It may be hard to imagine what Netflix – a public company valued at $12-billion, trading at a multiple of 74 times next year’s earnings – can teach your small business. But from channel development, exclusive licensing rights to technology, original content, to blowing up their own business model, there’s a lot to learn from the streaming service, and plenty you can apply.
First, like you, Marc Randolph and Reed Hastings, the co-founders of Netflix, came up with a business idea they thought was unique enough to attract customers and build a profitable business. They offered DVD rentals, delivered to your door with no late fees. This was unique and you can see why the entrepreneurs got excited. The Netflix service offered reprieve from hopping out to your local video store, and you could watch your “flix” at your convenience without worrying about returning the movie by a prescribed date and time. Netflix didn’t need to build, staff and maintain stores in every neighbourhood – it was all centrally located and warehouse-based. The post office and courier companies did the rest.
With this competitive advantage, they took on huge competitors like Blockbuster Video and began building market share. It wasn’t easy, changing customer habits, even if for the better. Communicating the benefits of a new product or service takes time, money and creativity.
What can you learn from this? Building a better mouse trap – in this case, a movie rental service –is one thing. Acquiring and keeping customers is quite another. You can be David and beat Goliath, but an “if I build it, they will come” attitude will get you nowhere, fast. You’d better have the capital and other resources to motivate your future customer base to adopt you.
Next, Netflix admirably launched an Internet streaming video service. Why was this admirable, you ask? Because Netflix knew at the time they launched the streaming service that they would be cannibalizing their existing video delivery business. But because they believed so strongly that Internet video delivery was to be a meaningful part of the future of video consumption, they were willing to risk their existing business.
I love that. They were so right. I see many companies turn their back on innovation because it threatens an existing product, service or business model. The truth is, if you don’t dismantle your own product, someone else will, and then you’re left with nothing.
So what’s the small business takeaway? Neither the past, nor the current state, equals the future. Even if you can’t always be on the cutting edge, your business and product offering must evolve. And while being two steps behind may still be highly profitable and ultimately less risky, you can’t bury your head in the sand and assume business as usual is sustainable.
It is not just that Netflix dove head first into video streaming, it was also how they did it.
From a consumer’s perspective, they made it easy. If you own a computer, smartphone, Nintendo Wii, Microsoft X Box, Sony Playstation, Apple TV or just about any mass produced Internet capable media device, you can get the Netflix software/app for free. Sign up to the Netflix service, pay a modest $8 per month and you’re given access to thousands of movies, TV shows, music concerts, documentaries and more.
What’s notable here is that they correctly avoided the temptation of creating a Netflix set top box – a piece of hardware they could sell you to interface with their service. Instead, they added the service to equipment you already owned. So trying the service was free of complications to experimentation because the service was right under your nose, as soon as you decided to give it a try.
What can a small business learn from this approach? Make it as easy as possible for the customer to try your product or service. Netflix partnered with dozens of hardware providers so that their product was ready to serve you, the minute you expressed an interest.
Furthermore, being able to access the streaming service from the gaming and Internet hardware was a low-cost value add for the hardware provider. Once upon a time, no one cared if their Nintendo Wii could be used to access Netflix – now, it’s practically a requirement of Internet capable devices of all kinds.
I’d call this a win-win-win scenario. Netflix gets broad distribution of its product and the “branding by association” benefit of being partnered with Nintendo, Sony, Apple, Microsoft and others. The hardware provider gets another feature to make its customers happy. The end users (you and me) get instant access to Netflix interfaces on our choice of devices, for free, in an easy to use format.
Next week, in Part Two, we’ll explore how Netflix’s pricing strategy, use of exclusive rights licensing, and insistence on creating their o n original content, can guide aspects of your small business to maintain a competitive edge in a world of capable competitors.
Special to The Globe and Mail
Chris Griffiths is the Toronto-based director of fine tune consulting, a boutique management consulting practice. Over the past 20 years, he has started or acquired and exited seven businesses.
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