The Netflix business model is a mix of On-Demand Subscription with All You Can Eat business models types. Let’s better understand that in this article. Quite possibly, you’ve been in a circle of friends in which somebody comments about a series they watched recently and someone else asks, “Is that on Netflix?”.
That’s because Netflix is now the largest streaming provider of entertainment content on the planet — and perhaps the biggest responsible for the series growth of recent years. What you may not know is that Netflix is more than 20 years old and when it was founded, back in 1998, it was just a DVD rental service by mail.
However, the company has not stopped in time, like many others in the entertainment industry, and its current success is due precisely to its ability to follow trends and break standards. Therefore, let’s get to know how Netflix’s business model works, which has been transforming over the years to keep up with the market and reach the level it is today.
Contents
Well, to begin with, Netflix is a streaming content provider, specialized in entertainment. Subscribers to the platform have a huge catalog of films, series, documentaries, and television shows at their disposal, to be watched anytime and through any device connected to the internet (smartphone, smart TV, laptop, etc.). But, as mentioned above, Netflix did not start directly with this business model, let alone with this value purpose. On the contrary, its first business model was based on a DVD rental system sent by mail to the entire United States. Let’s understand a little bit about how it all happened to get here.
Netflix was founded in 1997, by Marc Randolph and Reed Hastings, in California. They had the idea during a commute between their homes in Santa Cruz and Pure Atria, Hasting’s company, where Randolph was working as marketing director. Netflix was launched in April 1998 as one of the world’s first online DVD rental companies, with a small and under 1,000 titles.
Their initial business was to send physical copies of films, shows, video games, and other media through the American standard mailing system, in a pay-for-use model. The following year, they changed to a subscription model. To order the films, users would browse Netflix’s website, choose the title, and put in an order. After watching, they just had to post the DVD back.
The name Netflix (as you may have noticed) is a combination of “net“, from the internet, and “flix“, a variation of “flick”, an abbreviation for a movie. However, over the next decade, Netflix watched the DVD rental market begin to decline and soon adapted its business model. They stopped sending physical copies and made a catalog of titles available online, to be consumed by the public, at any time, in their home.
Video streaming was launched in 2007, with only 1,000 titles, and only worked on PCs and Internet Explorer, with a limit of 18 hours of free streaming a month, based on the users’ subscription plan. At the end of that year, Netflix had 7.5 million registered subscribers.
By 2016, Netflix had already expanded to other 190 countries, offering programming in 21 languages. And, in the following years, the company would win Academy Awards for some of its original productions. By transforming its business model, Netflix was also transforming the way people would come to consume video entertainment.
Today, the streaming service is a strong reality that has even attracted several competitors, with names such as Amazon Prime Video, Apple TV+, and HBO Max. Nevertheless, Netflix remains the absolute leader in the segment, with over 180 million subscribers worldwide.
Netflix’s first CEO was one of its founders, Marc Randolph. However, right before the company gets really bigger, he left the post, leaving it for Reed Hastings, the other co-founder. Nowadays, Hastings is the president and shares the CEO position as Co-CEO with Ted Sarandos, which is also the COO of the company.
“At Netflix, we want to entertain the world. Whatever your taste, and no matter where you live, we give you access to best-in-class TV shows, movies, and documentaries.”
As mentioned, Netflix has a subscription-based Business Model. That means that its main revenue stream is the monthly fees. It has over 180 million subscribers pay, all over the world. There have been many analysts who suggested Netflix could enhance its revenue by using advertisement, but the streaming provider reclined, explaining that this would lower the customer experience, which is its main value proposition, after all. Nowadays, Netflix offers three different plans of membership, which may be upgraded or downgraded at any time. They are:
All the plans can be canceled anytime, and the cost of the plans changes according to the country, but they are usually very affordable.
For sure, Netflix has a huge cost structure and, at the beginning of the current business model, the company had to invest a lot in order to accomplish the kind of video collection it wanted to offer the customers. So, Netflix hasn’t always been a profitable business. But it is now. In 2018, Netflix generated over 1 billion dollars, and this was 116% bigger than the income in the previous year. The following year, it generated over 1.8 billion dollars, an increase of 154% over 2018. And the expectation is that cash flow will only improve in the coming years, moving to a much more positive result. These days, Netflix’s valuation is 155 billion dollars… and counting!
