What emerges when you combine intuitive foresight with bold leadership? The answer is one of the most successful and recognized brands in the streaming industry: Netflix. The digital powerhouse has over 200 million subscribers to its platform and 15,000 titles in its library. Many people know Netflix as the streaming service it is today, but the online platform operated through an entirely different medium about a decade earlier. This paper will explore the lifecycle of Netflix’s subscription model through the lens of analytical marketing to outline the company’s transition from a DVD rental business to a multi-billion dollar streaming platform.
In 1998, Netflix co-founders Reed Hastings and Marc Rudolph recognized the dominance of video rental stores in the home entertainment market, as well as customer frustration with paying high fees for overdue returns. They addressed both factors by creating a new business model centered around distributing rental DVDs by mail. VHS dominated the market at the time, with only 2% of American households owning a DVD player (Oomen). Despite these limitations, the pair forecasted that the DVD market would grow enough to produce a viable business– and their insight was right: DVD players eventually entered 95% of all households. This leap was the first of many high-risk gambles they would make to position Netflix ahead of the competition and at the top of consumers’ minds. A year later, Netflix introduced a subscription service, allowing customers to rent DVDs online for a fixed fee per month.
Netflix focused on the ease of content delivery and, with its subscription aspect, alleviated the burden of late fees and return-by dates. In the beginning years of its launch, Blockbuster was the biggest competitor, servicing customers worldwide with rentable video entertainment. Almost everyone who grew up with it knows the now-nostalgic experience of hand-selecting a movie from the myriad of DVD or VHS-lined shelves. Hastings and Rudolph did not take this competition lightly, but at the same time, they were strides ahead of the global chain. Blockbuster’s most notable downsides were issues with supply and demand and its exorbitant late fees. Netflix’s distribution method and subscription service created a higher value proposition for customers to consider the newcomers seriously. By the time Blockbuster rolled out its rent-by-mail service and subscription plan, Netflix was already shifting to streaming.
DVD rentals were never the endgame, but they served as a foundation for Netflix’s mission to reinvent the delivery and consumption of entertainment. Ultimately, the subscription model’s life cycle slowly and then altogether eliminated the “middleman” from the equation. Instead of renting DVDs from the Internet to be mailed to a customer’s house– which still implied a wait time– Netflix aimed to contain the entire entertainment experience online via streaming. In 2007, the company pivoted its attention away from DVDs, launching “Netflix”’s predecessor, Watch Now, into uncharted territory.
The primary motivator for such an audacious change was a shift in consumer behavior. By 2007, DVD as the primary home entertainment format began to lose its grip on the public, reflected in a 4.5% shrinkage of the DVD market (Prokopets). The Internet was evolving into a place where consumers could download video content directly; however, the long download times on online movie distribution websites were a point of contention for people (Littleton & Roettgers). Netflix aspired to reinvent entertainment delivery for the casual viewer, the binge-watcher, and everyone in between. It recognized two critical trends that define much of our media landscape today: comfort and on-demand. The instant gratification of watching whatever, whenever, you want, stress-free, added significant value to the brand. The issue was that demand for streaming video content was practically nonexistent; not only because of a higher upfront price but there also existed more doubt about whether a streaming product would work.
This industry skepticism meant that there were not any robust technologies that could support such an audacious vision. Hastings had daringly launched Watch Now into an inadequate media ecosystem. There was significant trepidation among analysts and investors, but undeterred, he plowed ahead. Netflix “invested more than $40M in the development of new streaming technologies” (Oomen). By harnessing technology, Netflix enabled direct and immediate access to content. Additionally, being the first to venture into uncharted territory means that competition is absent; the lack of industry optimism for streaming services ensured a relatively uncompetitive space for Netflix to develop and innovate. Netflix officially split the DVD and online streaming into separate plans in 2011.
This decision angered some people– Netflix lost approximately 800,000 subscribers that year– but overall, in four years, the streaming platform increased its subscriber base by 283% (Prokopets). Netflix’s ability to attract and retain customers speaks for this success. Though Netflix spends around $200 million each year on traditional targeted ads, “the best marketing for Netflix continues to be word of mouth” (Massoud). This way, it appeals to a mass market, promising content abundance and accessibility; then it switches to a one-to-one approach with its perfected algorithm ensuring entertainment personalization. The decision to completely upend its original business model and reinvent the customer experience was a high-risk gamble that produced high rewards, unachievable without the foresight into growing trends and an unwavering commitment to a vision.
Every article written about Netflix’s history retrospectively posits the company as a futuristic thinker. The throughline connecting the life cycle of Netflix’s subscription model was the consumer. From the introduction of a subscription service to eliminate late fees and return-by dates to a principal focus on online streaming and algorithms to personalize customers’ experiences, Netflix has recognized the latent desires in consumers and catered its service to a diverse audience. Coupled with its keen ability to understand key trends, Netflix has grown exponentially. It has become highly price-inelastic, where a price change has little to no effect on the demand for said service, and this is something Netflix has kept in mind as it bi-annually raises its prices. Nevertheless, money cannot buy this coveted asset that was the life force of this life cycle: vision.
Works Cited
Littleton, Cynthia, and Janko Roettgers. “Ted Sarandos on How Netflix Predicted the Future of TV.” Variety, Variety, 21 Aug. 2018, https://variety.com/2018/digital/news/netflix-streaming-dvds-original-programming-1202910483/.
Massoud, Justin. “Netflix VP: Word of Mouth Is the Best Marketing Tool.” Myce.com, 23 Nov. 2011, https://www.myce.com/news/netflix-vp-word-of-mouth-is-the-best-marketing-tool-54915/.
Oomen, Marjolein. “Netflix: How a DVD Rental Company Changed the Way We Spend Our Free Time - by BMI.” Business Models Inc., 26 Aug. 2020, https://www.businessmodelsinc.com/exponential-business-model/netflix/.
Prokopets, Marie. “How Netflix Became a $100 Billion Company in 20 Years.” Product Habits, 30 Apr. 2018, https://producthabits.com/how-netflix-became-a-100-billion-company-in-20-years/.
Regan, Keith. “Netflix Launches Video-on-Demand Service.” ECommerceTimes.com, 16 Jan. 2007, https://www.ecommercetimes.com/story/55188.html.
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