How does Netflix do it?

Early last year my company, alteraxion, explored the possibility of launching an online DVD rental service (such as the one offered by Netflix) in the UK.  We invested a significant amount of time studying the market and developing a business plan for it but in the end decided that proceeding on a standalone basis instead of in partnership with Netflix would be taking a risk that we were not prepared to assume.

Aside from the fact that Netflix had stated its resolution to proceed independently, one of the key issues influencing our decision at the time was the fact that with over 100 competitors Netflix controlled some 95% of this market - it still does. 

We have since continued to give a lot of thought to the question of why and how Netflix has managed to maintain its dominance against other equally well-funded competitors such as Wal-Mart.  In the end, we concluded that there can only be two reasons to help explain Netflix' success: 1) it is the very best at what it does and executes flawlessly or 2) its competitors are executing poorly or simply don't 'get it' thus handing the market to Netflix on a silver plate (for example, by contributing marketing funds which raises the awareness for online DVD rental services in general without first having developed a service of its own that can stand up to Netflix'.)

More recently we completed a short analysis assessing the impact of Netflix' forthcoming UK market entry to share our learnings and raise awareness among local players.  Some of the points raised are excerpted below.  Please note that while we had UK players in mind when writing our report it is evident that many of the issues apply equally to the hundred odd Netflix contenders in the US.  Our conclusion is that we continue to view Netflix' leadership as unassailable with current competiting offerings (in either the US or UK).

You can read the report by following the link below.

How does Netflix do it?  It’s NOT voodoo!

Unlike Coca-Cola, there’s no secret formula to Netflix’ success.  What it does, how it does it and why it does it is open for all to see and learn from – one just need know where and what to look for.

 

Some things are business fundamentals

 

PASSION

Netflix is not happy to only play the game it wants to win it with a vengeance.  Every seasoned businessman knows that this is a key ingredient to success particularly for those operating in highly competitive and dynamic environments.  Also, in a world plagued with me-too products a unique character and some passion can make a world of difference to a company’s fortunes – just ask Richard Branson.

 

VISION

Netflix single-handedly created the DVD subscription model and subsequently developed the systems and processes to support it.  The list of things that it has had to ideate and build, often from scratch, to get where it is today is truly astounding.  Furthermore, although this vision has brought Netflix this far it is also becoming apparent that the company has the long-term strategic vision to lead the business where it should be tomorrow as is the case with its recent announcement to enter the digital movie distribution field as early as 2005.

 

COMMITMENT

Netflix has put its money where its mouth is.  Reed Hastings, Netflix’ founder and CEO, has raised substantial funds and committed vast resources in pursuit of the company’s vision while also investing millions out of his own pocket.  In its early stages, the company repeatedly failed to develop a successful offering and struggled to attract a significant number of customers.  However, when others would have cut their losses early and given up altogether, Netflix redoubled its efforts and came up with the winning business model that it is today.

 

EXECUTION

Netflix knows that organisations don’t create innovations but that it’s people who do.  The company has recruited a top management team with the drive, skills and experience to attract, manage and motivate the right staff to build a winning business.  Since going public this team has met or exceeded every quarterly estimate and continues to grow the business at an accelerated pace.

 

RULE #3: PLAY TO WIN NOT TO PLAY.

 

Some things are Internet fundamentals:

 

CUSTOMER

If you are running any kind of Internet business then you’d better make sure that it’s a customer-centric one.  If the offline customer is King then the online customer is Emperor.  If you still believe that you’re in the business of selling products or services then you’d better rethink matters quickly.  You’re in the business of delivering extraordinary customer experiences and customers will part with their hard earned cash only when you have gotten this part right.  Always remember that your customers can build you a castle or dig you a grave and that the decision is not theirs but yours.

 

CONTENT

Consumers don’t care one bit that you have hundreds of thousands of products on offer.  What they are looking for is the one product that best meets their needs and it is your responsibility not theirs to find that product or at the very least provide them with every conceivable tool to help them find that right product as quickly and efficiently as possible.  In much the same way that Amazon developed the most sophisticated and comprehensive book information management system in the world, Netflix has succeeded in creating a similar system tailored for movies.

 

COMMERCE

An online business that wants customers to buy its products or use its services must ensure that it can offer as 'frictionless' a shopping environment as possible.  While this may seem obvious we are still frequently faced with situations where this 'basic' premise is not properly executed.  For example, certain competing players still require a login on _every_ visit which is a little like expecting people to ring the bell at the front door of an offline shop and having to wait for a salesperson to come and unlock it...  Also, although not 'yet' a competitive advantage Netflix has successfully patented its sophisticated 'rental subscription process'.

                                                                                                    

COMMUNITY

In a world plagued by all kinds of impersonal transactions, consumers cherish every opportunity to meet and interact with other like-minded people.  They’re not just there to shop, they want to learn and share as well.  Notice how many of the most popular destinations on the web are those that have a strong element of community attached to them.  Netflix has succeeded in fostering such a ‘movie community’ with the help of many functionalities on its website such as, among others, ratings and reviews.

 

COMMUNICATION

Any online business must become a master at online communications to succeed.  This includes marketing communications to attract, convert and retain prospects and subscribers, inbound and outbound customer service channels and any other communications tools that can facilitate the interaction between the business and its customers.  Netflix has undoubtedly built such a communication infrastructure and the company successfully leverages it to deliver a superior customer experience.

 

RULE #4: THE OVERALL USE OF A SYSTEM IS DIRECTLY PROPORTIONAL

TO THE EASE-OF-USE OF THAT SYSTEM.

If you would like to receive a complimentary copy of the full report please send us an email  with your contact details and we will be happy to forward one to you.  If you would like to discuss how alteraxion can help you succeed in your own online initiatives please email me.

Comments

[Paul]

FIrst mover.

[andrewc]

Paul,

Thank you for your short comment.

I believe that Netflix' first mover advantage accounts for less than 10% of its success to date.

[Taz]

While normally I don't believe this way, in this case I think Netflix has been able to take advantage of the 'right place at the right time.' They offer an 8-disc-at-a-time option (Walmart's largest offering I think was 4), and virtually simultaneously to Netflix's rise to glory, the breaking of DVD copy protection and a steady drop in blank, single-sided DVD media has likely drawn new (DVD-burning-enthusiast) subscribers like moths to a light. I speculate you could yank these subscribers pretty quickly if you offered more simulatenous disc rentals at a comparable price (and an even faster transition as your subscription price drops), with a comparable available title selection and customer service, of course. Netflix has definitely done the right things to stay on top, though. They are not blind to the realities listed above, and apparently don't have many qualms with taking advantage of it all while maintaining their market share. I've been a member for years and still can't say anything bad about them.