NetFlixs Business Model and Strategy - Case Study Example

NetFlix’s Business Model and Strategy of the Executive Summary NetFlix’s business strategy is well aligned to the basic requirement in a movie rental business. They have a wide selection of videos and cater to almost all genres. Another key element to video rental business is fast delivery of rented DVD’s. As for NetFlix’s, delivery channel, they proudly claim 98% on time delivery on orders. The third and the most important niche required to become a market leader in this business is low cost of subscription. NetFlix has near zero rental charges for its subscribers and that is what sets it apart from its rival firms. Having satisfied the 3 basic criteria’s for successful business, this paper is aimed at examining what were the possible driving forces that led to such good market standing of the company. Along the same discussion we also point out various strategic and competitive challenges that the firm might face in near future and suggest means to minimize the impacts of those threats. Introduction At the onset, Netflix started off as a DVD rental provider that used internet to take orders. Subscribers made their selection over the portal and mailed in their orders. The DVD’s would then be delivered via mail. The entire system allowed the customer to keep the DVD’s as long as they wished to, without an extra charge. Netflix derived its major revenue from their subscription plans that incorporated costs of streaming, mailing and renting of videos. As we moved to the digital age, internet streaming and online viewing has caught up. NetFlix has welcomed the change and continues as leader by innovation i9n the video rental market. DVD renting, though, has not lost its value just yet (Hillary, Alex, & Ian, 2009). In this paper, we would analyze NetFlix’s market standing, its business model and its business and marketing strategy using various tools like the SWOT analysis and Porter’s five forces to determine the company’s key success factors and staying strength. Moving forwards, the discussion continues to determine the critical areas that might need immediate attention for NetFlix’s sustenance and also suggest some marketing and strategy recommendations that might prove useful in revenue and subscription improvement. Analysis Strategically speaking, video rental industry is more competitive that an oligopoly or a monopoly. This is believed to be in stark contrast with what the general opinion holds. An industry where instant availability drives the market, the paper tries to analyze what forces have led to success of NetFlix and what could be the possible challenges in the given scenario through various tools (Null, 2003). SWOT Strengths NetFlix is a well established brand and known to almost every Household Extensive and Assertive marketing has etched its name in memories of individuals Competitive Pricing has won the loyalty of the masses. Good relation and strong business with suppliers makes NetFlix, a good name among Video providers. NetFlix and a widespread presence which gives it an advantage due to ease of access. NetFlix has a wide array of offerings in videos, in both TV episodes and movies. The company has been constantly upgrading itself to higher technology and better capabilities. Weaknesses Damaged DVD’s demand a high cost of replacement. This might act as discouragement to frequent video buyers. NetFlix takes slightly longer time to procure and deliver videos. Speed in delivery is the pillar of success in this particular and this drawback could put NetFlix in a fix if it sustains for long. Customers who are not very frequent with movie rentals rarely find something else that might catch their fancy Video streaming fails to include all movies within its program. Opportunities NetFlix could try selecting movies that might have a recurring demand with customers. Such movies could be displayed on their video streaming channels (Lewis, 2001). The company could experiment with creating a collection of movies and TV shows of the subscriber’s interest and showcase them on a dedicated channel. They could also add their recommendations in movie collections. Introducing a subscriber referral scheme that benefits both the subscriber and NetFlix’s client base can act as a good marketing technique. The scheme could be reduced rental rates for the subscriber who refers a client that remains with the company for 12 months. Movie / TV show vending machines specific to NetFlix might also get popular due to ease of accessibility Threats Increased competition in video streaming client base from Hulu and Blockbuster Reducing rate of specific VOD channel which are being offered almost free for large durations (Netflix, 2003). Undoing