In May, Netflix saw its stock price jump a massive 30%.
Pretty darn impressive…
One of the key drivers behind the rise was Netflix’s decision to increase its video subscription fee by $1.00.
One teeny-weenie little dollar.
When they surveyed their customers about the increase, 73% said that they were either “not at all” or only “slightly likely” to cancel. (Source)
Here’s why the Netflix business model is succeeding – even when competitors like Blockbuster have failed.
#1 – Fill the Gap
Netflix founder Reed Hastings explains the origins of Netflix in terms many of us can relate to…
Hastings had a large amount of videos overdue and was facing a big fat fine – a fine so large, he was embarrassed to tell his wife about it!
He couldn’t believe that this was the best way for people to borrow movies.
His solution was to come up with a business model that let people keep the videos as long as they liked – as long as they paid a flat fee every month.
Virtually every successful business is based on satisfying some currently unmet need in the market.
#2 – Think Strategic Partnerships
Strategic partnerships can be a win-win for both sides…
For Netflix, a partnership with Apple is one such example.
Netflix allowed the owners of the Apple TV set-top box to sign up for Netflix directly.
They could even pay for the service through their iTunes accounts.
For Netflix, it was an opportunity to access Apple’s large customer base.
For Apple, it was a chance to provide their customers with more content in a convenient way.
A win/win/win approach…
#3 – Be Prepared
Much has been made of Netflix’s decision to offer streaming.
What is less well known, however, is how long it has taken consumers to catch up with the company’s vision.
As Hastings notes:
“In 1997, we said that 50% of the business would be from streaming by 2002. It was zero. In 2002, we said that 50% of the business would be from streaming by 2007. It was zero… Now streaming has exploded… We were waiting for all these years. Then we were in the right place at the right time.”
As Netflix shows, being in the right place at the right time has as much to do with preparation as it does to do with luck.
#4 – Think Recurring Income
One of Reed’s inspirations for Netflix came from the gym he belonged to…
The gym only had to attract a customer once, but it could continue to charge customer’s every month.
As long as a business is giving the customer something they want, subscription-based buyers will stay on board.
The fruits of this business model were shown recently when Netflix was able to raise their prices by just a $1 a month, but have an outsized impact on their profits.
Because Netflix was offering a great product that customers wanted, people were willing to pay a little extra each month.
#5 – Learn From Others
One of the principles I live by is the idea of modeling the successes – and learning from the failures- of other business leaders.
Experience is a great teacher,butyou can shorten the learning curve by learning from other people’s failures.
Reed Hastings learned from AOL, who was slow to adapt to the development of broadband – and suffered as a result.
It was a mistake he was committed to not repeating with Netflix.
Learning from the mistakes of others, Netflix has always carefully observed changes in its industry and adapted as needed.
#6 – Add Value For The Customer
One of the reasons that Netflix has proven to be so popular is, well, they are so good at giving the customer exactly what they want!
Hastings has noted that the real secret to Netflix’s success is that it adapts to its user.
The Netflix recommendation engine is very good at predicting what types of movies people are likely to want to watch…
As a result, 60% of the movies that are added to subscribers’ queues come from recommendations!
Netflix is more than just a movie rental service… It’s a place where you can find the right movie for you to watch.
With hit shows “Orange Is The New Black” and “House Of Cards,” Netflix has even become an innovative creator of new content.
It’s a development that few would have predicted when Netflix was simply the “DVD by mail” service…
Netflix has long practiced the maxim of going where the ball is going to be, not where it has been… And it will be exciting to see where that adaptive mindset takes the company in the future.
How are you adapting to changes in your industry?
In your corner,
Charlie