Blockbuster is slowly dying. They just closed about half of their stores. Their business is shrinking constantly. They may be in “the death spiral.”

I think one of the key reasons is that they’ve consistently failed to build a positive relationship with their customers.

Their first real success came when they changed the economics of the video rental business. All the mom and pop stores would buy VHS tapes for $80 a pop and then rent them out for $4.99 a day. Blockbuster went and negotiated with the big studios and cut a different deal: sell us the tapes for $4 and we’ll give you a percentage of each rental.

That was the beginning of the end for the mom and pop video stores: Blockbuster simply made it easier for customers to conveniently get the product they wanted at the same price.

Having taken much of the new release business, Blockbuster then cut the prices on the old releases to as low as $1 a day. That left almost no revenue on the table for the mom and pop stores and they slowly went out of business.

The first customer relationship killer: as soon as they had little competition, Blockbuster turned around and raised all the prices back up to $5 a day.

Next up was Netflix. The concept of no late fees and a flat monthly fee to get movies delivered straight to your home was interesting. The only downside was not having the ability to be spontaneous: you really had to plan ahead. And it was tough at times to get the new releases, because Netflix had no special deals with the studios.

Blockbuster came up with an innovative response: their own DVDs-by-mail service that came with two coupons for free movies at the store. We signed up for that and it was great – if we planned ahead, we had the movies we wanted by mail. If we wanted to be spontaneous, we had a coupon. (We only watch 2-3 movies a month, anyway.)

It worked. Blockbuster’s DVD-by-mail service started growing like crazy, because of the innovative marriage of online with bricks-and-mortar.

But they couldn’t leave well enough alone. The next customer relationship killer: they sucked all of the benefits out of their service, at least for customers like us. They killed the coupons, and you had to take the DVD-by-mail into the store and exchange it (often sending back a movie you actually wanted to see in order to get the one you wanted to see tonight). They jacked up the pricing and dropped the number of DVDs-by-mail. We were, in effect, paying to watch movies we weren’t watching, so we cancelled.

And now, Redbox has come along. A simple Internet-connected vending machine with DVDs for $1 a day. Does it have the broad selection of Blockbuster or Netflix? No. But it’s cheap, convenient and easy. You can even “reserve” a movie from a particular machine on their web site so it isn’t sold out by the time you arrive. (Not to mention, there are other methods too: Hulu, iTunes, etc.)

Of course, Blockbuster has responded by lowering their prices again (now it’s 3 days for $3). Call me cynical, but I’ve been burned this way before. The minute Blockbuster gets the upper hand over their newfound competition, they’ll just jack up their prices and cut the value all over again. I really don’t want them to “win” this round.

So I’m not saying I’ll never rent movies from Blockbuster. When it’s in my interests to rent something from them, I will. But I almost smirk when I get asked to pay $10 to become a part of the Blockbuster Rewards loyalty program.

Loyalty is earned, not sold.