the ease of Mail Order process might cause a strong decline in client base. With increased number of players in the video rental industry, NetFlix has to be very careful with its suppliers because they now have more option to sell their rights to. This means that its present contract. Netflix is presently very well positioned in the market, so much so that it can be safely called as a market leader. It also shares that competitive advantage of having a huge variety of video collections and a good availability of popular videos. This lead, however, might not sustain for long because there is stiff competition where industry players are trying to find new competitive edge every day. NetFlix also needs to be on the lookout for innovation in availability and supply niches to retain its market standing (Gérard & Martin, 2001). Staying Power Netflix’s success and impressive revenue stream can be listed down as its key success factors that brought its market standing to this day. 1. Product Quality: With video DVD’s, damage control is something difficult to avoid. However, periodic checks and maintenance have made it possible for NetFlix to keep faulty DVD’s away from its clients and maintain client satisfaction. 2. Wide Distribution Network: Numerous ties with production companies ensure a huge collection and greater access to latest videos (Desjardins, 2005). 3. Product Innovation: NetFlix has updated itself to being available on any internet based device. Be it the computer, the television or even internet compatible gaming device. 4. Low Subscription Cost: NetFlix enjoys the advantage of minimal subscription cost for renting movies and TV videos when compared to its rival competitors. 5. Easy to use Technology: NetFlix’s online video streaming software is user friendly and easy to access. Subscribers also enjoy the benefit of video suggestions that match their tastes and preferences with NetFlix’s web based suggestion streams. 6. Brand Presence: NetFlix is renowned for on time delivery for 98% of the orders. Porter’s Five Forces 1. Threat of Substitute Products: Significantly Low. Video substitute to renting movies and TV episodes are either too old in technology or too expensive to get popular. VHS market can now be considered to be depleting while the better substitute, the Blue Ray technology gains a widespread disapproval owing to its high cost of purchase of the Blue Ray Unit. Also, the Blue Ray Player accommodates well to the normal DVD videos, thereby reducing the pressure of a technological shift for VOD companies (Liedtke, 2006). As for threat from fee structure for rentals from other VOD companies, they were much lower with NetFlix owing to high server capacity. 2. Threat of New Entrants: Somewhat Medium. Video Rental Market becomes a difficult area to enter for those planning to venture into it, primarily because of customer loyalty to specific companies and favoritism to their chosen Video Rental Provider. Also, the industry thrives on the quick service and customer satisfaction which builds only with time. One might vouch for upcoming entries in the satellite television package deals which come with streaming abilities, but, on the flip side, the entry costs in this VOD industry is so high that such threats can be safely overlooked by market leaders. Barriers to entry are chiefly ruled by the leading market players. 3. Rivalry among Existing Players: More towards a High. Movie and TV Episodes rental industry thrives on competition through changing technology advanced video and rental features, ready accessibility of videos and affordability of rents (Freed, 2006). 4. Bargaining Power of Buyers: Medium to Low. If we keep piracy aside, buying DVD’s and using online streaming of movies is probably the only option people have to watch videos. Here NetFlix gains headway because of its price competitiveness. 5. Bargaining Power of Suppliers: Significantly High. Dealing with video suppliers is a tough task at hand for VOD providers. If at all, for some reason, the video provider feels the need to withdraw contract, they can pull themselves out of the deal and withdraw all their movies and shows from NetFlix. This can put the NetFlix is a tight scenario and pose threat from its competitors (Fisher, 2005). Summary and Conclusion Netflix has had a good performance record in the past and can be considered as a healthy company in the present. Their video collection is in good demand while their delivery system seems to be running smoothly. Also, an easy exit process makes unsubscribing less of a pain for those who wish to discontinue renting videos from NetFlix. The subscribers do not have to worry about being charged extra or being harassed for a longer duration that they