Netflix was revolutionized the home entertainment world when they launched in 1997 as a DVD-by-mail rental service with no late fees and without trips to local video stores.
Netflix leaders were aware that DVD sales wouldn’t last forever and quickly moved to capitalize on new trends in technology. Their gamble paid off, and in four short years Netflix went from 6 million subscribers to 23 million!
1. The Demand for Movie Rentals
At first, Netflix began as a snail-mail DVD rental service with an innovative business model: they offered a flat monthly subscription fee and allowed customers to rent unlimited movies – quickly overtaking corner video rental stores in popularity. Their success can be largely attributed to understanding their market: using needs-based positioning as a differentiator; developing an impressive recommendation engine which helped users find movies they would enjoy; communicating this advantage among potential competitors while keeping existing customers.
Netflix’s success can be traced to their pricing strategy: by offering a flat monthly subscription fee for unlimited movie rentals they managed to avoid late fees and shipping & handling costs as well as negotiate favorable licensing deals with major networks for fast library growth.
As the company expanded, they listened to customer feedback and continued to enhance the customer experience. For instance, in 2007 they added mobile device streaming of movies and TV shows allowing them to increase user numbers especially among younger generations who were more likely to use them compared with previous generations; furthermore this platform proved more cost effective than shipping DVDs to users’ homes.
Even amid rising competition and higher prices, Netflix remains unrivalled in the streaming market. They have successfully created and communicated a clear competitive advantage that they have managed to preserve through smart business decisions and by staying abreast of digital trends. Furthermore, Netflix has learned not to compete solely on price alone – something other online companies often fall prey to doing.
2. High Fixed Costs
Netflix initially faced high fixed costs associated with their initial infrastructure, such as purchasing DVDs and shipping and handling fees. As they expanded and added more subscribers, these fixed costs decreased progressively until each subscriber only cost a few cents in variable costs – an example of economies of scale and one key to Netflix’s success.
Netflix understood it could gain an edge over competitors by prioritizing customer experience. They implemented changes to streamline DVD-by-mail service to increase satisfaction and retention rates, leading to greater satisfaction rates that enabled Netflix to invest more profitably in original content production.
As internet usage increased, Netflix transitioned from DVD rentals to streaming video services. This decision enabled them to reduce overhead costs while increasing revenue; ultimately expanding subscription bases and profit.
Netflix understood that switching from DVDs to streaming was necessary in order to continue growing at an efficient pace; their strong moat of an existing subscriber base and exclusive content enabled this strategy.
Netflix’s ability to produce its own original content and deliver it consistently helps the company establish a moat by setting itself apart from competitors in the industry. As a result, they have been able to negotiate lower license prices from content studios while keeping current users while expanding their user base.
3. High Marginal Costs
As Netflix expanded, its marginal costs began to increase significantly. Postage and worker wages rose, storage was costly at scale and technology that enhanced streaming quality incurred costs that went beyond building the library itself. All of this added up to an increase in marginal costs over time that exceeded original fixed costs associated with building it in the first place.
As such, they recognized they could no longer continue growing at their usual rate and sought alternative means of increasing revenues. One strategy was introducing an ad-supported and premium subscription model, which allowed subscribers to add others at reduced rates to their accounts, increasing overall user count.
However, Pricehike also caused significant customer turnover and thus led to higher churn rates; therefore the company now seeks to maximize revenues from existing customer bases.
While Netflix has made progress in lowering marginal costs, they remain significantly higher than desired. They still have a very large customer base which necessitates expanding the number of paying users.
Good news is there are multiple opportunities for the company to do this successfully. For instance, its planned ad-supported version will likely attract cost-conscious customers willing to switch from an ad-free plan to this more cost-effective offering.
Netflix is also taking steps to form close ties with film studios in order to secure digital streaming rights at much reduced rates than traditional video rental stores can. This allows it to take advantage of long tail distribution strategies and maximize revenue potential of obscure films otherwise unprofitable for traditional video rental stores.
4. Large Subscription Base
Netflix has established such an expansive subscriber base that they are able to attract more new customers than competitors and generate increased revenues over time. As this enables Netflix to invest more in original content creation – drawing even more new subscribers – the cycle continues until Netflix has amassed an extensive library of movies and television shows that consumers want to watch.
Reed Hastings and Marc Randolph saw an opportunity in disrupting the traditional video rental model with Netflix, so they took steps to change it by eliminating late fees and offering an extensive selection of movies without incurring late fees themselves. Their groundbreaking business quickly expanded rapidly while becoming profitable within months.
Hastings recognized that Netflix could no longer remain solely a DVD-by-mail rental service and took steps to prepare for this eventual shift by expanding streaming offerings and waiting until infrastructure was in place to support high-quality video experiences such as affordable broadband access and stable network connections.
Netflix is also focused on expanding its global presence through international expansion of both its offerings and global presence. This has allowed them to enter new markets without incurring the costs of expensive advertising campaigns or signing questionable media publisher contracts, while finding new audiences for original series such as Dark (German science-fiction drama), Terrace House (Japanese reality TV series) and Wallander (Swedish detective series).
Netflix remains one of the most popular streaming services and continues to attract users, but they must continue innovating in order to stay ahead of their competition and maintain strong subscriber bases in an increasingly crowded marketplace. This could involve offering cheaper plans with ads, cracking down on password sharing or developing original content which resonates well with subscribers.
5. Streaming Technology
Like any business, Netflix must adapt to changing consumer demands. That is why, in 2007, they started providing a streaming option to DVD rental subscribers; by giving customers access to movies and television shows directly on their home devices, Netflix was able to compete more successfully against traditional video rental stores.
Netflix was able to take advantage of this new service to avoid the high shipping costs associated with sending physical DVDs out and let their customers watch what they wanted, when they wanted, without worrying about returning a movie before its due date – not only reducing late fees but also improving customer satisfaction.
By emphasizing customer experience, Netflix was able to set itself apart from competitors and establish a dedicated following. In order to maintain momentum, the company continued investing in streaming technology while expanding their library of available content – eventually becoming synonymous with streaming media and becoming the global entertainment leader.
Netflix utilizes both in-house streaming technology as well as partnerships with various consumer electronic manufacturers to enable their videos to be watched on multiple devices simultaneously, expanding access while maintaining consistent streaming quality for viewers worldwide.
Netflix has made significant investments to build out their own data infrastructure and has employed a team of engineers who monitor and assess its performance, continuously testing current and new devices to ensure they deliver an unrivaled streaming experience to their subscribers. They work closely with internet exchange points worldwide in order to optimize content delivery to viewers worldwide.
