1. Describe Netflix’s business model. How did it evolve over time?
Why was it
successful?
1997 founde3d, home delivery of DVDs through the mail and not through brick and mortar
Netflix sent movies to its subscribers based on the order of titles on the list, with subscribers
receiving a new movie from their queue upon the return of a currently outstanding film.
of the most successful Internet retailers of the time to identify characteristics they thought
might appeal to customers: (1) value, (2) convenience, and (3) selection
Ultimate online destination for movie enthusiasts
As DVDs being sold at traditional video outlets as well, advantage was shrinking, shipping
times bad
Shifted to a prepaid subscription service with no late fees
The value to Netflix of having our movies in the customers’ homes at all times was our key
insight.”
pricing system again, offering unlimited rentals for the first time. Subscribers could now keep
three movies at a time and exchange them as frequently as they liked
attractive for frequent viewers and people dissatisfied with late fees
Developed recommendation system to better balance demand, filter placed, new releases
rarely placed on recommendation list, ensures availability of movies
Needed to stimulate demand for older DVDs less expensive
Netflix’s size and growth rate also generated a positive “network effect” from its large
customer-generated rating system. Because it had the largest collection of movie ratings in
the world, customers recognized that they were more likely to have their tastes and
preferences accurately reflected in recommendations from Netflix’s site than any other
offered by a competitor.
Transition: Cooperation with major studios
Rather than pay an up-front price of $20 per DVD, the studios would reduce their unit up-
front price in return for a fee based on the title’s total number of rentals for a given period
of time.
“We spent more money, not less, with the studios but got bigger customer satisfaction. It
was like paying 20% more and getting two times the number of copies.”
lowering the acquisition costs for high-demand releases
By using a national inventory, we avoid that issue. We never have overstocks on one side
of town with understocks on the other side. Using the subscribers’ queues provides a great
deal of data. By looking into the demand in the near future, we can replicate near-perfect
inventory
Netflix quickly opened more distribution centers across the country, and subscriber
numbers continued to respond to the improved delivery service.
next-day delivery to more regions of the country allowed it to compete more successfully
with retail video stores for new customers drawn by all three of the targeted
characteristics of convenience, value, and selection.
Next shift distribution rights
acquiring the distribution rights to certain independent films through its Red Envelope
Entertainment subsidiary
By helping to bring high-potential films to market, Netflix hoped to enhance its reputation
as the highest-quality source of independent films, a designation that contributed to its
popularity.
Success: easy to cancel Customers could unsubscribe online from Netflix as easily as they
had been able to join. The only request was that they complete a brief survey explaining
why they left. Hastings believed that it was more fruitful to encourage departing
customers to return later on than attempt to coerce unwilling customers to stay:
wanted to make it a service that former customers would return to. Customers
appreciated the personalized aspect of Netflix’s service, a dimension that continued to
improve. The proprietary recommendation system grew more accurate in predicting a
user’s taste as the number of films rated by a subscriber increased.
2007 netflix launched streaming video
Our explicit strategy is to invest in things that are strategically relevant to customer
satisfaction potential. The key invention behind our subscription model is the queue. Our
average queue length is 50 movies. It turned out to be an amazing invention. It’s our
biggest switching cost.”
importantly, a customer’s profile was maintained if they left Netflix. If the customer were
to return, everything was already in place, as if they had never left. Hastings found that
growing the business in the face of a high churn rate was easier if many lost customers
eventually returned.
personalized user experience created by the ratings and recommendations system
Next big thing: video on demand
1. Evaluate the response of Blockbuster.
2. Is the Netflix Business Model disruptive? If yes, please explain why!
