Business Model of Netflix – How Does Netflix Make Money?

The business model of Netflix is a subscription-based  model that makes money via basic, standard, and premium subscription plans while offering access to stream series, shows, and movies on the Netflix streaming platform. Its business model is quite innovative. A renowned OTT(Over The Top) content provider,  Netflix provides media through internet streaming.

Netflix is an American over-the-top content platform and production company. Reed Hastings and Marc Randolph founded Netflix in 1997 in Scotts Valley and it is now headquartered in Los Gatos, California. Netflix incorporates a subscription-based streaming service offering online streaming from a library of films and television series alongside those that Netflix produces itself.

What is the Business Model of Netflix

As a streaming content provider that is specialized in entertainment has 209 million subscribers as of July 2021 of which 72 million users are from the United States and Canada. Netflix has its offices in Canada, India, Brazil, France, Netherlands, South Korea, Japan, and United Kingdom. It is also a member of the Motion Picture Association (MPA) that produces and distributes content from countries all over the globe.

To think of the company, it was founded in the year 1997 by Marc Rudolph and Reed Hastings. It was then known for providing the services which would be used by the people to rent some movies that they wanted to see on the DVD format. It would use the services of the Internet to make sure that happened without any trouble for sure. Netflix’s business model is profitable but it runs on negative cash flow because of the upfront cash paid for content licensing and original content production by Netflix.

The subscribers would be able to use the internet services and the services of the company to rent their movies as well as some of the online shows as well. The subscription base which is incorporated by the company is something which is considered to be very huge and it can be something that can be really helpful when it comes to the Netflix business model generating some money as well.

What does Netflix Business Model work?

To define Netflix, it can be said that it is a basic content provider which is used online and can be used properly to stream online movies and TV shows along with some of the other documentaries these days. This online streaming site has its own application and it can be accessible from some of the other connected devices as well. So, we can also say that it can provide all the services that people need to have.

Netflix defines its business model as-

Our business model is subscription based as opposed to a model generating revenues at a specific title level. Therefore, content assets, both licensed and produced, are reviewed in aggregate at the operating segment level when an event or change in circumstances indicates a change in the expected usefulness.

As an American Media Services Provider and Production Company, Netflix’s business model revolves around its subscription-based streaming service that comprises online streaming of a library of films and TV programs that also include those films that are also produced in-house.

The users will have to make sure that they are paying their monthly subscriptions to use the services which are provided to the people in the best way. Different types of content are provided on the online streaming sites and to access all of them, the users and the clients of Netflix will have to make sure that they can pay the money.

Also, there are the video formats that are available on Netflix such as HD and Ultra HD, and to access these video formats, some additional charges have to be paid to ensure that people can get the best options for Netflix.

Understand the Netflix Business Model Canvas

In the late 1900s, renting DVDs was a common business but was an expensive one too in the United States due to the high demands of the public.

It was in 1997 when software engineers Marc Rudolf and Reed Hastings realized that the charges demanded by the various companies for the DVD rental business were way too expensive. In 1998, they launched Netflix with the motive to deliver DVD by mail.

When only 2% of the Americans owned DVD players, the idea of delivering DVDs by mail became a game-changer in the business.

Netflix business model got expanded in 2007 with the introduction of streaming for binge-watching while retaining the DVD and Blu-ray rental business. The company expanded across the globe in 2010 with streaming available in Canada then Latin America and the Caribbean. In the year 2013, they entered into the content-production industry by debuting its first series House of Cards.

In the year 2020, they make US$25 billion in revenues. Let us now have a look at their business model canvas here-

1. Key Partners of Netflix Business Model

For channelizing its business model, Netflix depends upon different partners such as-

• Investors
• Content Owners
• Internet Service Providers
• Filmmaker Guides and Individuals
• Cinemas and Theaters
• Prizes and Film Festivals
• Influencers
• IP Holders
• TV Network Companies
• Google and Amazon
• Alliances with Smart TV Companies
• Alliances with the Gaming Industry

Netflix is one of the leading names when it comes to the platforms which provide online streaming services to people these days. To be honest, the company has managed to serve more than 190 countries in total.

The business model totally depends on the Target audience of the company. The more members are present in the company, the better it will be for the people for sure.

