Netflix Business Model & Revenue Model to Consider for a Startup
Netflix Business Model & Revenue Model are quite beneficial to consider for your own startup. Especially, if it has a content library at its core. It is safe to say that subscriptions have drastically changed the revenue landscape of many digital businesses. They have come to almost entirely the pay-per-view model. Even though, the latter can still be found. For instance, YouTube Movies operates on a pay-per-view model.
Audience-wise, price-sensitive customers tend to avoid the pay-per-view model. It is valid for situations as casual as selecting a movie to watch after a long day at work or school. A tired person may not care about choosing, but having to pay for it surely places a burden. So particularly when it comes to digital content, the pay-per-view model excludes a large category of viewers such as large households, students and young adults, casual viewers with unpredictable viewing patterns, and so on. In contrast, the unlimited subscription model caters to all of these large categories of viewers. By extension, by having more viewers, the business can achieve wider audiences up to global reach, and capitalize on that. This is what Netflix is doing quite successfully.
So, in this article, we’ll deconstruct the Netflix business model and revenue model so you can start your own business with our Startup Services,
Table of contents
Netflix’s Past and Present in Numbers
1997 – the year Netflix started as a DVD rental company. For 10 years, Netflix would remain a major DVD-by-mail rental company. Yet, around the year 2000, Netflix already introduced a subscription business model with DVDs.
1,000,000$ – Netflix awarded this prize to BellKor’s Pragmatic Chaos for the movie recommendation algorithm in 2006.
2007 – Netflix launches its streaming services. It still has DVD rentals as the most popular plans: one and two DVDs at a time. There are options to rent 3 and 4 DVDs at a time as well.
2010 – Netflix raises prices on DVD rental plans and introduces its streaming-only plan. Most importantly, Netflix announces its goal to become a streaming-only company. The company’s shares move up 200%.
2013 – as streaming of digital content has become the primary revenue goal, Netflix starts producing its original content. House of Cards and Peaky Blinders are among the first series originating that year.
9.33 million paid members – Netflix added these many viewers in the 1st quarter of 2024 against 3.93 million projected by analysts. Netflix’s performance surpasses expectations by 140%!
So, it’s time to dive into the inner workings of the Netflix business model & revenue model.
Netflix Revenue Model
A revenue model is secondary to the business model. It is a business model that determines how a business creates, delivers, and captures value. Then, a revenue model details the specifics of how this value translates into revenues.
To explore more business models, read our article Top 10 Business Models to Consider for Your Startup.
For Netflix, with its content library, choosing a subscription business model was an early decision. Their DVD rental service offered flat fees and no late fees. After all, signing up for a subscription means taking on an ongoing commitment. It wasn’t unlimited yet, but it was a step in this direction compared to the competition.
Since those early days, Netflix has managed a website. It allowed customers to select DVDs to rent. As Netflix had already developed Cinematch algorithms, it was able to personalize its DVDs recommendations. That system was based on viewer ratings.
The common business concern with an unlimited subscription is its economics cost-wise. Some people can watch Netflix 2 hours a week and others 20 hours a week. The company’s resources are used differently for the same price. So how does this unlimited subscription business model manage to make Netflix profitable? First, let’s discuss subscription plans.
Netflix Subscription Plans & Economics of Unlimited Subscription
Netflix has three subscription plans and users can manage them flexibly. They can downgrade, upgrade, or cancel at any time. Another point that makes subscribing to an ongoing commitment pressure-free.
Basic differentiating factors are the number of screens a user can watch at a time and video quality. Also, the premium plan has a feature called immersive sound or spatial audio. All plans have opportunities to download content, yet again tied to a number of devices.
So, one way Netflix somewhat manages different usage patterns is by pricing on the quality of streaming and stream numbers.
The second point is that subscriptions cost differently in different countries. After all, Netflix operates in 190 countries. For instance, Netflix is the cheapest in Egypt as its basic plan costs only $1.46. It is the most expensive in the US – $15.49 for the standard plan. Below is a map of pricing tiers.
Map: Joe Berkowitz Source: Netflix plans and pricing, as of 4/23/24
In addition to different pricing, the content library varies across countries. For instance, Harry Potter movies due to high licensing fees are available only in a couple of countries. This is also why original content is so central to maintaining an unlimited subscription revenue model.
How else does an unlimited subscription help Netflix business model to stay lucrative?
