Netflix is one of the most revered companies around that is still growing at staggering rates (e.g. doubled their profits every year for the last 10 years). They are probably the most successful company using a pure subscription business model.
Netflix is our in-depth, real-world example to understand the subscription business model:
- How to make the Subscription Business Model work that Netflix is based upon
- Netflix Economies of Scale are a crucial underpinning assumption of the subscription business model
- Netflix Dis-economies of Scale: how – in reality – this key assumption doesn’t hold true for Netflix
- Netflix Crucial metrics: Contribution Margin or the key metric that drives all investment decisions
- Netflix Crucial metrics: Customer Lifetime Value (LTV) and Customer Acquisition Cost (CAC)
- Netflix Free Cash Flow: a crucial metric that shows the external funding needs to fuel the investment cycle
- Netflix Flywheel: the investment cycle in relation to competitor moves will ultimately determine Netflix’s trajectory
- Business Model Canvas Netflix summarises everything succinctly in the most popular strategy tool
Click on the links through out this overview to jump to the detailed article on the topic.
(1) How to make the Subscription Business Model work that Netflix is based upon
- Some of the biggest tech companies have made Software-as-a-Service (SaaS) a pillar of their business model, take Microsoft, Oracle,
- One of Apple’s biggest growth areas is their service offerings. Salesforce, Workday are prominent companies that were SaaS from day 1.
- The Subscription Business Model is probably the most popular revenue model among the SaaS.
- Netflix, too, uses the Subscription Business Model as their revenue model
- There are also other revenue models within SaaS, such as pay-as-you-go, e.g. Amazon Web Services uses both
- There are 12 important elements you need to know to make the Subscription Business Model work (successfully)
(2) Netflix Economies of Scale are a crucial underpinning assumption of the subscription business model
- One of the most fundamental microeconomic principle underpinning the Subscription Business Model are Economies of Scale
- It means that as you scale up your company, your revenues grow faster than your costs
- Especially fixed and overhead costs are assumed to be growing slower than revenues
- But is this really always the case? Well, nowhere close to what you learn in your economics 101 courses
- The reality is more intriguing and challenging for innovators
(3) Netflix Dis-economies of Scale: how – in reality – this key assumption doesn’t hold true for Netflix
- Here is a spoiler alert: Analysing Netflix’s financials over 20 years is revealing
- And it shows significant examples of dis-economies of scale
- You may call those one-off periods of innovation or transformation
- But in reality, these periods stretch over more than 5 years at a time
- And they are due to typical challenges that all innovators face
(4) Netflix Crucial metrics: Contribution Margin or the key metric that puts an envelope to investment decisions
- The Subscription Business Model is characterised by continuous investments
- But at the same time, you can’t ignore the need for operating profits
- Netflix’s key investments are in (1) Content; (2) Technology; and (3) Marketing
- Netflix has been pointing out the importance of the Contribution Margin metric as their guide to investment
- Using their annual reports, we are diving into their 3 business segments (each being in a different phase):
- (1) US DVD (sunset phase); (2) US Streaming (maturing phase); (3) International Streaming (growth phase)
(5) Netflix Crucial metrics: Customer Lifetime Value (CLV) and Customer Acquisition Cost (CAC)
- How much does it cost Netflix to attract a new customer (CAC)?
- And how much does a typical customer spend while they stay with Netflix (CLV)?
- How does churn affect this?
- Netflix seems to be doing very well on these dimensions … that is: if you use the often purported (incomplete) methods
- Our discussion on economies of scale show which costs also need to be incorporated into the equation
- Doing so paints a different, more mixed, picture
(6) Netflix Free Cash Flow: a crucial metric that shows the external funding needs to fuel the investment cycle
- External funding is often the lifeblood of early start-ups
- And it has also fueled Netflix’s growth in recent years
- Netflix is transforming from a content distributor to a content creator (and distributor)
- And content creation is expensive (very expensive)
- The Free Cash Flow metric indeed shows the amounts of funding that still comes from external sources
- And it is one of the most important tools to understand the accounting of our investment cycle
7) Netflix Flywheel: the investment cycle in relation to competitor moves will ultimately determine Netflix’s trajectory
- Economies and dis-economies of Scale are important microeconomic principles of the Subscription Business Model
- Contribution Margin is, by Netflix’s own account, one of the most important accounting metrics that they are tracking
- Free Cash Flows shows the money coming into the company and fuelling the investments made
- LTV and CAC are the most important customer unit economic metrics for the Subscription Business Model
- We have learned about all of them using Netflix as a successful real-world example
- Now it is time to put them all together
- Our Netflix Flywheel does just that
- Netflix’s (and your) trajectory are going to be determined by how their investment decisions do in relation to their competition’s moves
(8) Business Model Canvas Netflix summarises everything succinctly in the most popular strategy tool
- A summary of Netflix’s key partners, activities resources, value proposition, channels, customer relationships, segments, costs and revenues
- And a starting point for your own Subscription Business Model idea
⇒ Netflix is our in-depth, real-world example to get deep insights into one of the most powerful business models of our time: the subscription business model with its crucial metrics, accounting, microeconomic and strategy knowledge
Source: innovationtactics.com