-streaming platform – this was two years before Netflix debuted their streaming platform. Both strategies were quickly reversed after Blockbusters shares fell 11% in the wake of announcing losses of $57m (£31m) in the second quarter of the year, as short-term profits were once again prioritised over long-term growth.
Obviously we know how the story ends. Netflix grew into one of the success stories of the early 21st century, while the fact that Blockbuster does still exist, with nine stores operating in the USA and a video-streaming service, might come as a surprise. Despite obvious shortfalls in customer experience, Blockbuster were unwilling to change as a business to better serve a changing customer journey, and ultimately this was the nail-in-the-coffin for the business.
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