The overarching consideration is a psychological factor. Consumer psychology is clear on the preference for an unlimited subscription as opposed to pay-per-view. With pay-per-view, a consumer is taunted with having to make an individual purchase decision. However, the perception of unlimited subscriptions is completely different. It is seen as unlimited possibilities to dive into content at the user’s convenience.
Additionally, a subscription is convenient for the user as well as for the business. There is no need to sell each and every movie.
In terms of business considerations, think about customer acquisition cost (CAC). CAC becomes a metric you’d want to see going down. To do that, a business should focus on keeping its current customers engaged and satisfied.
To see why, let’s look at numbers. Previously, we wrote that Netflix acquired more than 9 million new viewers in the first quarter of 2024. For Netflix, CAC is about $58 on average. This number is calculated by dividing advertising expenditures by the number of new users. For similar companies like HBO Max or Disney+, CAC is even higher. They spend between $70 to $100 per customer. So considering monthly subscription against CAC, it is financially justified to provide unlimited access. Of course, personal viewing recommendations and the quality of the unlimited content matter. Yet, in general, businesses are quite incentivized to keep users long-term as compared to sourcing new ones.
Overall, there are a lot of data-informed decisions in terms of pricing to manage costs and remain profitable.
Netflix Business Model
The revenue model discussed above is a component of the Netflix business model shown below.
Revenues and Costs of Netflix Business Model
Going from the bottom up, we can see that the revenue stream is subscription while costs consist of:
- Content production;
- Licensing;
- Technology development.
Key Activities
The cost structure reflects the key activities: producing its own Originals, licensing other content to appear on Netflix, and developing the Netflix platform.
There is also a lot of research happening behind the scenes. After all, Netflix offers personalized recommendations. Also, different movies get to the top depending on the country and customer segment. So, there is a lot of analytics that constitutes research activities.
Key Resources
Key activities are centered on maintaining Netflix’s key resources: its content library, platform, and its news website – Marca.
The Value of Netflix Business Model
The overall value is on-demand entertainment at any time any place. And this is true as Netflix can be watched virtually on every device.
To be more detailed, Netflix offers an ad-free entertainment experience with a diverse catalog of choices. There are high-quality documentaries, movies, TV shows, series, comedies and more. Content can be watched in high resolution depending on the user’s plan. When Netflix is purchased for a household, each person can still have their own account on a family plan. Thanks to this, each person within a household can also enjoy personalized recommendations. In addition, it is all available 24/7 with the possibility to download.
Customer Relationships
Netflix maintains customer relationships mainly through its platform (web and mobile). User experience (UX) is at the core of ensuring customer satisfaction and loyalty. Customer engagement relies on its recommendation algorithm. In addition, Netflix utilizes social media to lead a dialogue with its user base. Netflix actually tries to answer a large part of user comments on such social media as Instagram, Facebook, and LinkedIn.
Delivering The Value
Netflix delivers the value through its mobile app and web app. This can be used on most devices and smart TVs.
Target Audience
Netflix targets a wide range of customers who love movies and entertainment. Majorly, they are teens and young adults, and households from low to middle income.
Key Partners
- The more modern the device is, the more chance the Netflix app is already pre-installed. It represents the key partnership – consumer electronics manufacturers.
- In addition, to expand its reach, Netflix partners with cable companies and broadcasters. For instance, Comcast, a major cable company in the US, is such Netflix’s partner. With this partnership, Netflix comes in the Comcast Xfinity package.
- In terms of broadcasters, Netflix partnered with BBC One network to create Dracula (2020) and other content creation projects.
- Last but not least, Netflix partners with different producers. For instance, Netflix’s Bridgerton series is done in collaboration with Shonda Rhimes. Another recent one is “The Three-Body Problem” created by the producer of Games of Thrones. “The Irishman” was created by Martin Scorsese for Netflix. This is done to create diverse high-quality content.
Netflix Business Model: Which Companies Are Following Suit?
The subscription business model is popular with a variety of businesses. However, not all of them opt for an unlimited variety of it.
SaSS companies
In Adobe, there is a range of subscription plans for its Creative Cloud. Unlike Netflix though, users can have a free tier and use some of the functionality for free.
Product Companies
Dollar Shave Club is an interesting example as instead of digital content, it uses subscriptions for physical goods. For a monthly subscription, a client receives a monthly supply of grooming goods. Though, goods are available without a subscription as well. But with a subscription, there are benefits like a discount and early access to new items in the store.
HelloFresh. Similar to Dollar Shave Club, this company operates a subscription business model to deliver goods. HelloFresh delivers meal kits with its subscriptions. In addition, the company offers meal plans and a ton of recipes. All subscriptions are customizable based on preferences and number of people.