Netflix’s business model is subscription-based. It is a streaming platform, which offers on-demand video. Netflix makes money with three plans, in fixed fees, which vary by country: basic, standard, and premium. Its initial hook is a free month offer, for a trial period. Now, take a look at Netflix’s business model canvas:
The Netflix platform is designed to please a wide range of subscribers. For this reason, its catalog covers the most varied titles, able to entertain fans of films, series, documentaries, and shows of all genres, for all ages and preferences. For this reason, customer segmentation is both usage and geographical, but only to verify what type of content works best for each audience.
Netflix’s entire value proposition is linked to the fact that it provides quality entertainment to its user, 24/7. This proposition includes:
The main channels of Netflix are, no doubt, its own website, and app. But they also invest in online and offline advertising, take advantage of social media and benefit a lot from word of mouth among its users.
Netflix’s customer relationship is built primarily on the platform itself. First of all, it is user-friendly and, therefore, allows the user to configure it in the way that best suits them. Secondly, it uses an algorithm that suggests content based on what users usually consume. Netflix’s user support also allows access via website, email, chat, and telephone. And finally, the company’s work with social media is very strong. Netflix uses networks like Instagram, Facebook, and LinkedIn to update the audience about releases and promotions. Plus, the company really “talks” to their users, answering a great part of the comments in their posts.
In addition to its own platform, website, and app, Netflix’s key resources are mainly human and digital resources. Among them, there are: software developers, the content library, the recommendation algorithm, filmmakers and producers, the brand, and the studios that Netflix is developing to support its own creations.
Netflix’s key activities are all about offering the best streaming content experience to its users. This means that, in addition to investing in technology, and hiring and retaining talent to keep its platform running at high performance, the company also needs to focus on its content offering. That is, besides maintaining and expanding its platform on the website and apps, Netflix needs to produce, select, license, and acquire relevant content, besides building partnerships and negotiating with studios, content producers, and movie production houses, while also analyzing and understanding customer behavior to improve their experience. Last but not least, Netflix must keep developing its subscription model and pricing strategy, to keep and grow its customer base.
Netflix has a wide range of key partners. Among them, media producers and TV networks stand out, which license their content to Netflix; consumer electronic producers such as Wii, X-Box, PlayStation, which bundle Netflix with their systems; and Amazon AWS, since the Netflix platform is totally hosted on AWS. Besides those, there are investors and regulators.
The cost structure of Netflix is huge and that’s why the company had a bad cash flow during its first years — the new business model demanded a huge investment to reach the position where the company has gotten today. This huge cost structure involves:
Below, there is a detailed SWOT Analysis of Netflix:
-> Read more about Netflix’s SWOT Analysis.
As you can see, Netflix’s business model is entirely built on subscriptions from people all around the world. They do not have an ad-based business in their service, as this is something they do not intend to run, avoiding the risk of losing clients to a competitor – and it’s surely a good call, because, as days go by, more and more video streaming services seem to emerge in the market.
Tesla, Inc. is by far one of the most well-known companies in the world. As…
The Duolingo Business Model revolves around creating an interactive language-learning platform accessible to people worldwide.…
Johnson & Johnson, a pharmaceutical and consumer goods company established over a century ago, prides…
Caterpillar, a renowned global manufacturing company, has dominated the industry for decades. With its extensive…
Instacart, founded in 2012, has quickly become a leading online grocery delivery platform. It offers…
The Quora Business Model revolves around creating a platform where users can ask questions, share…
This website uses cookies.
View Comments
I have undeгstand your stuff previous to you, and you are just extremely excellent. I actually like ѡhat you’ve acquired here, certainly likе what you are saying and how you say it. You make it enjoyable, and you still care to kеep it smart. Ι can't wait to read far more from you.
This is a tremendoᥙs website.