Business Growth Strategy of Netflix: A case study
Netflix (NASDAQ: NFLX) is the largest online streaming services provider in the world with a subscriber base exceeding 193 million. The firm is serving its content across 190 countries. It serves a diverse subscriber base globally. Its popularity worldwide was driven by its original content, which has continued to attract new subscribers and technological innovation. In recent years, its profitability has surged and its operating margins jumped to 13% in 2019 from 10% in 2018. At the end of the first quarter of 2020, its operating margins jumped to 16.6% and then 22% during the second quarter indicating faster growth in the firm’s profitability in the near term. The company maintains that member satisfaction is critical to its growth. It is why Netflix invests in producing original content. This strategy has worked for Netflix and has helped the company grow its subscriber base and earn a stronger word of mouth. The costs of producing original content are high and Netflix has accumulated a substantial debt that it might need to worry about. However, growing operating margins and audience size show that the company may have less to worry about its debt compared to its competition and other challenges. Judging on the basis of its past performance, the company will perform well in the long term. Overall, Netflix has amazed investors and shareholders with its performance.
In this post, we will analyze the main strategies Netflix has employed to find fast global growth. However, we will first take a look at the target audience of Netflix.
Who is Netflix’s target audience?
Netflix is a global brand that serves its content to a diverse group of customers from diverse cultural backgrounds. The company has expanded its subscriber base to around 193 million. Netflix has a vast amount of original and licensed content targeted at various age groups of customers. The company has priced its services competitively and released a few lower priced plans to hack into middle and lower middle class customer segments. In the emerging economies where the consumers are more price sensitive than the developed economies, the company introduced a smaller plan allowing users to access content only on smartphone devices.
The customers of Netflix are mainly in the 18-45 age group. It is the largest group of Netflix viewers. In the second quarter of 2020 alone the company has added around 10 million net new members overall. Its total memberships overall crossed 195 million in the third quarter of 2020. The largest group of consumers of Netflix are the GenXers, GenZ and the millennials. According to Statista, Gen Z and millennials were the most likely group to have subscribed to Netflix in May 2020. However, Netflix has also achieved strong penetration across the elderly segments. Netflix movies and shows are most popular among the people aged 16-34. The United States and Canada are together the largest market region of Netflix and the number of paid subscribers in the third quarter of 2020 from this region grew to 73.08 million.
Business Growth Strategies Employed by Netflix-
One of the core pillars of Netflix’s business growth strategy is its focus on original content. The company has continued to expand its collection of original movies and shows. It also plans to add more of them in 2020 and 2021. Its competitive moat has continued to strengthen. Everything aside, original content is the main differentiating factor for online streaming sites. It is not just Netflix but its competitors are also investing in original content including Amazon Prime. However, Netflix’s collection is much larger compared to the others. Nothing attracts customers from across the globe like original movies and shows. As Netflix’s treasure trove grows bigger so does its empire. Netflix expects its user base to grow bigger than 200 million by the fourth quarter of 2020. The only main drawback is the huge expenses the company incurs when creating original content. However, given the advantages it offers there is no better way of drawing audiences from worldwide than investing more in original content.
Netflix accumulated a substantial debt over time but with growing impact, the profits have grown and so have its operating margins. In the third quarter of 2020, its operating margins touched 20% and that is quite impressive. The company expects it will start generating positive cash flows by 2021. In the longer term, the company’s performance will further improve allowing it to service its debt without difficulty. So, original content is a critical source of competitive advantage for the online streaming platform. However, while creating original content, Netflix also maintains a strong focus on quality. It is because user satisfaction is above everything. It creates a lot of localized content for local users in various regions like France, India or other markets like China. However, the localized content does not just appeal to the local subscribers but also the international audience. Customers have substantial choices across various genres and languages meaning higher user satisfaction.
