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Can Netflix stay relevant?
Patrick Campbell Apr 15 2021
This week, we're taking on a company that has done the impossible time and time again—Netflix.
Netflix took on the DVD realm. Everyone told them that they weren't going to make it, that they were going to fail. They had a little bit of a Qwikster problem in the middle there. Then they went after streaming. Everyone told them they'd fail. And now everyone's telling them they're going to fail because Disney Plus—an amalgamation of Disney Plus, Hulu, and ESPN—is going to take them on and crush them.
And Netflix is definitely resilient, but this is the most challenging competitor they've ever faced. It's a fascinating case study and we're going to study not only what they're doing well, but what they're doing not-so-well in the context of the new competition within the market.
Watch the full episode
Pricing field notes
Innovation has led to Netflix being the behemoth in the market with 200M subscribers worldwide and 20 billion in annual revenue. But with all this success and innovation comes competition. And the competition has something Netflix doesn’t. Can Netflix stay relevant and continue to grow in what has become such a crowded market?
Below are some valuable takeaways you can implement in your own business.
- Netflix has great pull pricing
Pull pricing is a pricing strategy designed to naturally draw (“pull”) consumers to an upgrade. When you have a consumer product, you don't want to push someone to a price. You want them to naturally be pulled up because you will not only get higher lifetime value (LTV) from average revenue per user (ARPU), but you also get higher LTV from retention.
Netflix does this well and understands that there are certain levers they can pull to get people to pay more. And the things Netflix is using to pull people up, are the exact things that people are willing to pay more for.
- Understand the willingness to pay for different segments and features.
- Think through your customer segments and how they grow with the differentiated features that you have, not only from an add-on perspective, but also from a tiering perspective.
- Present features in a way that customers will naturally want and need to upgrade.
- Localization is key (and Netflix is doing it right)
Localization, the practice of adjusting prices to local markets, correlates with more growth. Cosmetic localization (changing the currency to match the region) correlates to 30-45% higher growth rates. Market-based localization (measured willingness to pay in each region) results in double the growth rates of non-localized pricing.
Netflix understands there's a different willingness to pay in other regions. And that there is an ability to capture new customers by changing prices for the same content in those regions.
- Change the currency symbol of your prices to match the currency of the region.
- Research willingness to pay in different regions and charge accordingly.
- Align your packaging and positioning to the different regions/personas.
- Understand your competitive environment
As an operator it’s important to know how competitive your market is. However, focusing on the right things is key. You have to understand what willingness to pay looks like. Additionally, you must understand what makes you unique. Don't use your competition as the North Star within your pricing. Use it as an input, particularly for packaging and positioning.
- Run your value-based data first.
- Understand the willingness to pay for different segments and features.
- Adjust packaging and positioning in the context of competitors.
Remember when Netflix shipped DVDs directly to your mailbox and before you could watch another show you had to mail the DVD back? Yeap, that was life back in the day. Now, you order some Postmates and can burn through a whole season of Bridgerton without even getting up to go to the bathroom.
What’s wild is that the world before Netflix’s DVDs was even more annoying. Let’s take you back to the 90s. Grunge was in style, dot coms were booming, and if you wanted to rent a movie or TV series you had to go to a physical store. Remember those? Not only was it inconvenient to go to the other side of town just to find out the movie you wanted to see was sold out, but it was expensive. If you forgot to drop off that copy of Apollo 13 on time, you could get hit with a $40 late fee. Don’t even get me started on rewind fees.
The inconvenience and fees led Reed Hastings and Marc Randolph to found Netflix in 1997 with 2.5M dollars. They envisioned a product that basically eliminated all the annoyances that came with physical stores. With the rise of shipping from ebay and amazon, Randolph and Hastings went all in, on DVD technology shipped right to your door with no late fees - all for one monthly subscription price.
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The compounding nature of subscribers, as well as the commitment to eliminating all friction to entertainment led to wild success and a billion dollars in revenue by 2007. Netflix didn’t rest on their laurels though, they innovated by eliminating even more friction when they started the first mass market streaming service, shortly thereafter. Now customers didn’t even have to go to their mailbox to be entertained. Netflix continued to grow and even innovated by producing their own content, based on their viewer data. All this innovation has led to Netflix being the behemoth in the market with 200 million subscribers worldwide and 20 billion in annual revenue.
