Founded in 1997, Netflix turned the previously incident-driven movie-rental industry upside down with a subscription model that let customers keep DVDs as long as they wanted, without paying late fees. The company’s use of centralized distribution centers cost less to use than retail storefronts and also provided Netflix with the space to build an enormous catalog of over 100,000 movies and shows.
Since 1999, the company has grown its customer base at a 61% CAGR to over 12 million subscribers in 2009. Additionally, over the same period of time, Netflix has been able to reduce its subscriber acquisition costs from over $110 down to $25, all the while keeping fixed costs low.
Lower cost marketing channels:
One of the keys to Netflix’s success has been its use of multiple marketing strategies to attract subscribers to its service. In particular, the company’s affiliate program has been especially effective while also being a low cost channel. The affiliate program makes available web-based banner ads and other advertisements that third parties may retrieve on a self-assisted basis from Netflix’s website and place on their own websites.
More recently, Netflix has launched partnerships with customer electronics partners such as Apple as well as video game console manufacturers to cost-effectively acquire customers.
Innovation:
While Netflix has benefited from certain trends since its founding, including the proliferation of cheap DVD players, it has also proactively out-innovated many of its competitors, leaving brick-and-mortal retailers such as Blockbuster and Hollywood Video in the dust. It took Blockbuster until 2004 to roll out its own DVDs-by-mail business.
Netflix’s intuitive, well-organized website which lets customers build queues of titles they want as well as an intelligent recommendations engine have enhanced customer experience and allowed the company to thrive as a business.
In recent years, the company has devoted substantial resources toward building out its streaming content library which has helped to drive new subscriber additions. Along these lines, Netflix introduced a cheaper $8.99/month plan which many new subscribers have been purchasing primarily for access to streaming content. While these subscriber additions have caused Netflix’s ARPU (Average Revenue Per User) to decline, the company’s profitability has actually increased due to lower postage and other costs associated with the $8.99/month plan users.
Netflix has also continued to innovate through the launch of a Netflix iPhone app and by expanding to new device platforms, improving the value proposition for Netflix subscribers and reducing customer churn.
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