What Startups Can Learn From Netflix

Netflix co-founder and CEO, Reed Hastings, launched Netflix in 1997 out of a personal frustration with late fees. Now, 16 years later, late fees for movies are obsolete and Netflix’s UVP has changed in accordance with the times. Today, it’s not about late fees. Consumers expect DVD rentals without them. And Netflix is pushing their streaming service. It’s an interesting move and one of the ways they’re remaining relevant.

So what can startups learn from the company behind the red envelopes? A lot, as Netflix has fought off challenges from many rivals and emerged an even stronger company.

Read on to see what you can learn from them.

Adaptation

The format in which people watch movies is changing. Video tapes are long gone and DVDs now reign.

But how much longer will that be the case?

With the advent of mobile devices and smart TVs, more and more people are getting their music from the cloud. And Netflix is leading the charge. It’s not cheap for them, either, as they’re estimated to be spending around $1 billion annually for exclusive content.

The decision to invest a significant amount of time and money into streaming is not an easy one. Netflix itself was a disruptive technology; no one at the time was offering DVDs by mail and it wasn’t possible years earlier with video tapes. What they’re doing with streaming movies is positioning themselves against any disruptive startup or competitor that may try to make a play for their customers.

And Netflix has been streaming movies for a number of years. They first offered streaming in early 2007 and it’s grown steadily, now accounting for a third of all North American bandwidth. By entering the market early, they’ve been able to accumulate six years of knowledge about the streaming movie business. This is a big advantage.

And so far, their endeavors into streaming have paid off. At the end of the third quarter in 2012, Netflix had 25,101,000 streaming customers in the US.

What does it require to have the foresight to know that customers will want something? I’d say three things:

  • A great CEO and team
  • A solid understanding of the market
  • Vision

Netflix has all three. Anyone who bets against them could be making a huge mistake.

Lesson to learn:

Be proactive. Don’t let inertia prevent you from adapting to a changing landscape. Be Netflix, not Blockbuster.

Culture

“You can’t build a differentiated product without building a differentiated culture.”

Aaron Levie

Research any top performing company, and you’ll find an emphasis on culture. Culture is key for every high-performing company.

Each company is made up of humans. Yet there are many companies that treat each employee as a tiny part of a larger machine. Humans have thoughts, moods, and emotions; and if they’re neglected or belittled by their employer, their work will suffer. And when their work suffers, the company will suffer, no matter how big the company is. One upset employee can spread a bad attitude to hundreds of other employees or customers.

So it’s worth researching this company’s culture to see how they get the best out of their employees.

If you haven’t already checked out Reed Hastings’ slides on Netflix culture, you should take some time to do so. There are a lot of slides, and it would be unfair if I tried to sum up all of them in a paragraph. So I will leave it up to you to read them. Here are the main points I took from them:

  • There are actual company values and nice-sounding company values. The actual company values are shown and proven by who gets promoted or released. They are demonstrated by the behaviors and skills that are valued in fellow employees. Netflix values these nine behaviors and skills:
  • The people who exhibit these nine values are the ones who get hired and promoted within the company. What are your company’s values?
  • The Keeper Test that every manager asks:
    • “Which of my people, if they told me they were leaving, for a similar job at a peer company, would I fight hard to keep at Netflix?”
    • The people who would fit in the “other” category are let go without any effort to keep them, in order to open a slot for a star employee.
    • This “Keeper Test” question reminds me of a quote about hiring and retaining the best employees – If there’s any doubt, there’s no doubt.
  • I love slide 27 because it provides a great indicator of how the company values an employee. The answer to the question posed can provide a lot of insight for a worker.
  • Limited loyalty is important for Netflix. Be loyal to employees, and it’s fair for the company to expect loyalty back.
  • “The best managers figure out how to get great outcomes by setting the appropriate context, rather than by trying to control their people.”
    • When talented employees do something dumb, managers shouldn’t blame the employee. Instead, they should ask themselves what context they failed to set.
  • What’s an outstanding employee at Netflix? One who gets more done and costs less than two adequate employees.
  • “Our model is to increase employee freedom as we grow, rather than limit it…”
  • “Great Workplace is Stunning Colleagues.”