But with all this success and innovation comes competition. While people laughed at Reed and Marc for shipping DVDs, and even going through the Qwikster debacle—they’re clearly winning, so companies with deep pockets want in on the action. Amazon, Disney, HBO, NBC, CBS, and all the old school entertainers are now in the game, spending billions to attract eyeballs and watch time. These competitors also have what Netflix doesn’t—merchandise deals, ad networks, and some, even have physical destinations to expand their revenue per customer.
Critics also point out that the deluge of content is diluting any semblance of quality and while quality content will always win, there just might be so much content out there it doesn’t matter, especially as YouTube and other non-episodic content continue to raise the stakes. Netflix is fighting back, through internationalization and spending billions on content, including $17Bn in 2020.
The question becomes: With seemingly no more physical distance to reduce in getting you entertainment—unless they plug right into your brain—as well as a world where quality in terms of content is becoming too relative, what can Netflix do to continue to grow? Will they go into different mediums, such as video games, sports, merchandise? How will they compete with other companies like Disney who have more nostalgia-based content? It seems this market is Netflix’s to lose, but we’re going to answer these questions and more by collecting data from 10, 542 current and prospective Netflix customers.
Inconvenient to cancel
I don't know if you remember early Netflix—early streaming, and the DVDs. DVDs were fascinating, but people just kind of conceptualize the streaming part, now. I would treat it almost like the DVDs, where I would buy it, I would watch the thing I was going to watch, and then I would churn. And then I would come back whenever they had something new. As soon as House of Cards came—not just House of Cards, but enough of their originals and when their catalog was big enough—it became too inconvenient to cancel.
I know it sounds insane because if you look at the lessons of Netflix, they focused on one thing that was crucial to their success. It was the amount of content that a user and all of these different fragmented types of users had to watch—either entirely over and over again or new shows—to maintain their subscription.
Netflix did really well with the data science and this understanding of what was needed to win in terms of content. And they kind of flipped it on their head. Netflix had the hundred-million dollar series. But they also had the little stuff they knew three-million people were going to watch, but it was the right three-million people to keep them coming back. And that's how they justified spending more than I think most incumbents did on content.
But here's the thing many people don't realize in their business: even though you're focused on that one thing, it has to evolve with the times. Netflix now has Disney Plus to deal with. But in the context of all this competition, they've gotten even more intense.
Notice how in the past six months they started advertising to viewers:
- Here's the number-one thing in the US.
- Here's the number-one thing in the world.
- Here's the number-one thing today.
- Here's the number-one thing yesterday.
Suddenly, their prediction algorithms got good. It's to the point where if everyone thinks it's good then I should watch it. I need to watch it. And they're doing other things like, "Hey, if you're not watching, we'll put it on pause." And they still focus on providing as much content as humanly possible to keep that person around.
Netflix's pricing page
Looking at their pricing page, it's super simple, but they still differentiate packages. I think this is interesting. When you talk about consumer apps, most try to keep one consistent price. Netflix understands that there are certain levers they can pull to get people to pay more. And you can see that with the premium plan. You see that with standard and the upgrade from basic.
I think what's fascinating about this is the simplicity plan. The instinct for most consumer products is to have a single price. And it's primarily driven by a mobile experience. But here, you're not necessarily on a mobile experience, exactly. You're looking at a modified version for both mobile and television.
What's fascinating is that you don't need a single price. The one thing that Netflix could do is if the single price was required for the amount of screen space, they get you on an initial price and then upgrade you based on some triggers.
The main trigger you can see is the number of screens. This is really good, not only for families but also individuals. If you share a password, you get into a higher-end plan so that everyone has a Netflix subscription or has access to one because many people are hopping on these number of screens.
And the only other differentiation here is HD or ultra HD, which is 4k, and that gets the people who really care. That upgrade to Ultra HD is going to catch a lot of people.
Let's get into the data.
Where does our data come from?
Here at ProfitWell, our Price Intelligently software combines proprietary algorithms and methodologies with a team of pricing experts who think about this stuff more than anyone else to help companies optimize their monetization strategy. We do this by going out into the market and collecting data from current and prospective customers, having the ability to collect data from everyone, from a soccer mom or dad in the middle of Kansas, all the way to a fortune 500 CIO in South Africa. We then take that data and run it through our algorithms and analyze it in every direction to determine a company's ideal customer profiles, as well as which segments value, which features and which segments are willing to pay more, all in the spirit of determining how a company can use monetization for growth.
Data and analysis
Great pull pricing
Pull pricing: A pricing strategy designed to naturally draw (“pull”) consumers to an upgrade.