Netflix’s other major growth driver is technological innovation. The company has differentiated its platform using technological innovation to offer a superior customer experience. User experience is not affected only by content quality but also by the overall quality of the platform. It is also affected by other factors like quality of streaming, searches and suggestions. While analysts believe that most of the technological innovation at Netflix is already a thing of the past, Netflix continues to invest in research and development every year. From its powerful search algorithms and recommendation system to the cloud technology that helps the company stream its services throughout the globe, Netflix maintains a heavy focus on research and development to grow its attractiveness. People consider Netflix a disruptor in the video streaming industry. However, while Netflix may have already acquired a substantial advantage based on technological innovation, all the innovation is not over for the platform. Netflix CEO Reed Hastings maintains that the website adapts to individual users’ preferences which differentiates the Netflix experience from other online experiences. Netflix is still evolving and the focus is on delivering more personalized experiences. The company makes it possible through the use of machine learning and artificial intelligence and its team’s creativity. However, that does not mean everything is just weighed and served before the users based on the same scale. No, that will bore users. They also get to try new things since there are several factors affecting recommendations. Netflix relies on AWS cloud computing for its computing and storage related needs. To deliver its content, Netflix relies on Open Connect, which is a network of data centers around the world with a clear focus to bring Netflix closer to its customers globally. There are thousands of Open Connect Appliances (OCAs) globally that distribute all of Netflix’s video traffic. So, all that you are watching on Netflix is stored on AWS but once you start streaming, the OCAs take over.
Focus on user satisfaction:
Member satisfaction matters the most for Netflix. Netflix co-CEO Reed Hastings acknowledged that there is no other way in the streaming industry; there are no gimmicks. It is fundamentally about member satisfaction and if one Netflix show satisfies, it is more likely that the member will be back the next day to watch more. It leaves less room in terms of selection of projects. Netflix has to pick only the projects it is sure about will please viewers. However, the resulting user loyalty is a great reward in itself.
There are many factors shaping user satisfaction. One of them is continuous evolution and higher personalization. It improves user experience and user loyalty. Apart from that, content quality also affects user experience. Netflix always focuses on producing quality content that appeals to the taste of the masses. Content quality has the strongest impact on user satisfaction. The stronger the quality of content, the higher the user engagement and the resulting satisfaction. Netflix will continue to invest in original content even at the cost of higher operating expenses. User satisfaction matters and has a direct impact on the company’s bottom line. Its profitability has kept rising in the past five years and would rise even faster. It became clear from Netflix’s performance in the third quarter of 2020 when its operating margin grew to 20%. Achieving user loyalty is important for Netflix so customers do not gravitate towards other online streaming brands. This will require continuous focus on customer satisfaction.
Netflix did not acquire all the growth at once but in phases. The company played strategically and undertook a three phase expansion into the new markets. Netflix analyzed these markets before making an entry. It first entered the markets that were geographically close to its domestic market. It first expanded to Canada in 2010 since the Canadian audience is very similar to the US audience. The firm needed to develop strong internationalization capabilities before it could move to foreign markets at a larger scale. Canada offered an important learning opportunity before Netflix, which needed to strengthen its core capabilities for faster internationalization. Just a few years past its foray into the Canadian market, Netflix had developed strong globalization capabilities and then it proceeded to the second expansionary phase.
There were many factors that influenced the choice of markets during the second phase of Netflix’s expansion. The second phase involved faster and more extensive expansion. In this phase, the firm expanded into fifty markets. Apart from the attractiveness of the local market, there were other factors like the presence of affluent customers and broadband internet, that the firm considered before entering these markets. In this phase, the company also made significant investments in data and analytics. Netflix continued to learn about internationalization in this phase while growing its partnership with the local stakeholders and increasing its revenue.
