Case Study: Netflix

In 1999, Netflix introduced its online DVD rental service; this has been its major offering ever since.
For a flat monthly fee, Netflix subscribers can order as many movies as they desire, up to three
movies at a time, and they can keep the movies rental as long as they want. Unlike other services at
that time, such as Blockbuster, Netflix has no due dates and no late fees. The movie rentals generally
arrived next day and titles were out of stock. As of 2005, Netflix had more than 3 million subscribers;
and subscriber turnover was extremely low.

According to Reed Hastings, Netflix’s chief executive officer, ”What you have here is the $500
million market growing 100% a year. And any market that big, growing that fast is bound to attract
competitors.” Wall-Mart began online rentals of DVDs in June 2003 and in summer 2004;
Blockbuster invested $100 million in an online rental service in Great Britain. Many analysts saw this
move as a test for a possible entry by Amazon in to the U.S. market.

Hastings see the competitive environment as a “classic case where our competition have size, but we
have focus.” Hastings believes that his firm’s major asset is its subscriber base. He also feels that new
features such as Netflix Friends, which enables users to share movie reviews with each other, is
another competitive advantage.

Of its competitors, Hastings is most concerned about Blockbuster. Netflix has 35 distribution centers
(which enable it to reach more than 85percentas of the customers overnight). Blockbuster has 25
centers and plans to add more. Hastings recognizes that Netflix has attacked Blockbuster’s core
business and that Blockbuster will strongly defend it.

In contrast, Hastings does not know if Amzon will invest the resources to build and maintain
sufficient distribution centers. Competition from Amzon, however, cannot be dismissed. Unlike
Blockbuster, Amazon is an internet firm, has a huge base of customers, and has a logistic
infrastructure to efficiently distribute DVD rentals.

In May 2005, Wal-Mart decided to exit the online DVD business, a rare defeat for retailing giant.
Wal-Mart worked out an arrangement with Netflix and gave Wal-Mart’s DVD customers the chance
to continue their subscription with Netflix at their current price for one year. Netflix will promote
Wal-Mart as a place to purchase DVDs and Wal-Mart will publicize its arrangement with Netflix.

Many Retail Analysts are concerned not only with the size and retail, background of Netflix’s
competitors but also worry about the possibility of a price war. To stay competitive, Netflix cut the
price of its basic subscription plan from $21.99 to $17.99. A few weeks later, Blockbuster cut its main
plan (allowing up to three rentals at a time) by $2.5o to $14.99.

Hastings believes that a price war with Blockbuster is unlikely because a price war will cut into the
profitability of Blockbuster’s store operations. Netflix also has existing software and logistics system
that gives it a significant cost advantage over its competitors: “ Our favorite analogy is Dell, which
makes money on price that no one else in the industry can profit from.”

(a) Develop specific objectives for Netflix’s strategic plan over next five years.
(b) What target market strategy is most appropriate for Netflix? Explain your answer.
(c) Describe Netflix’s competitive advantages and disadvantages relative to Blockbuster and
Amzon.com
(d) Explain why retail analysts are so concerned about a price war for online DVD rental?
a) Netflix should create customer satisfaction targets for the next five years. Netflix should
concentrate on improving consumer happiness and loyalty. Netflix's chairman, Reed
Hastings, has already come up with a plan. “When members are truly happy with the service,
they tell their friends about it, and they retain more,” he added. So it's really driven by the
members, and when we have fantastic programmes coming out, as well as unique exclusives
and other things that make people so enthusiastic about Netflix, they're more inclined to tell
their friends and stay. As a result, it's a combination of the two. But essentially, it’s member
pleasure. ” Netflix is rapidly increasing its member base, but there is always room for
improvement. Netflix, like any other firm, should establish a sales goal. They should
concentrate on increasing sales and subscription numbers. Netflix should aim to expand
internationally and globally. This will boost their earnings. Finally, Netflix should have a
profit goal, especially a gross profit goal.

b) The target market is the consumer segment that a company is looking for. The mass
marketing target market approach is the most suited target market strategy for Netflix. When
a firm or organization uses a mass marketing approach, it offers goods and services to a large
number of people. The concept that a retailer's location is near a big population base is one of
the characteristics of mass marketing. Netflix had 8.5 million members at the end of 2008, up
25 percent from the previous year. Netflix predicted a jump from 10.6 million to 11.3 million
customers in 2009. Netflix aspires to be a global company. Their subscriber base is rapidly
expanding. Netflix aspires to be available in as many countries as possible, to expand
subscriptions and market share, and, most crucially, to profit from foreign markets. Because
of the nature of the business and service, only cheap rates can be charged, the larger the
number of paying members, the more Netflix can earn a return on a large investment in
content. Netflix maximizes sales potential by employing a mass marketing target approach.
As previously said, they will appeal to a diverse range of consumers. Finally, Netflix will
utilize a mass marketing strategy to offer a large range of DVDs and popular pricing.

c) Netflix was formerly considered a big new economy firm with a one-of-a-kind digital
business strategy. Netflix outperformed its rival (Blockbuster) by completely integrating the
Internet into its business model. Netflix was able to swiftly take advantage of emerging digital
advancements. Netflix was ranked first in Foresee's top 100 online retail satisfaction index
report in 2008. Netflix began poking holes in the old video rental business model, despite
Blockbuster's dominance. When compared to Blockbuster Video, Netflix had a fantastic
website; there was no standing in lines at stores, the movie titles were seldom, if ever, out of
stock, and consumers didn't have to return their purchases when they were finished. Netflix
highlighted a number of flaws in Blockbuster's old business strategy. Customer convenience
was one of Blockbuster's numerous flaws, but it was Netflix's strength. Although Blockbuster
had numerous convenient locations, it couldn't match the ease of a mailbox. Second, Netflix
took advantage of Blockbuster's huge profit margins on late fees by exposing them. Netflix
didn't have any deadlines or late penalties. Netflix has consistently placed the client first, but
there are drawbacks to every benefit. Netflix prioritized its customers, but it never considered
the absence of immediacy. Some customers may not want to wait for DVDs, thus Blockbuster
has numerous locations. Because it had not only a website, but also many shops, Blockbuster
outperformed Netflix in terms of revenue. Blockbuster had a huge amount of physical assets
and was able to profit in this area when Netflix was unable to compete. In compared to
Blockbuster shops, Netflix lacked customer interaction. Customers were unable to ask clerks
questions or receive further information about the DVDs they were purchasing.
d) The pricing war prevented future potential competitors into the industry. At the same time, it
lowered the earnings of both firms. Analysts predicted that the severity of the pricing war
would cause both companies' operating earnings to decline over the following few years.
Because such rivalry was harmful to both companies, it was thought that they should combine
their resources to establish a strong duopoly. Analysts also felt that Netflix might merge with
a powerful player, such as Amazon, until it was financially stable enough to form a strong
monopoly and prohibit all new entries into the US online DVD rental industry.