How growing domestic marketing costs could create problems for Netflix

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Netflix on a laptop. Image: sitthiphong/Shutterstock

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Netflix is spending a lot more on marketing to retain its place as the world’s number-one streaming service.

The cost of adding domestic subscribers on its US home soil has shot up in recent years for Netflix, reaching $100 per net new subscriber, according to research from Ampere Analysis.

Acquisition costs for domestic subscribers have increased significantly in recent years – between 2013 and 2015, the cost of a net new domestic subscriber stood at approximately $60.

Adding international subscribers does not seem to be as expensive for the company, as the cost has remained relatively flat at around $40 to $45 for each new customer added.

Everyone knows that Netflix spends big on content, and its marketing budget is a fascinating metric to examine.

Ballooning budget

According to Ampere Analysis, between 2014 and 2015, Netflix spent $0.3bn per year on domestic marketing, while 2017 saw a spend of $0.6bn in the same area.

14pc of Netflix’s expenditure goes towards marketing costs and it spent close to $1.3bn on advertising its streaming products, split roughly between its domestic and international markets.

Global expansion is obviously a reason for an increased marketing spend, but some analysts are questioning whether the increase is proportionate. In 2016, Netflix spent just under $1bn on global marketing; five years ago, the company was spending around $0.5bn.

Rising marketing spend combined with falling subscriber growth means that it takes Netflix 11 months to achieve payback on net new domestic customers. In comparison, international subscribers cover their marketing costs within four months.

This lengthening of the payback period as well as rising content costs could explain why the service is testing a premium price tier in several countries.

Analysts at Ampere said that if international markets go the same way as Netflix’s domestic market, a further rise in subscriber acquisition costs could rise to a fifth of the company’s total costs.

Real challenges ahead

Richard Broughton, research director at Ampere Analysis, said: “With declining domestic growth rates and spiralling acquisition costs, Netflix faces a very real set of challenges if it is to continue to command such a strong position.

“Our research shows that while Netflix can continue to enjoy relatively low acquisition costs for international subscribers and a buoyant market keen to embrace SVoD [subscription video on demand], it cannot afford to take its eye off the ball in the domestic market, even momentarily. Its ability to grow ARPU [average revenue per user] will be critically important to manage long-term growth, domestically and abroad.”

Netflix on a laptop. Image: sitthiphong/Shutterstock

Ellen Tannam is a writer covering all manner of business and tech subjects

editorial@siliconrepublic.com