We touched on this already, but Netflix has great pull pricing to let users choose to move up in price. So push versus pull pricing, we've talked about this a couple of different times. Push pricing is almost punitive. If you want a certain feature, you have to upgrade. You're also going to get all these other features that you probably don't want, but you want that one thing.
Pull pricing is when I care or use more of it, I’m naturally just going to get pulled up.
So, as we saw on their pricing page, it comes down to the number of screens. Or, if you're interested in a higher fidelity or higher definition, I should say experience. When we look at the data, you'll see what they're using to pull people up are the exact things that people are willing to pay more for.
We see this consistently with people who care about their pricing. Netflix is known to care about everything, which is a good sign and has helped with its dominance. And overall, they're spot on with the median price point, right around $11 per month, which aligns with their middle tier.
But you do have people who are willing to pay more. Particularly the folks who’s number-one feature is Ultra HD, and the folks that care about the four screens, which are the only two things that'll push you to that $15, $16 a month plan. Now it's kind of fascinating that there is an option for unlimited screens. I wanted to test this just to see what people would think.
And the reason is because the word "unlimited" is more of a marketing tactic than it is an actual monetization tactic. I typically wouldn't use this from a monetization perspective. You're capping your growth because people are willing to pay more for less. But if you find a particular feature or functionality that you can game a little bit and market a little bit further, there might be some opportunities there.
Of course, with an unlimited plan, if Netflix can't figure out how to protect their downside, there's just a ton of people who will end up using this and sharing it. But it shows a distance that they can push to get people to a $20 per month plan. I don't know if it will be based on screens or features, but there's something there because people are more than willing to pay for these higher-end plans.
Now, in the context of Disney, it’s fascinating to think about. When you think about Netflix in particular, you have a world where Disney has essentially gone to the low end of the market, even though they have more brand equity. They’re priced right around $6.99 per month. And if you do a bundle, it's like $12 a month and you get Hulu as well as ESPN plus.
I think Netflix is definitely at the higher end of the market competitively. But it doesn't mean there aren't more people willing to pay a higher price. And I think Netflix has to figure out whether they want to do some sort of add-on, whether they want to do more revenue streams, or should they just stay the course and defend their base. They'd do that by adding more users to ensure that they don't churn out, which is a bit of a dangerous game when the market becomes much more competitive.
It's going to be interesting with HBO Max. If you think about the Netflix strategy and the HBO strategy, there's a combination. I mentioned this earlier, but there's premium original ontent, and there's filler content.
They had Friends. They had The Office. It's critical to have the stuff that people will watch—like West Wing—over and over again between the originals to sustain subscribers. Otherwise, you end up with cliffs where people fall off and then resubscribe. So it's going to be interesting. There's an opportunity for a higher tier, but I wonder how they’ll differentiate.
I think it's similar to Spotify who we've studied as well. They need to figure out how to do different revenue streams. Not because they aren't going to continue to grow their base and their core membership, but because it's about growth and faster growth.
Amazon and Disney, and some of these other products that have streaming services now, also have a bunch of other stuff to sell.
Consider Disney parks. The minute they start bundling Disney parks stuff with Disney subscriptions, all of a sudden, and it’s not an either/or situation like everyone’s treating it, but Disney’s going to be monetizing this so much better than Netflix. So I think Netflix needs to consider how they will continue to be relevant. And it's going to come from great content sticking to their core. But they might need to get a little uncomfortable with how they monetize, which they've shown no indication of being able to do.
Localization is key
Localization is key and a great case study with Netflix. For those at home, localization means essentially charging different prices for the same product in other places. Willingness to pay fluctuates in these different regions.
You can see that here perfectly with Netflix. We've got Pakistan and Kenya down on the low end with much lower willingness to pay. They'll pay like $5 a month. The Nordics are up there at about $15 a month, I think on the other end. And both of them fluctuate pretty heavily from the United States where their market is most dense.
And this has controls for things like VAT (value-added tax), as well as the exchange rate. That's some criticism we often get. These are actual willingness-to-pay differentials.
What's interesting about this for your business is that you can consider different densities, different competitive structures, as well as just different living standards in a bunch of other places across the world. Even in a B2B environment, the UK and Western Europe are willing to pay probably about 15-20% more net. When you compare that to the United States, the Nordics typically pay 25-30% more.
One thing Netflix has done well—and they haven't done this from a pricing strategy but a contract strategy—is preview the content. The content can be teased but not played.
They've also done an excellent job ensuring the prices are different in different regions. And I don't know if you ever travel with Netflix, but the content is different from one location to the next, because of other preferences and things like that.
