Play – Key Capabilities
Netflix was born as a result of a spontaneous reaction to the traditional movie rental model which included costly and annoying late fees. Hastings tapped into a new, emerging market venture which enabled customers to rent DVD’s online for a monthly fee. By subsequently copying a very simple ‘subscription’ based model, Netflix would grow into an entirely new market concept with unrivalled success. Having a first-mover advantage, Netflix has identified a niche based on customer needs and responded by utilizing the internet to focus on customer convenience and timely delivery of DVD’s across the US. They have since expanded their facilities throughout the United States and have established themselves as industry leaders. Competitors such as Blockbuster and Hollywood video were relatively slow to respond and were initially unaware of the market share Netflix would capture in the upcoming years. This has given Netflix a sustainable competitive advantage.
An opportunity that Netflix could (and is currently considering) to explore, is to provide a downloadable service to complement their existing online service; however, there are still on the . While it is possible and often more convenient to directly download movies via the Internet, licensing issues and the fear of have prevented the establishment of such a service (Rosenberg, 2000). The CEO of Netflix, , said that he believes it would not be an instant success because of complications in copyright handling and relatively slow adoption of broadband Internet; however, Netflix will offer limited video on demand sometime in the future, allowing users to download movies via the Internet and is even considering an expansion into the market.
Pause – Traditional Rentals versus Subscription Model
The traditional movie rental model does not provide the consumer with flexibility. Customers are typically paying a fixed fee per movie rental with financial penalties for returning movies past their due date. Although there are various promotions such as rent a new release and receive an old release for a reduced fee, the model still requires the user to return the movie(s) on site and on time. The subscription based model, on the other hand, is based on a fixed monthly fee providing the user with flexibility in the amount of movies they can rent at any given time with the added bonus of no late fees.
If you compare the Netflix model based on a $20.00 monthly subscription fee for 3 rentals (on average every 11 days) to Blockbusters per movie cost of $3.79 for the same number (and frequency) of movies, there is a significant savings with the Netflix service of $1.97 per movie which is more than 50% off of the Blockbusters per movie price. (Refer to the table below)
Are customers better off with a subscription model?
Consumers may find subscriptions convenient and cost efficient for a variety of reasons: First, if they believe that what they buy is something they would frequently purchase; second, if they believe that they will save money on a subscription basis verses multiple single purchases; and third, if time is a concern and they perceive the subscription model will provide convenience and take just one transaction to initiate repeat delivery of the product or service. However, for the consumer who subscribes to the service with the intention to use the service frequently but later, for any number of reasons, does not, the potential cost savings are lost.
Special Features – The Netflix Process
Little’s Law Calculations
Material Flow: I = R x T
Average inventory (I) = 2,000,000 Throughput (R) = 80,000
Average Flow Time = I/R = 2,000,000 / 80,000 = 25 Days
In other words, a Netflix DVD rental spends an average of 25 days in ‘circulation’ from delivery to the customer to receipt by Netflix.
Damaged DVD (Requiring Repairs) Flow: I = R x T
Average Inventory (I) = 180,000
Throughput (R) = 24,000
Average Flow Time (T) = I/R = 180,000 / 24,000 = 7.5 Days
A damaged DVD takes an average of 7.5 days before it is repaired and available to rent.
Inventory in circulation: I = R x T
Average Flow Time (T) = 11 Days
Throughput (R) = 80,000 DVD’s
Average Inventory = I = R x T = 80,000 X 11 = 800,000
Netflix has on average 800,000 DVD’s in circulation at any given time in the process.
Subscription Profits
Based on an annual subscription rate of $20.00 and a constant subscriber rate of 300,000 Neflix would see positive cash flows with profits of $46,840,800.00 as per the annual income statement below:
Bonus Features – A New Model
Should the marketing department implement a $5.00 discount for earlier returns, the impact on the net profit is a 40% reduction over the $20.00 subscription model.
Distribution
The pros and cons of the new distribution centres Netflix has put into service are summarized below in the SWOT analysis:
SWOT Analysis for using 11 distribution centres vs. 1 central distribution centre
Fast Forward (Sneak Peaks) – The Netflix of Today
The Netflix of today serves over 5.7 million members through 42 shipping centres in the United States, employing over 1,200 people. Netflix is the first and the largest online DVD rental service with over 70,000 movie titles and 42 million DVD’s in circulation. Offering 8 monthly service plans ranging from the lowest price at $5.99 per month for one title at a time to the highest price at $47.99 per month for unlimited selections, Netflix is shipping 1.4 million DVD’s each and every day.
Credits
Netflix. Online Website. Homepage. [Accessed 11 January 2006.]
Bremner, B. (1999). Cashing in on business. Boston: Little, Brown and Company.
Rosenberg, Y. (2000). Successful internet business. Boston : Harvard Business School Press.
Appendix
Page of NETFLIX CASE STUDY
