Netflix was one of the key players in the U.S. Home Video Rental Market ever since its inception in 1997. The company was the first of its kind to use...
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STRATEGIC MANAGEMENT NETFLIX IN 2011 – Analysis PGP 1, SECTION 6 GROUP – AE1
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PARINITA V KUMAR – 15805 Summary Netflix was one of the key players in the U.S. Home Video Rental Market ever since its inception in 1997. The company was the first of its kind to use the DVD concept to deliver movies to homes, thereby making a market for itself. With the evolution of time though, complexities developed and Netflix had to keep modifying its strategies to maintain competitive advantage. Their recent move to charge separately for their streaming video service and DVD service had been a huge cause of concern for the customers. Over the years Netflix carried out a lot of changes to maintain competitive advantage and bring about unique value proposition to customers. They have been listed as follows –
Early Days Reed Hastings introduced DVDs to the movie rental business. Until then, only VHS videocassettes were available for rental. The new DVD technology gave them a first mover advantage in terms of technology. The DVDs were easier to ship and hence proved to be cost effective. At the same time, customers were able to view better quality content. They went ahead with DVDs model and targeted the early adopters of DVD technology. They wanted to capture the underserved market and wanted to be the first one to gain early mover advantage. Netflix showed great prowess in demonstrating customer value in advance. Prospective customers saw the DVD technology to be the future of movie rental industry. It is evident from the fact that DVD player in US households penetrated from 5% in 1999 to 65% in 2004.
Prepaid Subscription Service Customer Value proposition is step by step process. Netflix were hit by bad reviews from customers regarding slower delivery. The customer retention was proving to be a tough task at a period when they spent 100 – 200 $ to bring in a customer. The cost of building a library was also proving to be costly. Prepaid subscription service was perceived to add value to the customer. Netflix used this to turn their longer delivery time to their advantage. It proposed to allow customers to hold 3 movies at a time and exchange as frequently as they liked. It meant customers always had a Netflix movie DVD at their home. Netflix were quick to make pricing changes accordingly by introducing unlimited rentals. The term “unlimited” proved to be a great value for the customer. It helped Netflix add more customers to their subscription base. Netflix provided a complete package to the customers and was termed as Netflix’s “all you can eat” model. This model was a great alternative to the traditional per-day fee structure that the industry followed.
Proprietary Recommendation System The recommendation system from Netflix went on to become a hit for Netflix and created a unique value for the product. Five movies would be highlighted on their website, which would then be rented out instantly. It later changed to five movies a day. The referral system was made to respond better to customer demand. All the logic behind the suggestion came from a short survey at the start of account creation. The system also gave rise to Queue method of allocation of movies to customers to avoid any discrepancies among customers. To avoid stock out, a filter was placed between the output of recommendation system and the results displayed to the subscriber. The whole system helped wash out any customer frustration. Waiting times were also reduced as only in stock movies were suggested. The entire system went on to become a great hit. It was totally aligned and delivered what Netflix aimed for – convenience, value and selection.
Building the Movie Library One of the major sources of dissatisfaction among subscribers was the inability to rent new relapses in a timely manner. To overcome this, Netflix entered into relationships with studios that allowed them to have access to a national inventory of diverse blockbuster movies.
Distribution and Delivery To solve the problem of next-day delivery, Netflix opened 58 delivery centres by 2009 as they believed delivery time was a key measure of customer satisfaction.
Growing Content Acquisition To enhance its reputation and to cater better to the ever-increasing subscriber base, Netflix acquired the distribution rights to certain independent films through Red Envelope subsidiary which helped them gain access to high quality films.
Customer Retention In a bid to retain customers and to attract return visitors, Netflix dished out an online subscription policy where customers could cancel subscriptions as well. Their profiles were maintained even if they left Netflix. Moves like these were extremely important to customer satisfaction potential and also helped the company save costs.
Transition to Streaming Videos To maintain their position in the industry and to differentiate itself from competitors, Netflix launched the streaming feature at minimal additional cost and with a “view instantly” option.
Developing original content With licensing costs on the rise and competitors striking similar deals, Netflix developed the idea of developing original content to differentiate themselves. The first such movie they invested in was House of Cards, which was met with tremendous success.