Businessmodel of Netflix

Customer Segments

Netflix has always sought to appeal to a mass-market by providing an affordable, convenient way to consume video media.

Initially, before the advent of online streaming, they sought to take customers away from established brick-and-mortar video rental stores such as Blockbuster by providing the consumer with a more convenient way to choose films with the added benefit that they didn’t impose exorbitant late fees.

Since 2007, their target customer base has expanded to include almost everyone in the world with a high-speed internet connection. They have been central players in bringing on-demand premium video streaming to the mass market.

Value Proposition

In their initial phase as a postal-rental company their value to consumers hinged on convenience, affordability and range of films.

Brick-and-mortar video rental stores could not compete with the convenience Netflix offered consumers by letting them order rental DVDs in the post. Netflix also had access to millions of more consumers who perhaps lived far away from any rental stores or maybe simply did not want the inconvenience of a trip to a store Unconstrained by shop sizes, Netflix was also able to offer a broader selection of films, stocking tens of thousands of more obscure titles rather than primarily blockbusters.

Since online streaming took off, Netflix’s value proposition is slightly different. They still offer customers convenience, range of selection and competitive pricing, but they achieve this differently now.

They offer convenience by having one of the most established and reliable web streaming platforms out there. They offer a wide selection because they have negotiated deals with most of the world’s major and minor film studios in addition to developing their own award-winning original content. They continue to offer pricing that is competitive through their subscription-based, “watch-as-much-as-you-like” approach, which differs from competitors such as Apple’s streaming services.

They are also appealing for many consumers because unlike some competitors such as Hulu Plus, they do not currently include advertisements for subscribers.

There is nothing inherently non-replicable about Netflix’s streaming-business model, and increasingly, as the world of online streaming develops, they find themselves in a market with a lot of strong competition. Their current dominant position in the market is due to their status as pioneering and well-funded early developers in the field, and they continue to offer users access to an unparalleled range of content. Nonetheless, it remains to be seen whether they can maintain this status, or whether disruptive newcomers may eat into their market-share in the future.

Channels

Netflix’s main channel has always been their website. Initially, customers could mail-order film rentals from it, and the convenience of this online channel that enabled them to usurp their rival Blockbuster’s market-share.

Nowadays, subscribers stream video directly from netflix.com, but Netflix also offer a mobile app for subscribers which serves as a key secondary channel.

TV set top boxes provide another channel, as Netflix has done much work to ensure the compatibility of their platform with many main brands.

Customer Relationships

Netflix maintains its relationships with customers on a subscription fee basis, offering unlimited on-demand streaming in exchange for a monthly fee.

Netflix has created a platform in which the user experience is entirely self-service, and yet still easy to use. The company was an early pioneer of film-recommendation algorithms, which they developed to give the user a better experience.

Key Activities

Over the years Netflix’s key activities have shifted from mail-order processing to focus on developing online video player software, content licensing and original content development.

Key Partners

Content providers have always been key partners, as their entire business model is completely dependent on third-party video content. Netflix have negotiated deals with studios the world over to obtain rights for streaming the content they offer.

Another key partner used to be the United States Postal service, who processed the hundreds of millions of rentals that at one point they were posting yearly. This end of the business has since declined, and as streaming took over, internet service providers have replaced them as key distribution partners.

Key Resources

Netflix’s original key resource was its massive inventory of DVDs and efficient mail-order processing capabilities, but today, Netflix’s key resource is the rights it owns to stream virtual content. It has deals with more content producers than its rivals and is therefore able to offer its users a wider array of content.

The platform itself is also a key asset. They have invested heavily in ensuring it is as user-friendly and reliable as possible while offering a wide range of highly developed features such as algorithmic film recommendation.

An increasingly lucrative resource for Netflix is their original content. They own the exclusive rights to a number of in-house productions that regularly draw audiences of millions.

Cost Structure

Netflix’s biggest expenditure is paying for the rights to stream its third-party content. Netflix’s cost structure is cost-driven, and its business is based on its ability to sell cheap streaming to a mass market. These days, because it is such a large and important channel for content producers, Netflix is often able to negotiate more favorable licensing deals than its competitors, allowing it to offer its services so cheaply.

To provide customer service and to update and innovate its platform, Netflix employs over 3,700 employees, whose salaries constitute another key expenditure.

Revenue Streams

Since very early on in the company’s history, the main revenue source has been the monthly subscription fee its users pay. This has not changed, even as the company’s business has switched from mail-order to streaming.

When they were still primarily a mail-order rental company, they used to make additional revenue from advertising on the DVD envelopes they would post out, but these days, advertising is not a revenue stream for Netflix. There has been speculation that they may in future need to introduce some advertising revenue streams in order to increase profits and continue their growth.