As absurd it may sound, but the cable TV is being slowly pushed towards obsolesce. Cable TV, which was considered a phenomenon, is being replaced by Netflix. It started out in 1997 when Reed Hastings and Marc Rudolph put it out as a rental for DVDs online. Over the course of years, the Netflix business model evolved, and now you can stream movies and TV shows on Netflix.
As of now, Netflix outranks cable TV in the United States of America. This particular statistic is evidence of the gradual demise of cable TV. You could say that Netflix was the last nail in the coffin of the beloved cable TV we once loved.
In the recent years, the subscribers of Netflix have grown exponentially. The subscriber base is so large that it accounts for more than a third of the entire traffic on the Internet during peak hours. The success of Netflix has everyone talking. Not only did they earn US$ 1.21 billion in 2018 fiscal year, but they also generated US$ 15.8 billion in the same year. Critics and users all want the answer to this golden question: how does Netflix make so much money?
Before we can answer that question, we need to give you important insight on how the Netflix business model operates. The success of Netflix is rooted in its business model.
How does the Netflix Business Model Operate?
Netflix is not only home to movies and TV shows, but it also has documentaries and other videos-on-demand. It uses a subscription model to earn money. The customers pay a monthly subscription to stream different kinds of visual content hosted by Netflix. Moreover, the US entertainment giant provides DVD rentals of movies and shows. They supply the DVD to their customers who need them.
The quality of the content depends on the type of subscription that a user pays for. The content is available in either SD, HD, or Ultra HD.
The Netflix Business Model
Netflix business model is an exciting prospect that has evolved over the years. Now that they have established their dominance over other streaming services, it is safe to say that their research and development has paid off.
The Target Audience of Netflix
Netflix currently leads as the largest internet television network with over 100million subscribers. They have subscribers in over 190 countries who stream 125 million hours of movies and TV shows in one day.
Netflix targets customers regardless of their gender. Moreover, their customers are between the ages of 17 to 60. Furthermore, most customers belong to households that have annual income of $30,000 or greater. If you study the statistics, you will realize that the subscribers belong to different lifestyles. This disparity shows that Netflix uses psychographics, not demographics, when targeting prospective customers.
There are three types of people that Netflix is targeting with their product. They are:
- Users that are too busy to go out and shop for movies and shows
- Consumers that love movies and who frequently rent movies
- Users that want the best bang for their buck
What Value Does Netflix provide to its Customers?
Netflix has been able to climb the ladders of success, all thanks to its huge database of movies, TV shows, documentaries etc. Moreover, to add more value to its service, Netflix has incorporated a smart suggestion algorithm to its streaming service that suggests new movies and shows according to the likes and watching habits of the user. It is one of the best suggestion algorithms that provides personalized suggestions.
Furthermore, Netflix is well-known for their no advertisement policy. No ads mean that the users can enjoy their favorite shows and movies without any disturbance. This makes Netflix a great option if you love binge watching.
Netflix has a wide array of supported devices. They currently have the best range of supported devices that includes PCs, TVs, mobile phones, and video gaming consoles. Last but not the least, Netflix promotes binge watching by releasing entire season of shows instead of weekly episodes. The viewers no longer have to wait days before they could see another episode of their favorite show. With Netflix, the users can view the entire season of shows in one sitting.
How Does Netflix Business Model Make Money?
Subscriptions fees is the main source of revenue for the US streaming service. Subscribers pay Netflix to get access to the huge database of movies and TV shows. The subscription fees pay for the expenses that are incurred by the company.
As Netflix does not host advertisements, subscription is the only significant source of income. The streaming service offers three different plans to it users. Each plan offers something different and has a different monthly price tag attached to it. The three plans are:
- Basic – the content can only be streamed in SD
- Standard – the content can be streamed in HD
- Premium – the content can be streamed in Ultra HD
The subscription fees of each plan varies from country to country. The DVD rental service operates on a similar model. The monthly subscription in this case depends on the number of discs that are rented at a time and rented for the month. The online subscription and the DVD rental services are different and cannot be combined together for a better deal.
Expenses That Are Incurred By Netflix
While Netflix has been making loads of money in every fiscal year, most of the money that is made is reapplied in the business to pay for various expenditures incurred over the fiscal year. These costs include licensing cost of movies and TV shows, production cost of Netflix original titles, marketing, research and development, technology expense and other costs.
These expenses eat a huge chunk of the profits that are made by the streaming service. This is one of the reasons why the executives at Netflix are contemplating whether they should introduce advertisements. For example, they spent about US$ 8 billion in 2018 for content generation.