The third phase of expansion saw more aggressive growth when the company expanded to 190 markets worldwide. The company had matured by now and gained valuable experience that supported its faster growth worldwide. Apart from being more experienced at knowing people’s preferred content, Netflix had also become a superior marketer and organized itself better. The company also added more languages, optimized its personalization algorithms and also expanded its support for various devices, operations and payment partnerships. It entered Poland and Turkey in 2016 and six months later it added their local languages to its user interface, subtitles and dubbing.
In this way, Netflix grew its global presence in three phases. While it expanded geographically, it also continued to improve its content quality and service quality.
Focus on the mobile first experience:
Netflix had recognized it early that in several corners of the world and mainly in the emerging and developing economies people accessed the internet mainly on mobile devices. From social media to online shopping, music and entertainment people were using mobile devices mainly to access online content. Netflix shifted its focus to mobile experience. From signups to credentials, and the user interface as well as streaming efficiency for cellular networks, the company grew its emphasis on the mobile Netflix experience. The company also focused on growing its relationship with smartphone brands, mobile and TV operators as well as internet service providers.
With the number of smartphone users worldwide growing, opportunities for streaming brands are growing. Netflix has introduced a smartphone plan for Indian audiences that is priced lower than the other plans.
Netflix's growth also involved regional partners. The company formed regional mutually beneficial partnerships. The company partnered cellphone companies or cable operators to sell its content with its existing video-on-demand offerings. One example is Vodafone. When Vodafone launched its TV service for Irish customers, it introduced a dedicated Netflix button on its remote controls. In the Indian market, Vodafone offers free Netflix subscriptions with its postpaid offerings.
Netflix also entered a partnership with Telefonica in Latin American countries. The agreement includes many initiatives that vary from market to market including:
- integrating the Netflix app into Pay TV set-top boxes and providing access to Netflix from the Movistar Play Video OTT service,
- enabling members to pay their Netflix subscription via their Telefónica bill and adding Netflix to certain mobile video data plans that allow Telefónica customers to stream video without tapping into their standard data allowance.
Netflix formed a partnership with KDDI (telecom brand) in Japan. KDDI offers Netflix video content through mobile phones together with its au brand mobile communications.
Netflix has also invested in marketing to grow its brand. The company has been winning markets with quality content. With its quality and original content, the company earned a strong word of mouth. In the US and Canada, two of its biggest and earliest markets, the company benefitted strongly from word of mouth and earned media. Netflix started as an entertainment brand but became more of a lifestyle brand for millennials and GenXers. Its image was that of a technology, entertainment, and lifestyle brand. The company kept growing better at marketing as time passed. Its marketing approach kept growing more refined. No doubt, Netflix was a customer-centric company and more growth-oriented than the competitors. While expanding internationally, it was learning about new cultures and the marketing techniques that garnered the best response. Its connection with customers strengthened as the company grew its focus on understanding user preferences. The growing use of data and analytics and higher personalization helped maximize user satisfaction and grow brand equity. From paid promotions to digital advertising, and social media, the company uses all channels to reach and engage users. It has also developed market-specific strategies. In fiscal 2019, Netflix spent $1.88 billion on advertising. A total of $2.65 billion were spent on marketing.
A few last words:
Netflix has grown at an amazing pace in the past five years. The company has more than 195 million subscribers in the third quarter of 2020. Its profitability is growing fast. The company's operating margin has expanded to 20% in 2020. The substantial debt burden the company had accumulated over the years does not look a major worry now. Netflix is growing its competitive moat stronger through investment in original content. Most of its revenues and profits have gone into creating original content. However, there is no other way out since member satisfaction affects profitability. Original content attracts new members in larger numbers. To engage them, you need to produce more original content. Netflix plans to produce more original content in 2020 and 2021. Content costs are fixed costs. So, Netflix will have reduced its debt burden substantially in the long run. Its profits are growing, and operating margins are expanding. The costs of content production are fixed. Netflix's subscriber base is expanding and going to bring in enormous profits each quarter. The message is clear; Netflix will invest where it matters most - into original content that drives subscriber base growth.