A History Of The Netflix Strategy

In 1997, Reed Hastings, along with partners Marc Randolph and Mitch Lowe, was inspired to develop one of the most successful bricks and mortar businesses to date, when a frustrating situation exposed the need to create a lucrative e-commerce business, requiring many of the same basic components as a traditional business, including a cohesive business model, compelling marketing plan, and strong implementation strategy. It was the video rental late fee that motivated Reed Hastings to develop Netflix.com. [1] Advances in technology, adaptation of DVD media over VHS, and an unmet consumer demand is responsible for the successful launch of Hastings’ vision, which has undergone several strategy shifts similar to other innovative start-up companies that begin with a simple vision. Changes in focus or direction have continued to assure that the company remains dominant in the movie rental industry, using a strong business strategy and a cohesive implementation plan that have increased the odds of their success in the market.

Hastings began his business by declaring a simple yet effective mission statement, “our appeal and success are built on the most expansive selection of DVDs; an easy way to choose movies; and fast, free delivery.” [2] The business strategy for Netflix has evolved to satisfy new market opportunities, although the original concept has remained the same, making the company’s business model the perfect business model from which all eBusinesses could learn, regardless of the slow adoption by the internet user community.

To translate market opportunity to business opportunity, Hastings follows the seven-step framework to create the original company and continued to leverage the individual steps to re-evaluate the company’s position in a changing market. . There are four key environments to consider when analyzing a market opportunity-customers, company, technology, and competition. [3] The overlapping areas of these key environments would represent the market opportunity area for a business.

The first of the seven step process identified the unmet or underserved customer needs by Reed Hastings, being a customer himself. He was able to draw upon his personal experience to establish the opportunity nucleus of the company that stemmed mostly from processes dictated by traditional video rental businesses. The bricks and mortar movie rental companies had generally established methods and policies regarding video rentals, late fees, and membership rules that, according to Hastings, would have no reason to change without external competition.

Following the problem recognition step, Netflix identified its target market by grouping customers into segments, referred to as the distinction between must-have and nice-to-have customers. [4] For Netflix, this includes identifying customers using geographic, demographic, and behavioural segmentation approaches, with the target audience expanding beyond the regions and primary market areas that typically define traditional brick-and-mortar businesses. In this type of business, the target audience is bound by technology rather than geography, giving Netflix the competitive advantage it needed to begin as a business by utilizing an Internet-based system that allowed a user to find movie titles, making it easier than strolling the aisles of a video rental store. The entire supply-chain of the Netflix mail-order fulfillment system is more desirable than issues surrounding weather, store hours, and drop boxes common to most bricks and mortar movie rental businesses.

Step four of the seven-step process involved assessing the resources necessary to deliver the benefits of the product to the consumer for Netflix as a company, and step five required an in-depth assessment of the technology required to deliver the product to the end-user, and the impact of these new technologies externally as the technologies used in 1997 were primitive to present-day technologies. As a positioning strategy for the future, Netflix was able to incorporate Broadband technology as a part of its product delivery system and distribution strategy as it is commonplace today, making the online users’ experience many times better than before. Step six of the market opportunity framework involved distilling the opportunity into concrete terms, before the final step of justifying the company’s position in the market and identifying the overlapping areas of the four key environments mentioned earlier that represent the market opportunity area for Netflix.

The online experience that Netflix provides to its consumer rivals the competition and is a part of its differentiation strategy in the market. The Netflix market position boasts “an easier way to choose movies, fast and free shipping, and no late fees or due dates” [5] , unique to the company in terms of its product and delivery. In addition to following the movie rental membership models of other businesses, Netflix expanded the scope of their offering to include several levels of membership and created an online community where member could contribute by offering and sharing reviews as a part of its promotion strategy. Today, this online business model that differentiates the product by creating an experience for the user has become a beacon for other businesses to follow. [6] 

Netflix follows best practices across 7Cs-context, commerce, connection, communication, content, community, and customization as its product, promotion and distribution strategy. [7] The context of Netflix’ site follows basic rules for ease of use and navigation standards for the web, and uses a clean, uncluttered design to present an online movie rental experience that is unique for its users. The color scheme and graphic elements also remain true to the corporate brand image of the company. Its commerce capability is limited only by its business model, where members spend the majority of their time within the areas of the Netflix website that offers movie reviews and search capabilities, as the only transactions are one-time enrolments and subscriptions to the monthly service. Members only revisit the commerce section if a subscription needs to be changed since all other transactions are automatic and recurring. The connection design element is not used on the Netflix member site as the Netflix website does not offer any external links. However, in the non-member and public areas within the website, Netflix offers external links to the websites of major publications, well-known critics, and other movie review sites. Netflix banner ads that are found on many popular sites, link each banner ad to the Netflix main page. Netflix has also mastered the challenges associated with integrating their website and other communication channels. As an example, each time a movie is returned, the member receives an email, asking them to review the movie and offer additional comments if desired. Periodically, the member receives an email asking for information regarding the timing and condition of a DVD once it is delivered. This information is then used to monitor the quality of service of the fulfillment centers. The Netflix website content consists mostly of movie imagery, descriptions and storylines, and member posted reviews. A non-member is presented with content designed to encourage enrolment, whereas the member community enjoys a user-specific experience, where movie titles are presented to each member that are relevant to his or her likes and dislikes, based on individual movie reviews. The content also includes static information regarding the Netflix organization, its affiliates, career listings, and social networking links. Additionally, Netflix provides a robust community design element to their site, where members are invited to participate in reviews, forums, and blogs. The tell-a-friend option creates a viral element useful in word-of-mouse marketing, but falls short of providing functionality that allows member-to-member communication. Movie ratings provided by the users are real-time, whereas the written reviews are moderated before posting live to the site. Lastly, customization features include allowing every member to manage his or her own personal movie queue. Much like a playlist, the Netflix queue is used to control and manage the titles and order that the movies should be delivered to the member. The site uses this customization element to provide a member-specific experience to the user. Every member also receives an interactive list of movie titles that can be added to their playlist as another customization feature, after analyzing the member’s previously watched movies and the associated ratings provide enough information to create a suggested playlist.

Netflix uses several communication strategies as its promotion strategy for prospecting and acquiring new members. Of the four categories of communication which are direct, personalized, mass marketing, and general approaches, the company relies mostly on the general approach of banner ads, email, and viral marketing. Members opt-in to receive special notices, offers, and incentives. [8] Netflix also uses banner advertising to direct traffic from sites with a similar audience demographic as their current target market.

As its new pricing strategy, Netflix split its pricing model into two options. The first one continued with the old model where customers get unlimited streaming along with DVD-rentals, and also added a new option where customers get unlimited movie streaming without the option of DVD-rental. The unlimited streaming only option, which is clearly Netflix’s preferred method of delivering TV shows and movies, costs $7.99 per month. The unlimited streaming with DVD-rental costs between $9.99 to $41.99 per month, depending on the number of DVDs rented. The old pricing model started at $9.99 per month, so the new streaming only option represents a $2.00 monthly decrease.