The big lesson is this: people of different regions have different preferences. You'll have other competitive structures in different places, and your pricing should be different in different areas as well.
Understand the competitive environment
You have to realize the competitive environment. We don't talk a lot about competitive pricing here. Not because it's not essential, but because most people put way too much of an emphasis on competitors. They think, "Oh, we're so competitive," when in reality, your competition is an action, or a spreadsheet, or a pad of paper with your customers, rather than the actual competitor that you have.
But in the world of Netflix, I think they should be worried because of what we've seen. And we alluded to this a couple of times. The world of Disney Plus has a lot of content that was bringing people to Netflix.
You're about to see something called a value matrix. We collected data from the group comparing feature preferences and plotted those on the horizontal axis, more valued features on the right, less valued on the left. We then collected willingness to pay for the overall product and plotted that based on their number-one feature preference on the y-axis. Analyzing data in this manner allows us to determine which features are differentiable add-ons, core, or commoditized for each segment.
We did a value matrix not only of Disney-Plus members or those potentially going after Disney Plus, but also Netflix folks.
When we look at the differentiable feature quadrant, basically the upper right—Marvel, Disney Channel content, Pixar movies, Disney movies, and the far left here, which is also valuable content—Star Wars, Indie content, and even NBC content, those are valuable pieces of content. But Netflix is essentially lost.
Subscribers are moving to Disney Plus, or their contracts are weaning down. Now, this doesn't mean that Netflix is completely screwed, but it does mean that Netflix needs to think, "Hey, there is something here. This competitive pressure is going to affect us more than we typically think."
And so what I like to say, in terms of competitive pressure, is that you must run your value-based data first. You have to understand what willingness to pay looks like, what segments care about different things, et cetera. Additionally, you must understand what makes you unique. What is that North Star you're going after?
For Netflix, it was content and data-driven content. Then you want to look at your competitors. So, in this case, Netflix is losing a lot of this high-value content. So they need to adjust their standards. For example, maybe they become the Thursday, Friday-night type TV versus the big box office series. Maybe they kind of readjust who they are, and they become that particular part of the niche, rather than going after all online media. That was what they were doing during the first few years of the streaming business.
You have to keep in mind how competitive your market is and realize as an operator, you're going to over-index it. But make sure that if your competitor keeps talking about one thing and that's costing you customers, you probably should be talking about that, and sling back a little of that context, as well.
For us, accuracy was a huge differentiator. It's colossal, like a North Star for us. And what ended up happening—when we kept talking about that—our competitors had to start talking about their accuracy as well. We'd have "bake-offs" in terms of our accuracy versus theirs, which allowed us to entrench our place in the market. We forced people to at least ask about accuracy, which was beneficial to us.
Great pull pricing lets users move up in price based on features. We saw this with high definition, ultra-high definition type content, and the number of screens. Keep in mind when you have a consumer product, you don't want to push someone to a price. You want them to naturally be pulled up because you not only get higher LTV from ARPU, but you also get higher LTV from retention.
And Netflix does that very well. It aligns so well with their entire ethics code. They don't even want you to be a subscriber if you're not using it. They only want you to use their platform and their products. They want to know if you're going to keep watching.
Localization is key. Netflix understands there's a different willingness to pay in other regions. And there is an ability to capture new customers by changing prices for the same content in those regions.
Understand the competitive environment. Netflix had the streaming market to themselves for quite some time. Amazon crept out there, but with nowhere near the budget that Netflix had.
You have a worthy competitor in Disney, which batches both HULU and ESPN into the mix. So don't use this as the North Star within your pricing. Use it as an input, particularly for packaging and positioning. You should always compete on price in a good way, meaning you shouldn't have to go to the race to the bottom. You want to make sure your packaging and positioning adjust in the context of those competitors.
Who's up next?
Next week we have an ecommerce juggernaut that sits on top of not only Shopify, but all of its competitors. It powers both email and SMS marketing for a crazy amount of ecommerce. It's Boston's own Klaviyo.
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This is a ProfitWell Recur production—the first media network dedicated entirely to the SaaS and subscription space.
By Patrick Campbell
Founder & CEO of ProfitWell, the software for helping subscription companies with their monetization and retention strategies, as well as providing free turnkey subscription financial metrics for over 20,000 companies. Prior to ProfitWell Patrick led Strategic Initiatives for Boston-based Gemvara and was an Economist at Google and the US Intelligence community.
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