By setting these rules, Netflix has guiding principles on which to base their personnel decisions. If you don’t have rules or principles in place, things become arbitrary, and each employee is treated differently. Have some guiding principles that all employees are aware of, and it’ll make some decisions much easier.

Lesson to learn:

“Either you define your culture or it will define you.”

Hiten Shah

Partners

In September 2001, a relatively unestablished company partnered with an established company. I still remember first hearing about Netflix (unestablished) from Best Buy (established). At the time, I thought Netflix was a scam and the movie equivalent of Columbia House. Netflix just seemed too good to be true. But I knew that the established company, Best Buy, wouldn’t be partnering with a sketchy company. It’s the established company that gave me assurances about the unestablished company.

Here was the partnership:

Netflix and Best Buy partnered for a co-branded offering. There were advertisements online at bestbuy.com (shown above) and in all of Best Buy’s 1800 retail stores. As an example of their presence in retail stores, they placed ad cards in boxes of newly purchased DVD players.

Did it work? According to Reed Hastings, yes. He has called the partnership with Best Buyone of our most important and successful partners…”

What’s interesting is that, at the time of this writing, Netflix has a market cap of $5.63 billion. Best Buy’s is $4.80 billion. Times change.

Netflix also set up an online affiliate for marketers and anyone wanting to make money through promoting Netflix. This helped spread Netflix through various online campaigns.

By the way, if you use KISSmetrics, you’ll be able to see which channels your most profitable customers come from using the Revenue Report.

Lesson to learn:

Your brand cannot reach everyone. Partners can help you access channels that are very expensive or otherwise difficult to attain. Approach potential partners with an open mind, and remember that partnerships must benefit both parties.

Testing

Seth Godin has a great post on his blog about the culture of testing at Netflix. There have been others who have documented the array of elements that Netflix tests.

Testing is important because if you want to optimize your business, you’ll need to test. There may be more revenue waiting for you, but you’ll never know it if you don’t test.

You should always be testing. When you get the results of a test, you can learn from them.

For example, if this was your homepage headline:

We Sell the Best Widgets

and if you change it to this:

Order Now and Get Free Shipping

and get a bump in conversion rate, you’ll know that people like free shipping. You can analyze it further and then try different tests, keeping those results in mind.

If you’re looking for tips to help you achieve a high conversion rate, check out this KISSmetrics blog post.

Lesson to learn:

More testing can mean a higher conversion rate, which can mean more revenue. You wouldn’t turn down an opportunity to get more revenue without paying for it, would you?

Enticement

Every election has an “undecided” group.

There are always people who, despite an unlimited amount of information and endless news about the candidates, still cannot decide who they prefer.

Similarly, businesses have an “undecided” group. Some call them “fence sitters.”

Netflix had a lot of these at one point. Curt Finch explains:

“Netflix was working really hard in 2001, trying to figure out how to get “fence sitters” off the fence. Netflix knew they had an offering that was so much better than Blockbuster’s, yet they couldn’t figure out the trigger that would move the customer from simply recognizing that Netflix was an interesting, cool deal, to actually using Netflix. They struggled for two or three years to find their trigger.

“After years of searching, they found the answer. When Netflix put a processing center in the town of Worcester, Massachusetts, their penetration rate in the New England region more than doubled. So Netflix started putting processing centers in different customer regions, which reduced the number of days it took for customers to get the next DVD from four days to one. Netflix found that penetration went up by 130 percent because of this. Customers loved the faster response, and – they couldn’t stop talking about it.”

Why do you have fence sitters? Figure out why they are there and then figure out how to get them off the fence. You may be able to get a lot of them off in one big fell swoop like Netflix did.