wish to stay (Thompson, Peteraf, Gamble, & Strickland, 2012). In this winning set-up, NetFlix holds the strongest market position among peer companies. Their online video recommendations are a hit with subscribers as it matches their choices quite successfully. Video viewing convenience has been made as easy as sitting at home and viewing it over the internet. Nobody needs to waste any time to purchase a DVD to watch their favorite video. At other times, people can order them through a simple mail and the video gets delivered at the doorstep. Despite all this, the company faces a few minor challenges at the grass root level, that need to be addressed urgently. Online and computer based video watching unknowingly filters its client base to a large extent by the mere source of video viewing. Aged population above the age of 50 might not be as technologically capable as youngsters and hence computer and internet media deters their movie watching and renting experience. There is a need for an alternative for this section of population (Mauffette, Leenders, & Erskine, 2001). NetFlix’s advertisements need to grow and encompass their entire array of offerings. Their present promotional talks about movie rentals alone, while a larger section of population feels the need for renting out their favorite TV shows, child entertainment and workout training programs. Netflix’s delivery system needs to upgrade to quicker modes. People do not want to wait for mail delivery when they have the option of pulling out their video from the nearest vending machines. Recommendations 1. Advertising campaign should be directed more towards communicating the speed of delivery and instant gratification of video needs of a customer. Delivery process is what can set NetFlix apart in the industry. Also the ad should take care in displaying its wide array of video offerings so as to capture largest market niches (Gallaugher, 2008). 2. Strengthening ties with video suppliers becomes of prime importance in today’s era when there is a whole herd of players in the market trying to do the same. Building long lasting relationships with production houses would gain their loyalty towards NetFlix and also make attrition difficult. 3. Creating and maintaining strong ties with suppliers also ensure quick availability of latest videos and better range of video offerings for subscribers. This can act as a great crowd puller. 4. NetFlix could experiment with a referral-reward program. For every referral that stays for 12 months, they could allow one month of free subscription to the referee. 5. NetFlix could also experiment with vending machines that give and take back rented videos. Such kiosks could be designed to know what the movies on the client’s watch list are and arrange for delivery of the same. NetFlix is a strong player in the industry. Some of these recommendations might just prove useful in expanding their subscriber base as well as revenues and help them retain their market standing. References Desjardins, D. (2005). Observers raise eyebrows over Blockbusters bold moves. DSN Retailing Today, 44 (1), 6. Fisher, K. (2005). Netflix settles class action lawsuit. Retrieved from http://arstechnica.com/old/content/2005/11/5515.ars. Freed, J. (2006). Redbox aims to bring a DVD rental machine to a lobby near you. Retrieved from http://www.insideredbox.com/redbox-dvd-rental-kiosks-take-over-the-world/. Gallaugher, M. (2008). NetFlix Case Study: David Becomes Goalith. Retrieved from http://www.gobookee.org/get_book.php?u=aHR0cDovL3d3dy5nYWxsYXVnaGVyLmNvbS9OZXRmbGl4JTIwQ2FzZS5wZGYKTmV0ZmxpeCBDYXNlIFN0dWR5OiBEYXZpZCBCZWNvbWVzIEdvbGlhdGggLSBUaGUgV2VlayBpbiBHZWVr4oSi. Gérard, P. C. & Martin A. L. (2001). Turning the Supply Chain into a Revenue Chain. Retrieved from http://hbr.org/2001/03/turning-the-supply-chain-into-a-revenue-chain/ar/1. Hillary, C, Alex, M. & Ian, K. (2009), Strategic Report for Netflix, Inc., Retrieved from http://economics-files.pomona.edu/jlikens/SeniorSeminars/oasis/reports/NFLX.pdf Lewis, P. (2001) Netflix: Video on Delay, Fortune, 144(5),88 Liedtke, M. (2006). Frequent Netflix renters sent to back of the line: The more you use, the slower the service, some customers realize. Associated Press. Retrieved from http://www.msnbc.msn.com/id/11262292/. Mauffette, L. A., Erskine, J. A., & Leenders, M. R. (2001). Learning with Cases (2nd ed.). London: Ivey Publishing. Netflix. (2003). Netflix 2003 Annual Report. Retrieved from http://ir.netflix.com/annual.cfm. Null, C. (2003). How Netflix is Fixing Hollywood, Business 2.0., vol. 4, issue 6, pp. 41-44. Thompson, A, Peteraf, M, Gamble, J. & Strickland, A. (2012). Crafting and Executing Strategy: The quest for competitive advantage. New York: McGrawHill. Read More