Introduction
Netflix has grown from a DVD video rental service to a global streaming service, in many ways shaping video viewing habits and culture. Although the company is now in many ways associated with high competitiveness and popularity among users, the path of its executives cannot be called flawless. One of the most glaring episodes that staked the service’s existence was in 2011, when CEO Mr. Hastings decided to split the payment for disc rentals and subscriptions to the streaming platform. This pricing mistake had global negative consequences, significantly devaluing the company’s stock. At the heart of this situation is the problem of pricing without regard to competitors activity.
Analysis
The reason for this behavior was the manager’s desire to increase the company’s profits through high price increases. This method can be useful in situations of monopoly, when clients have no alternative in choosing a service provider. In the case of Netflix, by 2011 there were a sufficient number of alternative organizations providing similar services on the market. Consequently, at a time of strong price increases, clients were able to choose another firm. Moreover, the services provided by Netflix were offered by some firms at a similar cost, for which reason, the sharp price increase provoked an active customer exodus.
Timely recognition of the mistake and a change in company policy was the only right decision, and put the management on a path of long-term development and unprecedented competitiveness. Since 2011, Netflix has gained several strengths that make it one of the world’s industry leaders. First, the company has a strong brand, mission, and vision. Secondly, its strength is its global reach, which is unprecedented in today’s society. Netflix is the most influential streaming service, which is popular not only in the U.S., but worldwide. The company has more than 208 million paid subscribers in 190 countries. Although the majority of Netflix’s existing customers are from North America, 80% of new subscribers are outside of the United States and Canada (Green, 2018). Netflix attracts a wide audience and takes into account the diversity of its users. The service transcends national and cultural barriers by offering shows in more than 30 languages.
Thirdly, the strength of this company’s work is unique and successful content. In the beginning, the platform simply bought the rights from movie studios and showed everyone’s favorite movies and TV series. But in 2013, the company made a breakthrough with its first original show, House of Cards. It became a hit, ran for five seasons and won a total of 27 Emmy Awards.Since then, Netflix has increasingly relied on producing its own content (Lucas, 2019). Moreover, the service knows exactly what, how, and when to offer the user. The launch of “House of Cards” in 2013 was a relatively risky venture and cost Netflix $100 million (Mcdonald & Smith-Rowsey, 2018). For the first time in history, the series was not released as a single pilot episode to test audience reaction, but as an entire season at once.
The recommendation system, which has about 700 programmers working on it, is built on tracking the behavior of Netflix viewers. Depending on what movies one watches, at what times, on what devices, what ratings one gives them, Netflix gives one recommendations on what to watch next (Noam, 2021). It uses a system of special tags to find options – they’re set up by a few dozen freelancers who review hundreds of movies specifically for Netflix and give them detailed genre characteristics in the form of tags. For example, a post-apocalyptic zombie movie based on modern literature, with strong female roles (Burling & Mcnutt, 2019). The Atlantic in 2014 counted that Netflix has about 77,000 such micro-genres (Mcdonald & Smith-Rowsey, 2018). This is one of the main aspects that appealed to me personally as a user of the company. Netflix adjusts to the preferences of different segments of consumers, and this approach inspires trust and interest in the service.
Solutions
Netflix’s strategy in 2011 tended to be ineffective since it did not take into account the market’s situation and competitors’ behavior. The solution to this situation is to carefully monitor the market and develop a long-term pricing strategy. It is important to note that the unfortunate experience has been correctly reflexed and Netflix is now firmly established in the marketplace with a clear understanding of its competitors. The ervices Disney+, HBO Max and Hulu, with their sit-down releases, can hold audiences for weeks while a series is released. Netflix subscribers, after watching the entire season, may not renew their subscriptions. Hence, it is likely that the service may reconsider its release model (Burgan, 2019). The company’s CEO’s actions in admitting strategic mistakes are smart and ethically correct (Mcdonald & Smith-Rowsey, 2018). This is explained by the fact that after the public apology, the company began a new path of intensive development.
Netflix expects to increase the number of subscribers in Asia. According to Tony Zameczkowski, vice president of business development for the Asia-Pacific region, the company will continue to allocate money for the production of local films and series. This is how Netflix plans to maintain its user base while the number of users in the U.S., Canada and Europe does not grow. The company will also continue to offer a cheaper subscription option in that region, where Netflix can only be watched from mobile devices (Lobato, 2019). The service also plans to work with local carriers to attract potential customers who aren’t used to using credit cards.
Recommendation
Over time, Netflix’s suite of services and quality of service has changed dramatically. Now the company is looking for new growth drivers and new sources of revenue in the future.
The service has a policy of not integrating advertising into its service, although it could be a great source of revenue. According to Hub Entertainment Research, a survey of 3,000 Americans found that 58 percent of them would be willing to use platforms with ads if their subscriptions dropped by $4 to $5. In contrast, Netflix recently increased its subscription fees. Some analysts think it’s time for management to change its approaches (Brimage, 2020). Another possible way to diversify is to enter the games market. Back in late May, The Information reported that the streaming pioneer was looking for a head of gaming (Burling & Mcnutt, 2019). A platform similar to Apple Arcade is being considered. There has been no movement on this topic so far. According to the publication, the company has no plans to add advertising to games.
Justification
By analyzing competitors, the company can form a tactic of distancing itself, while shaping the price perception of customers. In this way, managers will be able to attract and retain a target audience due to several aspects:
- The company’s pricing strategy should determine how it treats its competitors.
- At the same time on the basis of this practice, it is not necessary to monitor closely and completely equal to the competitors, which is the other extreme. In this case, the company first loses some of the profits it could have made from goods with inelastic demand; moreover, there is no commitment to achieving the company’s goals.
- In order for pricing to be effective and yet controllable, the tactics suggested for Netflix are as racially necessary.
As a general rule, it is sufficient to allocate a list of products and control the prices in the market only for those products in order to form the price perception of the customer. It is also important to properly identify competitors to look out for, perhaps this step was ignored and led to adverse consequences during the pricing phase of 2011. These measures are part of the pricing methodology that has not received proper attention. In addition to competitors, it is always important for the CEO to consider factors such as key metrics, and the frequency of revaluations. Nevertheless, the methodology will not work without a careful examination of the actors in the market. (Green, 2018). (Lobato, 2019).
Conclusion
Thus, Netflix, having no experience in producing TV series, managed to conquer the market and significantly increase the number of subscribers around the world. Nevertheless, during the expansion phase of the business, a serious mistake was made in pricing, resulting in a loss of value for the company. Managers did not consider that the products the service offered could no longer be considered so unique that customers would agree to significant price increases. After analyzing this information, the company developed certain algorithms and oriented its policy in an innovative way.As a result, Netflix went from DVD rentals to original content production and became a world leader.
References
Brimage, M. (2020). Netflix. Greenwood.
Burgan, M. (2019). Netflix, Amazon, Hulu, and streaming video. Mason Crest, An Imprint Of National Hightlights Inc.
Burling, A., & Mcnutt, M. (2019). Netflix. Essential Library, An Imprint Of Abdo Publishing.
Green, S. (2018). Netflix. Bellwether Media, Inc.
Lobato, R. (2019). Netflix nation: The geography of digital distribution. New York University Press.
Lucas, R. W. (2019). Customer service: Skills for success (7th ed.). Mcgraw-Hill Education.
Mcdonald, K., & Smith-Rowsey, D. (2018). The Netflix effect: Technology and entertainment in the 21st century. Sydney Bloomsbury Academic.
Noam, E. (2021). The technology, business, and economics of streaming video the next generation of media emerges. Edward Elgar Publishing.