The Netflix factor

24 Dec 2010

After transforming the movie rental industry in the US, Netflix is putting all its marketing efforts into the growing video streaming business.

The idea for California-based video streaming company Netflix came about when CEO and co-founder Wilmot Reed Hastings had a US$40 late fee on the movie Apollo 13 that he’d rented.

It was six weeks overdue and he had misplaced the cassette. He was so bothered by it that he didn’t want even to tell his wife. Later he realised, on his way to work out, that the gym had a much better business model: you pay US$30 or US$40 a month and exercise as little or as much as you want.

And so in 1997 Netflix was born – a company that transformed the film rental industry by providing flat-fee unlimited rentals without due dates, late fees, shipping or handling fees, or personal-title rental fees.

“Netflix changed the way Americans rent movies with DVDs and is doing the same again now with live video streaming,” says Steve Swasey, vice-president, corporate communications, Netflix. “DVD players had just started selling in the US in March 1997 so not only was the company trying to get people used to them, but also to the idea of renting movies via mail.”

In October of 1997, Netflix started executing its billion-dollar business plan with only US$2m in seed funding. Now it has 600 salaried employees and carries more than 20,000 movie titles, which can be streamed to 200 network-ready devices, having started with PC only three years ago.

“Netflix is an internet-exclusive company with a unique delivery method. We deliver from distribution centres in multiple sites. We still ship DVDs but all our marketing efforts are put into streaming now. This is the growth area – it’s well documented that streaming is the future. Currently, 65pc of our members are watching instantly.”

Famous red envelope

One of the ‘wow’ factors of Netflix’s proposition over the years has been its famous red envelope. From the outset, Reed Hastings knew that if the company didn’t find a way to work within the US Post Office’s systems, it wouldn’t succeed. He spent hundreds of hours in regional postal centres observing and asking questions.

The result was an envelope with a design that was critical, not only for the customer experience but also for its operations and business model. It had to meet several criteria, from effectively holding and protecting the DVD to transforming into a return envelope. Above all else, the envelope was Neflix’s ‘product’, the item that customers would touch and see, so it had to have all the key features of a marketing piece.

There have been at least 150 iterations of the Netflix envelope since 1998. It evolved so many times as Netflix tested and learned what worked best – for example, one change was a little cut-out on the outside of the package that allows staff check the discs back in by ‘seeing’ the inside disc barcode without having to open the package.

Aside from the envelope, Netflix has used traditional vehicles for advertising and marketing.

“As a mainstream consumer company we use TV, the internet, direct mail, free-standing inserts in newspapers and public relations. We spend about $200m a year on advertising. However, word of mouth is still the most important way of generating and keeping business. Netflix is one of those brands that people say they love – for example, if they see someone wearing a branded T-shirt, they will say, ‘Oh I love Netflix’,” says Swasey.

“As a brand, Netflix achieves very high satisfaction ratings. It is the No 1 internet company for customer satisfaction, according to the American Customer Satisfaction Index and for 10 out of the 11 Fore See Results surveys which come out twice a year it has been No 1 in terms of customer satisfaction.”

Regarding the focus of Netflix’s advertising, Swasey says it deals very directly with the customer benefits – that of the ability to watch instantly and have unlimited movie enjoyment. A number of TV ads feature ‘The Wrightnow Family’ – for example, in one ad a man comes selling popcorn and the dad of the family invites him in to watch a movie ‘right now’.

PR has also been an important part of Netflix’s marketing strategy.

However, not all of it has been positive. The company launched in Canada in September with a splashy event on a Toronto street that attracted dozens of onlookers. But many of those in the crowd were actors who were paid to be there. They were then interviewed by journalists who didn’t realise they weren’t real consumers who were genuinely interested in the product.

Swasey says Netflix apologised for the misunderstanding and doesn’t believe the incident had any ill effect on the brand. In fact, within hours of the event, Swasey addressed the matter on the company blog in a post entitled ‘We blew it’. “Simply put: we blew it,” he wrote. “We didn’t intend to mislead the media or the public, and we can understand why some have raised questions. We’re sorry that our misfire has given Canadians any reasons to doubt our authenticity or our sincerity.”

Web power

The internet has been an extremely powerful tool for Netflix from a marketing perspective. “The internet enables us to be much more predictive and more accurate about what people will want than a video store. There are 3 billion ratings in our database from customers,” says Swasey.

“For example, if you gave It’s Complicated five stars, Bridget Jones’s Diary five stars and Avalon three stars, we can compare you with all the other people who gave the same ratings to the same films, see what they chose and rated highly otherwise and can predict what you will want to watch. The predictive algorithms are extremely innovative and highly accurate, but also very important.

“With 20,000 titles available, how do you choose what to watch otherwise?”

When someone joins Netflix as a subscriber they are asked to fill out a quick survey, outlining how often they watch romantic comedies, children’s movies and so on, and this forms the basis of the service provided. People can have a free two-week trial in the US and a month free in Canada. After this they pay US$8.99 a month to subscribe, no matter how many films they decide to rent or receive via streaming.

The attractive price and mass-market appeal means that Netflix’s customer profile is quite broad.

“Netflix’s customer base looks like America. There are single parents, college kids, grandparents. The common thread is they all have a credit card and an internet connection. There are 90 million homes in the US that fall into this category and we have 15.9 million as customers.”

Recently there has been much speculation that Netflix might be considering entering markets other than Canada. According to Swasey, however, there will be no imminent announcements about international plans.

This article originally appeared in Marketing Age, Volume 4, Issue 4, 2010