Netflix Business Strategy & Netflix Unit Economics

Netflix Business Strategy

Netflix Business Strategy
Netflix Business Strategy

I have previously written about Netflix business model, this article is in continuation to the earlier one and is about the behind the scenes kind of business strategy that Netflix adopts and its consequential unit economics!

The actual board room kind of stuff ūüôā ! ¬†In case you are really interested in Netflix strategy analysis, then this is for you… P.S. If you haven’t realized, I was working on creating a new series of posts dedicated to business strategy and thus they delay in posting! ¬†This post marks the beginning of a new business strategy series of posts, it may or may not include posts that I have wrote earlier.

Netflix Business Strategy

In 2016 end of the year, Netflix expanded to nearly 130 odd countries, thereby taking its total geo presence to 190 countries. The crux of Netflix business strategy is that in international markets it focuses on localization of content i.e. original content in the local language in international territories.

It it could not produce the required amount of content in local language then it will outright purchase the content from local publishers either for an upfront fee or upfront fee plus royalties.

This localized content helps Netflix compete with local channels or networks who primarily rely on regional language entertainment for their living.

Apart from focusing on localized content, Netflix also invests in international and ever green content like house of cards, orange etc. which are watched by very niche audience but advertising to that cadre of people gives more money per capita to Netflix then doing mass market advertisement for brands.  In simple words, advertising to viewers of house of cards is getting more money from brands rather than advertising to viewers of local content.

Netflix Business Strategy

The above netflix business strategy holds true in home markets as well.  Assuming Canada has large population from India (Indian Immigrants and Workers), Netflix markets local shows procured from India to Indians living in Canada.  This does not give a higher per capita advertising income but does help in gathering a critical non-local mass.

Netflix’s business strategy¬†is impacted heavily by its poor relationship with movie theaters, Netflix doesn’t get the lions share of releases like Amazon gets its lion share of product launches worldwide. ¬†This puts the company in a serious war with the film making community because many filmmakers love having a traditional theatrical release for their films and not a mass market-online-worldwide release. To counter this Netflix is trying hard to win their love and is also picking up after the junk of TV producers and film makers whose TV series and Movie Series have suffered a setback in viewership terms (e.g. Stranger Things – A TV series started by a TV channel eventually scooped up by Netflix (they licensed the show rights for themselves) and later abandoned). ¬†This is just to get into their good books by elevating them from the status of failed producers to fantastic (exit giving) producers.¬† Licensing is an important part of running a video on demand company, read more on licensing examples here.

Netflix Strategy Analysis

Netflix strategy analysis calls for understanding the basics of content production business, where you invest upfront in the buying (creating, producing) the asset and later on giving it on lease.

The content when created attracts lot of upfront fees and investment in terms of payments to stars, techies, writers, editors etc.  Once the asset is completely acquired (completed in production and rights transferred to broadcaster i.e Netflix) the marketing begins.

The marketing of content is done across media like TV, radio, Print, Outdoor, Social etc. and once enough momentum is created they decide on the launch date. Then aggressive marketing follows the launch (post launch brand building and inviting binge viewers to subscribe and advertisers are roped in).

Netflix pricing strategy

Netflix pricing strategy is an integral part of business strategy of netflix.  Netflix will always prize itself in pricing way below cable costs and will keep the data consumption to a bare minimum.  Thus the internet consumption that happens while buffering and loading of the videos (about 2 hr long) that happen when playing series or movies is equivalent to browsing facebook for about 3 hrs.

Netflix Unit Economics

The LTV (life time value) of a netflix customer is very high because this  is a subscription business model + a viable replacement for another high value subscription (i.e. cable).

Netflix spends about 11-15$ in acquiring a customer digitally + another 10-15$ in one month free trial that costs it about 4-7$ : The total CAC (Customer acquisition cost) becomes 15-22$. ¬†Let’s assume about 25$.

Once subscribed post the free month trial, Netflix customers typically spend about 15$ average per month on movies and TV series.

Thus the unit economics would turn out to be profitable on a quarter over quarter basis post the acquisition of the customer.  For e.g. Customer acquired in January of a year (for free month) would actually spend his first dollar in February which is 15$.   Thus the income statement looks like:

Jan + Feb : – 25$ expense + 15$ income = -10 $ loss

Jan + Feb + March : -10 $ loss (From above) + 15$ income = 5$ operational revenue

Post March whatever the customer pays will accrue into the operational revenue of NetFlix.  Netflix may decide on waving off a full year price in anticipation of the customer sticking to the platform more than traditional cable thereby increasing eyeballs on Netflix which leads to higher advertising income for Netflix.

This way the netflix business strategy actually is a long term strategy rather than typical cost + markup profit strategy.

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