2. Value Propositions of Netflix Business Model

Having a huge customer base of over 195 million all over the world, Netflix’s business model idolizes some of the following points:

• The 24/7 streaming ability on the OTT platform with zero ads gives a superior edge.
• Unlimited access to HD and ultra-HD Tv shows, movies, and many other types of entertainment never fails to bore the users. Having a large number of partners allows the company to never fall short of content of any type.
• The contents can be accessed in any part of the world with the Internet. Though the membership is contract-oriented, it can be canceled at any point in time.
• Netflix has a very virtuous way of advertisements. It recommends content based on the ones the users have recently watched, which in a way compels them to view more movies and shows and eventually extend their plans too.
• Sharing of accounts is one of the rarest features provided by Netflix. The users share their accounts with anyone and entertain themselves simultaneously.

3. Customer Segments & Business Segments

Generally, the customer segments of Netflix include users who enjoy watching movies, TV Shows, and documentaries. Netflix also targets avid video content lovers who enjoy convenient delivery on their Smartphones and TVs.

Customer segmentation is done in three ways here-

• Micro-Segmentation- 2000 taste clusters
• User Segmentation (usage parameters)- Technology, Viewing behaviors, & browsing behaviors
• Macro-Segments/Ad Targeting (non-users)- Geodemographic, and other macros

More, the company has three business segments, which make them money in different ways. They are as follows:

1. Domestic Streaming

Having been found in the United States, this streaming plan is solely provided to the members of the States itself, and the revenues are collected from the monthly membership fees.

In 2015, the numbers went on to increase from 44,738 to 54,750. This indicated an increase in the costs too. The contribution margin, i.e., the variable costs subtracted from the total revenue, sky-scraped to 37%. Such a contribution margin was noted to be the most profitable plan as a short-term plan.

2. International Streaming

The revenues from this streaming plan are collected from the monthly membership provided to the patrons residing outside the United States.

As of 2017, the revenues were confirmed over $5 billion because of the international extension plan in 2015. The contribution margin was noted to be a positive 4%, which was negative in 2016.

3. Domestic DVD

Well, it is often said that we should never forget about the times when we started. The same has been done by Netflix.

Starting with renting DVDs, the OTT platform has not forgotten about its roots and still collects monthly revenues from DVDs by e-mail. Being the company’s oldest form of revenue, the rental DVDs still provide a considerable margin.

What’s more intriguing is that the platform has separated the movies, TV shows, and documentaries for kids and adults to promote a family-friendly environment.

We will discuss this in our next section while understanding the revenue stream that helps Netflix make good money-

4. How does Netflix Make Money? – Netflix Revenue Streams

The main revenue line of Netflix is its subscribed users who opt for different subscription programs for enjoying the streaming of Netflix shows.

In the year 2007 Netflix decided to convert its business structure from mail-in-system to streaming content based on subscriptions. Let us now understand how it has helped Netflix in making money-

1. Subscription-based Model

Netflix has more than 209 million subscribers from over 190 countries that have been one of the prime factors behind their revenue generation.

The three subscription plans that Netflix offers are-

Basic Plan

In this plan, Netflix content can be enjoyed in the standard definition

Standard Plan

This Netflix plan lets users enjoy streaming in high definition

Premium Plan

By opting for this subscription plan, users can enjoy the streaming of videos in ultra-high definition

The pricing of these plans varies with the countries.

2. Important partnerships

Netflix also builds alliances with a wide range of movie producers, writers, filmmakers, and animators for receiving content and legally broadcasting the content. It also has partnerships with Internet Service providers and all of this helps it in making money.

In addition, owners of Netflix make money via licensing Netflix-owned content, product placement, DVD rental, etc.

5. Netflix’s Key Activities

Different activities that Netflix performs include hiring and retaining software and tech geeks, plus it is also involved in maintaining and optimizing its platform on the web, mobile applications, TV apps, etc.

• Netflix is also associated with producing, licensing, and acquiring its original content for expanding the Netflix video library. Netflix further develops a pricing business strategy for the Netflix subscription model to ensure cost-effectiveness and channelize new customer acquisition.
• It is involved in making a roadmap to enter into the new market and optimize user recommendations for retaining the existing customer base. Business model Netflix is additionally responsible for building local communities and economies to support the development of Netflix’s local original content.
• Building and securing a partnership with studios and content production houses, plus negotiating profitable deals with Studios, Movie production houses, and content providers are some other key activities that are not only considered as the value proposition of the brand but also understood as key resources to optimize revenue streams.

