In Response To Sam Or More Real Economic Research

My Dad has been considering the subscription model. For $19.99 a month, customers could have two DVDs out at anytime and for any length of time. The reason we have not done this is that it would take expensive and time consuming capital improvements. We would have to get credit card capability. In fact we would have to get "Internet" credit card capability because we would have to automatically charge cards without the cards and customers being present. We would also have to update our computer system and retrain employees. My Dad has not deemed the idea worth it yet.

My problem with the subscription model is the incentives are confused. Customers have the incentive to rent two new DVDs every night. I have the incentive to order very few new DVDs. It is not a sustainable strategy. People would quit the subscription after coming in and not getting the new release they wanted a few times.

We have always implicitly stated our mission as the provider of "low-cost" entertainment. From a cash flow perspective, our rentals (between a $1.66 and $2.50) have always been cheaper than Blockbuster. We do ask that new DVDs be returned in two days, but we rarely charge late fees. We were doing this well before Blockbuster started the "No Late Fees" campaign.

Our ideal customer only rents with us and rents just as many older titles as they do newer titles. We have also depended on yuppies to rent "sophisticated" movies that they have a hard time finding in other places. Lately this type of customer has went over to Netflix for the convenience or stopped renting movies from us for some other reason. Now we have more "New Release Hounds" who want the newest, biggest blockbuster and are willing to go wherever to find it. It is really difficult to satisfy these types of customers without substantially increasing our prices or to start charging late fees. We cannot buy the quantity of DVDs it takes to get deep discounts, and many times Wal-Mart sells them for less than we can buy them for.

Our experience has been that people have an overly negative response to price increases even if you are still cheaper than your competitors. We increased prices a year ago, and I think this has as much to do with our slow-down as anything else.

Our real problem is entrepreneurial subsistence. My Dad has gotten tired and sees the business as a cash cow that will soon run out of milk, so he does not have the energy to be creative. My Uncle and I have too much education to devote but so much energy to the video store. We have had good employees, but none of them have had the combination of skills to really move the business forward.

My Dad probably has the right mindset. In a few years, everyone will be downloading movies anyway.