Netflix is an online subscription-based DVD rental service that promises to connect their customers to the movies and television shows they love through means of sending discs through the mail or streaming them directly via the internet. For only $7.99 per month, Netflix offers their customers unlimited access to their massive video library (>70,000 titles as of year-end 2006) and is able to deliver DVD’s by mail to over 90% of their nearly 7 million subscribers in only a single business day.
There are many factors that go into how Netflix is able to generate profit with this business model. First and foremost, Netflix uses a subscription-based revenue model. This came about after adopting a more emergent business strategy to better adapt to feedback being provided by its customers. Netflix initially used a revenue model similar to that of the brick and mortar video rental stores with the thought that the convenience factor of having discs mailed directly to your home would outweigh the inconvenience of having to wait the extra time it took to ship the discs. In 1999, Netflix shifted to the, more simplified, subscription-based model which, in turn, increased the value proposition that Netflix was able to offer its customers.
Another large consideration in generating profit is their partnerships with nearly all of the major movie studios that allows them to purchase DVD’s at a reduced up-front cost in return for a fee based on how often those discs are rented in a given time period. This, in conjunction with a good recommendation system that brings older titles to the forefront of customer’s minds and the Netflix subsidiary company, Red Envelope Entertainment allows Netflix to house a larger library of titles for a lower cost than its competition while satisfying the sizable niche market of individuals who are interested in renting titles that they have missed or re-renting titles they’ve already seen that most video stores could not.