Ideas for PhotoGraphics

Notes: PhotoGraphics, my current employer, is a small chain of retail stores offering cameras, photographic services, and movie rentals. Our biggest competitors are Ritz Camera (camera sales), CVS (photo finishing) and Blockbuster (movie rentals). Blockbuster eliminated late fees for most rentals in January 2005. My employer asked all of us for input as to how best to respond to this aggressive move. I prepared the following business plan and submitted it to the company's leadership.

Why people rent movies.
Movies used to cost $80, and back then, it made sense for people to rent them.
These days, movies cost $20 or less.  It’s not a money issue anymore.  People rent them because they don’t want a house full of movies they rarely watch.

Our competition
Big retailers selling movies.  People would rather buy their favorite movies for $20.  These are the titles that customers will return to over and over (Gladiator, Lord of The Rings, Shrek, etc.) Most movies aren’t fantastically good, and people will still prefer to rent these.
Blockbuster and other rental stores.  They mostly behave the way we do.
NetFlix and On-Demand cable movies.
NetFlix costs $18 and has a big selection.  Customers do have to know what they want a few days in advance; there is no “what-are-we-in-the-mood-for-tonight” flexibility.
On-Demand cable costs $50.00 a month around here.  Selection is limited, but within that limit, customers have immediacy of choice.
Blockbuster eliminated late fees.  They are running big ad campaigns on this.  It’s a big talking point and it comes up in our video department.
Our customers hate “extra night fees.”  There’s no dressing it up.  People think late fees are a hostile, unfriendly thing we do to extort money out of them.  It doesn’t matter that late fees are mostly the customer’s fault.  They perceive us as mean.
Late fees, or fear of late fees, is the main reason most customers bring back their movies in a timely manner.  Without late fees, there are plenty of people who will take their sweet old time on a movie.
Some movies are irreplaceable.  Many classic VHS titles are no longer in stock.  If a customer keeps them out forever, that title will never again generate income for the store. 
Blockbuster’s move will have two effects on us.
Short term, we’ll lose customers.  People will go to Blockbuster and rent from them.
Long term, I think it will raise the price Alan pays to buy movies.  
Blockbuster is a HUGE company.  They will have millions of customers keeping their hot movies at home for a week or more.  
Blockbuster will have to order large quantities of hot titles to have any of them in stock.
When the biggest buyer of anything doubles its demand, prices for all buyers increase. 
Dave Walsher points out that when Blockbuster runs out of stock of a hot movie, customers will come to us.  I say that’s terrible.  We don’t want to be the video store of last resort; we want to be our customers’ first choice.  

I think Blockbuster’s move was an ill-considered, panicked response to the emergence of NetFlix and On-Demand movies.  It’ll hurt them badly in the coming quarters, and they have shareholders who will admonish them.  Of course, it might take years, for corrective action, and you might not have the money and patience to wait them out in the meantime.
We should not drop late fees.  It smacks of “Me, too!” and we’ll have to follow suit with Blockbuster and buy huge quantities of hot titles.
Remember, Blockbuster didn’t do this because they wanted to.  They didn’t do it because they were worried about us, either.  They did it because they needed to compete with NetFlix and On-Demand.  
We drop late fees just because Blockbuster did it, and we’re fighting the wrong fight.

So what do we do?
I think we offer a subscription service to our customers.
We offer a PhotoGraphics club.  Not a video club, not a photo club.  A club for the whole store.  That’s key.
We charge $10 per month, via credit card.  Automatically.
Club members can take any two movies they want, and keep them out as long as they like.  They never have to buy the movie, they never have to pay late fees.  They can rent additional movies ONLY when they return the ones they have.  
Club members can get all the free double prints they want.
Club members pay 29¢ for digital prints.
Club members pay $5.99 for Kodak Picture-Maker enlargements.
I think you lose money on this, but you gain stability and reliable, steady income.
You also take a big step towards getting our customers to use both sides of the store.  Movie customers become film customers.  Film customers become video customers.
Continue to honor existing club cards and punch cards, but stop selling them.
$120 is the annual value of this membership.  That buys a customer 3 photo club cards and 2 12-punch video cards.  If a customer came in today and bought all those cards from you, wouldn’t you be willing to give that customer free movies and film discounts all year?