The business model of Netflix Essay
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The business model for Blockbuster and the one for Netflix have many variations. Blockbuster was solely a “brick-and-mortar” company having no online affiliations. It made its money mostly from continuously providing customers with new movie releases to rent. Building thousands of Blockbusters countrywide also helped lead to the company’s success, for by doing so, customers were provided with the convenience of location. Both Blockbusters late fee system, which guaranteed the timely return of rented movies, and its policy of selling the already viewed films, contributed to the company’s value.
Netflix, although also based solely on renting movies, was purely online unlike Blockbuster. Its business model revolved around three main criteria to attract a variety of customers, value, convenience, and selection. The company’s hope was to appeal to the customers who shop online for these three very same reasons.
The company focused primarily on DVDs as it was a new technology at the time. Its business model also evolved from a fixed number of rentals per month to an unlimited number of rentals for a fixed prepaid price.
They also had a recommendation service that attracted attention from many potential customers since it was not exclusive to Netflix customers. This system allowed Netflix to give customers a more personalized experience. Since it recommended mostly older films it allowed Netflix to utilize the movies that otherwise would never have been rented (Shih, Willy, et al). Both business models focused greatly on convenience. Netflix, however, provides a service that allows a renter to borrow a movie without ever having to leave his or her driveway. Also, its improvement in its business model that allows customers to rent an unlimited amount of DVDs per month is a worthwhile business strategy.
Instead of being stubborn like Blockbuster, Netflix has evolved its business model to better fit the customer. Its ability to make the renting experience more personal has also played a role in its success. For this allowed for personal recommendations, which resulted in older movies being rented out that one would otherwise not know about. Netflix’s investment in IT, its focus on providing the customer with a satisfactory experience, resulting in repeat customers, the money saved from not having to pay many of the costs that most “brick-and-mortar” companies do, and their fast delivery time, are all excellent strategies which have contributed to its success. Although much of Netflix’s success was a result of the aforementioned strategies, without IT or information technology it could not have competed with other rental businesses like Blockbuster. Its initial use to provide customers with a convenient and personalized means of renting movies largely led to its accomplishments as a business. Their use of a search engine makes finding movies much easier than going to a Blockbuster and having to go through hundreds of titles before finding the right one, especially if it’s an older movie.
Its use of user feedback for movie recommendations, enables the company to promote and rent out older titles that otherwise would have just been collecting dust. This recommendation service also encourages repeat customers since it offers other movies that he or she will be very likely to want to watch. Another contribution of the Netflix’s movie recommendation service to the profitability of the company is its ability to be used by anyone, which attracts many potential customers. Other, competing, movie rental businesses that lack Netflix’s IT capabilities, like Blockbuster and the multitudes of smaller “brick-and mortar” retail stores have a very limited customer base. This is true especially as more and more people gain access to the internet. The added convenience, efficiency, accessibility, broad reach, personalization, user-friendly interface, reasonable pricing, vast selection of movies, and recommendation system are all made possible due to Netflix’s investment in IT. Most of these advantages provided by Netflix’s IT are sustainable.
Its lower operation costs, as compared to a “brick-and-mortar” retailer, such as Blockbuster, contribute to its ability to provide service at a lower price. Customers will typically bend over backwards for a lower price. Its infrastructure and methods of engaging customers are tough for other companies to compete with. This is especially true for its recommendation service. This provides every customer with their own unique set of movies based on previous user feedback and selection of movies. Stores like Blockbuster do not have this service and so the only thing customers can go by when looking for similar movies is genre, a very inconvenient method. However, its previous business model of focusing primarily on renting out DVDs is not sustainable. This is especially true as streaming movies is becoming more and more popular. Netflix was able to solve this problem by converting to a streaming service.
They did so at a point in time when streaming was not nearly as popular as today, enabling them to get a head start on the market and acquire reasonable pricing from companies that provided the movies. This transition was relatively painless since they were already located online, had the IT capabilities of streaming, and had a strong customer base. More recently Netflix has faced the problem of streaming prices increasing. This is a result of content providers increasing their rates since streaming is becoming more mainstream, or popular. Netflix increased their rates to make up for the expense of the content, however, this led to an almost instantaneous increase in unsatisfied customers. The first step in solving this problem is to regain the loyalty of the customers who left and to maintain the loyalty of the customers still partaking in streaming movies. They did this by offering a rate of $7.99 per month for unlimited streaming.
This is even lower than a movie ticket. However, if they seek to gain more customers at a rate similar to the early 2000s then they will need to alter their business plan. Perhaps offering customers a 2 month free trial as opposed to only one month will improve the chances of customers signing up with Netflix so as to continue the service. Also improving the personalization of Netflix could help improve customer loyalty. If when adding movies to the queue one could rank the movies by which they would most like to see it would prevent one from being overwhelmed by hundreds of titles, most of which they only had a vague desire to watch. Also if they built a stronger search engine that allowed customers to do a more specific search than just genre or rating, it would improve the user experience.
For example a user should be able to look for a particular genre or genres, with a particular actor, release date, and user rating, to find the movie that the particular user is currently in the mood for. If they expand to other countries or go international they could also possibly solve their decrease in customer problem. There is not nearly as much competition in international countries as in the US so this option could potentially increase the subscriber amount and thus increase Netflix’s revenue.
Also expanding their movie catalog could attract more customers. They could also improve their recommendation system; this will increase the amount of traffic to their site, which in turn could lead to other companies desiring to pay for advertising on their site. The key to Netflix’s sustainability is the continuous improvement and upkeep of its IT as well as maintaining reasonable rates. This will encourage returning customers while at the same time attract new ones.
Shih, Willy, et al. Netflix. Boston, MA: Harvard Business School Publishing, 2009.