Netflix's Customer Comeback: Strategies for Success After Price Hike

NETFLIX - CUSTOMER STRIKES BACK

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Netflix found itself in hot water back in 2011 after deciding to separate its DVD and streaming services and jack up the prices. This move didn't go down well with the crowd, leading to a lot of unhappy customers dropping their service and the company's stock price taking a serious tumble. Enter Hunter Keay, an ambitious young investment banker who was pondering over how to measure what Netflix was really worth now. He was toying with the idea of looking at the long-term value of Netflix's customers instead of just the usual number-crunching. All this was happening at a time when the way we watch TV and movies was getting a total tech makeover. Keay was stuck figuring out if Netflix could pull off a sequel to its initial success and win back its spot in the limelight. Problem Statement: NETFLIX - The Customer Strikes Back

In 2012, Hunter Keay, an investment banker, faced client worries when Netflix split its services and raised prices, causing a loss of customers and a drop in stock value. Considering using 'customer lifetime value' to assess Netflix's future, Keay noted that new tech was changing how we watch videos, raising questions about what's next for Netflix Netflix: The Sequel – Bouncing Back from a Strategy Setback ● Challenge: Post-2011 backlash from splitting services & price increase led to subscriber loss and stock plunge. ● Strategic Recovery: Re-evaluating business strategies to regain customer loyalty and stabilize stock value. ● Innovation and Adaptation: ○ Considering Customer Lifetime Value (CLV) for deeper insights into customer relationships and long- term profitability. ○ Adapting to new content delivery trends to meet evolving consumer demands. ● Outlook: Exploring Netflix's potential to not only recover but also lead the market with innovative content delivery models.

Evolution of Content Delivery and Business Models ● Transition from VHS to digital has diversified business models: ○ Before 2000: Dominated by physical rentals and purchases (e.g., Blockbuster). ○ After 2000: Rise of digital platforms (e.g., Netflix, Hulu) with subscriptions, à la carte, and free streaming options. ● Consumer shift from owning (DVDs) to accessing (streaming) content. ● Digital streaming has surged, overtaking physical media. ● Graph: Steady decline in physical disc usage from 2005-2015, with a rise in digital streaming. Digital streaming as percentage of content delivery, 2005 - 2015 (projected)

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● Customer Lifetime Value (CLV) is the total net profit a company expects to earn from a customer throughout their entire relationship with the company, considering factors such as purchase frequency, average order value, and retention rates. ● CLV is crucial in understanding the long-term profitability of acquiring and retaining customers, providing insights into which customer segments are most valuable and guiding resource allocation decisions. ● Hunter Keay considered using customer lifetime value (CLV) to determine a more accurate value of Netflix stock, diverging from standard methods favored by his firm. However, he was uncertain about the applicability and validity of CLV in this context and how it related to traditional valuation methods. ● Keay recognized how new technologies were changing the video content industry and customer habits. He questioned whether future innovations, such as "Netflix 2: The Sequel," could match the success of the original platform amid industry shifts. ● CLV helps companies like Netflix make strategic decisions by identifying valuable customers for retention efforts and assessing the success of acquisition campaigns by measuring the quality and potential lifetime value of acquired customers. Customer Lifetime Value (CLV)

● In the 1980s, the rise of videotape and VHS cassette players led to the boom of movie rental businesses. ● By the 1990s, national chains like Blockbuster and Hollywood Video dominated the market, strategically locating stores for maximum accessibility. ● Customers typically visited rental stores to make spontaneous rental decisions based on available titles. ● Rental costs varied from $3.00 per week for older movies to $6.00 per three days for new releases, with Blockbuster offering a vast selection of about 2,500 titles. ● Late returns were common issues, prompting stores to impose late fees as incentives for prompt returns. ● Blockbuster's decision to eliminate many late fees resulted in a significant revenue loss of $400 million, signaling a shift in the traditional rental store model. The Traditional Retail Rental Store

● In Early 2000s, DVD mail service started gaining popularity. ● Selecting and Arranging multiple movies in order of priority in an online queue, ensured prompt delivery of subsequent selection and also for customer to always have something on hand to watch. ● Subscription tiers based on no of movies rented simultaneously. Starting price at $7.99 per month for one movie at a time. DVD by Mail Select Online Prompt Delivery Flexible Delivery

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● VOD was content distribution via an internet connected television, computer or mobile devices. ● Instant access to movies from an online menu. ● No waiting for complete file download as content can be viewed as it's being downloaded, eliminating wait times. ● As there is no exchange of a data-storage medium was required, so stock-outs and late fees were avoided. ● Offers larger and more eclectic catalog. Video on Demand (VOD)

● Movie rental kiosks were free standing dispensers of DVDs located in high-traffic areas with extended sometimes 24-hour access, such as convenience stores, grocery stores, and fast-food restaurants. ● Redbox - Founded in 2003 and funded by McDonald’s. - By 2012, rented 1.5 billion movies from 30,000 kiosks nationwide - Five-minute drive of two-thirds of the U.S. population. ● Blockbuster's "Blockbuster Express" kiosks are Redbox’s only competitor. ● Revolutionizing rental price point (about $1.00 per night per movie). ● Customer Benefits of Kiosk: - Elimination of planning ahead required by DVD-by-mail services. - Avoidance of additional location visits needed by rental stores. - 24-hour access, freeing customers from time constraints. ● Challenges: Limited selection, Delayed releases Kiosk Rentals Redbox kiosk

Netflix's Strategy: Delivering Goosebumps! ● Innovative Business Model: Shifted from late-fee-driven rentals to a subscription service allowing unlimited rentals without extra fees. ● Data-Driven Personalization: Introduced Cinematch recommendation system; user ratings improved suggestion accuracy, driving engagement with an average of 200 movies reviewed per customer. ● Growth and Retention: Emphasized customer lifetime value (CLV), with promotions to boost monthly orders and referrals, leading to a substantial increase in subscribers and retention over a decade (2001- 2011). ● Visual Data: Graph shows a consistent upward trend in paid subscribers, highlighting the success of Netflix’s customer-centric approach. Paid Subscribers and Retention Rate , March 2001 - December 2011

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Netflix's Road to Redemption: A Strategic Conclusion ● Financial Rethink: Hunter Keay examines alternative valuation methods like Customer Lifetime Value (CLV) versus traditional financial models for Netflix. ● Innovative Response: Netflix responds to customer loss by enhancing its recommendation system, directly influencing customer retention and service value. ● Strategic Challenge: Keay faces the task of reassessing Netflix's market value in the wake of a controversial strategy change and evolving industry landscape. ● Customer Retention Strategy: Special promotions and an expansive catalog aim to increase customer rental frequency, leveraging CLV for growth. ● Impact of Technology: The case study acknowledges the crucial role of technology in reshaping content delivery and consumption patterns. ● Future Uncertainty: Despite challenges, there's speculation about Netflix's ability to recapture its pioneering edge in the sequel to its original success story.

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