Case Study: Netflix
By allowing subscribers to rent however many movies they wanted a month and not charging late fees, Nettling offered the same service as competitors but with a simpler approach from the customers’ viewpoint; in addition, the lack of a physical store meant the customers’ options weren’t as limited. As well as their pricing plan, they offered a review system that customers’ recognized as making it more likely that their preferences would be reflected in recommendations from Nettling.
Nettling eventually adopted a survey system to market movies directly to customers that Increased customer awareness of lesser-known films. That simpler, more direct service allowed Nettling to grow until It was a direct competitor to larger firms Like Blockbuster.
In order to continue being competitive, however, Nettling had to continue innovating and this is where their strategy became more transformational in its innovation. As long as people had to wait for their DVD’s to be delivered, there would always be a market segment that was more likely to use Blockbuster for more immediate rentals.
Nineteen’s innovation in this regard was the Video on Demand service (VOID). With this service, any subscriber could watch any available film/ elevation show instantly from the comfort of their home without even having to drive to a Blockbuster. In hindsight, Blockbuster could have adapted better to the rise of Nettling.
Initially Blockbuster dismissed the Idea of online retail all together, saying that It served a “niche market” and that there wasn’t enough demand for a mall order rental service. Their 2002 annual report didn’t even list competition from Nettling as a risk.
While Blockbuster did adopt their “Blockbuster Online” service In 2004, the service suffered from serious losses stemming from their advertising costs. When hey finally eliminated late fees in 2005, it cost them almost $700 million without an offsetting rise in rental revenue. Looking at these facts, it becomes clear that Blockbuster’s first mistake was in denying that there was even competition from Nettling. Had they responded sooner, they may well have been able to defend themselves.
In addition, they could have attempted a rating and recommendation system similar to that used by Nettling.
And lastly, they could have pursued deals with DVD player manufacturers the way that Nettling did. Compare Blockbuster’s and Nineteen’s profit models. How might the differences affect the respective company competitive position? Netters profit model was originally very similar to traditional video rental businesses. Customers were charged a fee per movie plus a sloping fee.
However, they soon moved Into a prepaid subscription model where subscribers could rent four movies a month. This soon became unlimited DVD rentals and allowing schedulers to Keep tenure movies at a time.
I Nils pricing model attracted customers who were unhappy with the high cost and limited selection associated with stores such as Blockbuster, who continued to charge per movie as well as emending late fees. List each major shift in Nineteen’s strategy. What assumptions might they have used in each stage? The shift to a subscription based plan and then to unlimited DVD rentals was the first major shift in Nineteen’s strategy.
There assumptions at this stage were based off of customer feedback, namely about cost.
Customers were unwilling to pay similar prices to retail locations when there was also a shipping delay involved. The shift to a subscription plan mostly eliminated that concern, as they could now have a movie at home while waiting for the next one. The shift to unlimited rentals allowed hem to make the service simpler while increasing the value of the subscription. The next shift was when they adopted their recommendation system. Nettling realized that half of the movies they were renting out were new ones, which were also the most expensive to offer.
By recommending movies based on surveys subscribers took, they were able to rent out older, cheaper movies and bring in greater profits. Also integral to this system was a filter to prevent the system from recommending a movie that was out of stock, preventing a customer from becoming frustrated with the system. Nettling negotiated direct revenue-sharing agreements with major studios where instead of paying standard unit prices per DVD, Nettling paid they studio a fee based on how many times a title was rented in a given period.
Sustaining innovation often becomes greater than customers need, eventually too expensive or too good compared to competitors. With this in mind, Nineteen’s VOID is a disruptive innovation.
It changed video rental from a costly DVD rental system to a cheaper (for the customer) and simpler system where the customer doesn’t even have to get up from their couch.