Skip to main content

Last week I wrote about how the founders of Netflix guided their company in a way that we, as small business owners, can learn from.

Now let's look at the pricing model for their internet video streaming service. It's cheap. It's so cheap, as a matter of fact, it took a very long time and required a huge number of subscribers just for Netflix to break even.

For starters, your first month is free. That's a great hook. Since it's likely you already have the Netflix user interface under your nose – after all, it's available on over 1,000 different internet capable devices – trying it out for a month is no risk.

After your first free month, the regular fee is $8. That's perfect pricing. First, it is so low, you can immediately justify it as equivalent to the cost of a new movie release rental or two a month. It is also about the same cost, or less, than your cable provider's movie channel or pay per view fees. Eight dollars is enough to take seriously, but not enough to worry about.

I was an early adopter of Netflix and I wasn't exactly thrilled with the selection of titles they offered at the time. But, between the kid's shows and a movie here and there, I wouldn't have dared cancel – it was still a great deal. So they priced both for value and competitively against existing options. Brilliant.

But though this pricing model was brilliant, it had a catch: In the absence of a large subscriber base, how could Netflix afford to license the latest greatest movies and TV shows? And without the latest and greatest movies and TV shows, how could it attract a large subscriber base?

Netflix knew that the product had to come first and so, over time, they added superior content licenses from major movie studios and production houses. Some of these were multi-million, multi-year deals and some were small and exclusive. As the content improved, the number of subscribers increased and the consumer's value proposition for their $8 a month became stronger and stronger.

So what can a small business learn from Netflix's moves? To start, the product comes first. It doesn't mean you need to hide away in your basement until your product is flawless and has every feature and benefit imaginable. But you need it developed enough to offer value to at least the early adopters. Then, after you launch, the product development continues. Forever.

Also, you can learn the power of the impulse price point. At $8, Netflix is hard to beat and they are holding that price in spite of the fact that many people, like myself, would likely be willing to pay more. The company seems to be doing this for market share reasons – keeping the competition at bay as they grow around the world. There is always an argument for a more profitable business with fewer customers, but Netflix has no intention of being a boutique service.

Now, in spite of its recent successes gaining video distribution rights from some of the biggest companies in the business, like Disney, the company is also delving deeper by commissioning their own movies and TV shows. Most notably, House of Cards and Hemlock Grove, and more recently, the new season of the cult favourite, but Fox castoff, Arrested Development.

But why would they go to all that trouble when they can just keep licensing other studio's hard work? A few reasons: Video streaming is not patented. So, in spite of their brand recognition and existing market share, other companies such as Amazon – with its Prime instant video – are hot on their trails. By developing its own content, the company is leaving their competition behind by offering popular productions that can only be seen by sticking with Netflix.

Also, when you consider the high cost of a single season of a television series on DVD, the consumer could pay for about four or five months of Netflix monthly fees instead. So now, that $8 is looking like a steal.

Furthermore, Netflix releases the entire season of each of their exclusive shows all at once, so bingers (like me) can feast on multiple episodes, back to back, at their convenience. And bonus: There aren't even commercials to fast foward through, as is the case with your PVR.

But the most fascinating competitive advantage they have is their staff of hundreds of engineers and scientists who create not only a back end infrastructure to show movies, but also a host of complex data-mining algorithms that monitor who watches and likes what. This is real-time product consumption data that is unparalleled in the consumer world. Knowing so much about what their subscribers watch, and how they rate what they like and dislike, builds a powerful prediction tool that leads to certain styles of productions being married with certain actors and directors. While this doesn't always guarantee success, it sure is a huge advantage.

Your small business likely won't be hiring scientists and engineers to predict what you next hot product or service offering is going to be. However, like many aspects of Netflix's success, it can teach us a valuable reminder: The customer is always right and the faster and more accurately you can give them what they want, the more successful you will be. You might not have an algorithm, but you do need to be listening.

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.

Join The Globe's Small Business LinkedIn group to network with other entrepreneurs and to discuss topical issues: Our free weekly small-business newsletter is now available. Every Friday a team of editors selects the top picks from our blog posts, features, multimedia and columnists, and delivers them to your inbox. If you have registered for The Globe's website, you can sign up here. Click on the Small Business Briefing checkbox and hit 'save changes.' If you need to register for the site, click here.

Follow us on Twitter: @globesmallbizOpens in a new window

Report an error

Editorial code of conduct

Tickers mentioned in this story