Service Companies
Strava. It’s a mobile fitness-tracking app. In mobile, you often want to give away some functionality. Its premium subscription similar to Netflix allows a user to use features in an unlimited mode.
Content-driven Companies with Subscription Business Model
Spotify. Users get unlimited access to Spotify’s music library. Unlike Netflix, there is a free tier which is add-supported for revenues. Subscription primarily removes ads, although there are other benefits of subscription as well.
Playstation. With its premium subscription, a user gets access to the entire catalog of games. Yet, if a user doesn’t pay for a subscription, there are some free options as well as the ability to purchase games.
Fitbit. Similar to Strava, Fitbit’s premium plan allows a user to access its functionality without limits. It includes a library of guided programs and challenges.
Peloton. It has a wide variety of online workouts, both on-demand and live. With a subscription, a user can get unlimited content per household. Additionally, premium plans provide some personalized recommendations. This business model is very similar to Netflix business model.
Scribd. This company operates a huge collection of documents available online. With a Scribd subscription, a user get an access to online documents from three services: Scribd itself, plus SlideShare, and Everand. The content includes presentations, ebooks, audiobooks, pdf files, and other documents.
The New York Times. Also similar to Netflix business model as it operates a digital content library. With a subscription, a user can get access to a large library of exclusive content such as news, games, audio, and more. Digital content is unlimited, and there is also available home delivery.
Disney+. This company is a direct competitor to Netflix, especially in the US. Its subscription is actually cheaper than Netflix. Yet, they offer different content. Disney+ is more family- and children-oriented. The company compiles its library for family viewing by large.
Summing Up Netflix Business Model & Revenue Model
- Netflix has struck a cord with its customer base thanks to its unlimited subscription business model.
- It also managed to achieve great profitability. Similar companies cannot quite achieve Netflix’s volumes and lower CAC as Netflix has done.
- Even with unlimited subscription, Netflix manages to control the cost side due to a range of data-informed decisions. Netflix utilizes analytics to study viewing patterns and preferences based on demographics and user profile.
- Different subscription tiers, licensed content availability based on country, and its Originals are some of the ways Netflix ensures profitability while offering unlimited access to its resources for viewers.
FAQ: Netflix Business Model & Revenue Model
Netflix’s primary business model is a subscription-based model, offering unlimited access to a vast library of digital content for a monthly fee.
Netflix generates revenue primarily through subscription fees. It offers multiple subscription plans that vary in price based on features like video quality and the number of screens that can be used simultaneously.
Netflix offers three main subscription plans: Basic, Standard, and Premium. These plans differ in terms of video quality (SD, HD, 4K) and the number of screens that can be watched simultaneously (1, 2, or 4).
Netflix manages different usage patterns by offering tiered subscription plans and varying prices by country. This helps balance the cost of high and low-usage subscribers.
The key costs for Netflix include content production, content licensing, and technology development. These are necessary to maintain and expand its content library and improve its platform.
Netflix acquires new customers through targeted advertising and leveraging its strong brand reputation. Its Customer Acquisition Cost (CAC) is managed by maintaining high customer satisfaction and reducing churn.
Original content is central to Netflix’s strategy. It helps attract and retain subscribers by offering exclusive content that cannot be found on other platforms.
Netflix uses sophisticated algorithms to analyze user behavior and preferences. This data-driven approach allows Netflix to offer personalized recommendations, enhancing user experience and engagement.
The unlimited subscription model offers users the convenience of accessing a wide range of content without worrying about individual purchase decisions. It provides flexibility, ease of use, and a perception of value.
Netflix maintains profitability by utilizing data analytics to make informed decisions on content production and acquisition. It also diversifies its subscription plans and adjusts pricing based on regional markets.
Companies like Spotify, Scribd, Disney+, and Peloton have adopted similar subscription-based business models, offering unlimited access to their content or services for a monthly fee.
Netflix’s subscription model has significantly reduced the popularity of the pay-per-view model, as it offers a more appealing and cost-effective alternative for consumers.
Netflix has formed key partnerships with consumer electronics manufacturers, cable companies like Comcast, and content producers to expand its reach and enhance its content library.
Netflix’s pricing strategy varies by country to reflect local economic conditions and maximize market penetration. This approach helps balance affordability for users with profitability for the company.
Netflix ensures high user engagement and satisfaction through a user-friendly interface, personalized recommendations, high-quality content, and responsive customer support on social media and other platforms.