Finally, Netflix activities are also associated with complying with the laws as per the State or Region, or country to maintain compliance to censorship. Its business model is also involved in supporting disadvantaged communities and other ideological issues concerning their customers and society at large.

6. Building Unique Networks & Channels

Netflix has its own unique way of building and establishing long-term networks. Knowing about the desires of their customers, the company knows how to build an effective relationship with their patrons.

They provide customer support via e-mails, text, websites, and even through calls. It invigorates its networks with social media platforms like Instagram, Facebook, and LinkedIn to amplify its customer base and keep the target audience updated about the latest releases and promotions.

Besides these, Netflix also invests in online and offline advertising. The eulogization from their own customers attracts a lot of new ones as well and largens the numbers of users.

All in all, you can access Netflix from one or more of the following-

• Online streaming through the website
• Streaming through Mobile apps
• Streaming on TV Apps and Gaming consoles
• Mail delivery for DVDs

7. Customer Relationships of Netflix

Different factors upon which the customer relationships of Netflix is based are-

• Self-Setup Made Easy
• Exceptional Customer Experience
• Online Live Chat Services
• Social media
• Netflix Gift Cards
• Recommendation system
• Ensure transparency
• Guide through joining step

8. Netflix’s Cost Structure

Different elements that are integral to the cost structure of the Netflix business model are-

• Cost of purchasing rights establishment (TV shows and movies)
• Subscription maintenance cost
• Cost of producing movies
• Paid-Connection deal with Internet Service Provider (ISP) such as Comcast to stream Netflix data at high speed
• Cost for providing personalized recommendations, R&D, and artificial intelligence
• Infrastructure (data centers) cost of streaming content
• Employee salary distribution (customer service, Engineers, etc.)
• DVDs and mail-related shipping costs, etc

9. Trends Driving the Exponential Growth

As of 2021, the number of Netflix users was 209 million, which is a rapid increase from 2015 (70.84 million users).

Nowadays, the craze of Netflix has increased in youth so much so that the ones not having an account of the same regret and become jealous of their friends.

Now, what are the trends that allow this OTT platform to grow so much? Following are some of the points: –

1. Technology

A wide variety of content is available to watch seamlessly on different devices concomitantly.

2. Comfort

You can have a lavish time at your home watching any movie, web series, etc., sitting comfortably at your home with some popcorn and soft drinks. With Netflix, there is no need to go out and spend in theatres and cineplexes.

3. On-Demand

The feature of watch anytime/anywhere and cancel anytime provides the rostrum an upper edge over their rivals.

4. Low-Cost Subscription

The filmy geeks won’t deny that the subscription fee of Netflix is not a high one and a simple structure of payment. The company also looks after the privacy and security of the users.

5. Data-Driven

Netflix is not only used for recommendation purposes but is also used pro-actively to create content that fits personal preferences.

6. Uberization of the Service Economy

Uberization means benefitting more options on how to overwhelm the minds of the patrons. In the past years, especially in India, TV serials have fixed the schedule of the public on watching the same shows at the same time every day.

With Netflix, the case was reversed, having given the users to watch anything with great flexibility and optionality. The growth of digital nomadism and the self-employed/freelancer has transformed our habits and the way we consume media dramatically instead of the opposite. For media companies in this situation, on-demand has become a dominating economic strategy.

Conclusion

So, these are some of the important details that people need to know about Netflix. We hope that the business model can help you out in understanding how it can make money.

Netflix business has become the most prominent player in the media and video streaming industry which is also inspiring many other players around the world.

The innovative strategies of Netflix proved that just establishing a business model doesn’t help in monetizing those strategies too. It is more about the companies that allured their target audience with their content.

In fact, the more a company adds value to its business models, the more it creates an ecosystem for the organization to grow. Companies like Netflix create a user-friendly as well as a cost-friendly ecosystem with their business models paying attention to the fast growth of technology. The evolution of tech put to use in the right way has helped Netflix evolve in recent years in the most effective way.

What are your thoughts about the Netflix business model? Do you find the subscription business model the prime reason behind its success? Share your thoughts with us in the comments.

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