Lesson to learn:

Want to eliminate the fence sitters? Make your business the only choice.

Personalization

“If the Starbucks secret is a smile when you get your latte…ours is that the website adapts to the individual’s taste.”

Reed Hastings

From the minute someone signs up for Netflix, they get asked questions about their movie preferences. From there, when they watch movies, they get recommendations after they rate a movie. And it’s been remarkably successful. 75% of Netflix viewing is from the recommendation engine.

And the personalization that customers get from recommendations is really important. What if people ran out of movies they were interested in seeing and had no way to find recommendations based on their preferences? They might quit Netflix. So it’s an important element for the Netflix business, and it’s even more important for it be accurate. For me, I’ve found it is remarkably good. If Netflix thinks I’ll like a movie, I usually do.

Whatever your product is, it can benefit from personalization. Personalization has become so common that it almost gets taken for granted. From “Recommended For You” YouTube videos to priority inbox in Gmail, personalization and customization are everywhere.

Lesson to learn:

Personalization is nice because it requires no work for the user. Customization generally requires a little intervention from the user. Either one usually enhances the experience. How can your product be personalized or customized?

When examining the success of Netflix, you only have to ask one question:

What alternatives are there to Netflix?

The answer is not many. It’s a testament to their business and how far they’ve come in their 16-year history.

Have any questions, comments, or just want to chat about the company? Please do so in the comments!

About the Author: Zach Bulygo is a blogger for KISSmetrics, you can find him on Twitter here. You can also follow him on Google+.

  1. Killer article Zach. I’m a huge fan of Netflix and have been using the service since about 2008. In fact I no longer have cable!

    I wanted to point out that the 25,101 subscribers is in thousands. I did a double take when I read that their net income was only $7,675 and they had a $1 billion/year commitment on current content.

    • Oh goodness – how embarrassing that I missed that!

      Thanks for pointing it out – I’ll ask our blog guy to correct it.

  2. I Have been a huge fan of Netflix since they began. I hated how Blockbuster ripped off consumers with outrageous late fees. I have a Roku player in our bedroom that plays Netflix streaming and we prefer that t.v. to the one in the living room with cable. I love how this article is about innovation because even though I have been using Netflix forever and am a huge fan I recently canceled the mail version ( Redbox is easier for a quick movie night) and am now exclusively using Netflix for streaming. I watch Netflix streaming every night in bed and love it. I have completely changed how I use them but never canceled and don’t have plans too. If they would not have been innovative I might be using Redbox and Amazon Prime and Netflix might be joining Blockbuster in bankruptcy.

    • Here’s one thing that’s nice about Netflix – availability on multiple devices. Whether it’s a PC, Mac (no Linux yet, which is frustrating), Roku, Apple TV, Smart TVs, etc. It all works with Netflix! It’s almost like people take for granted that something that connects to the internet will have Netflix capability – and it’s Netflixs job to ensure that.

      Yeah, I’m still addicted to DVDs by mail. It’s the only way I can get a big selection of movies and TV shows that aren’t available on streaming. Not many of the movies that I watch are new releases, so this is where Redbox isn’t ideal for me. For example, I have the movie Safe House right now – which was released probably around summer 2012. I have no idea if it’s Redbox still carries it. Before that I watched The Company Men, which I don’t think is available on Redbox.

      Redbox limits you, Netflix doesn’t. In the end, though, the ultimate goal for Netflix is to get any movie available anytime via the cloud – no physical media required.

      And I like to watch Netflix before bed as well – sometimes I’ll even turn on a TV show like Louie or The Office in the morning to help wake me up.

      Netflix is a great product and I love the way they’re run and where they’re going.

  3. Netflix is a great example of successful businesses. Thanks a lot for the case study Zach. There have been many startups who have come and gone in no time but Netflix has been an unprecedented industry leader for a while now and it would really take something hard to beat them. The importance that the company gives to its users and then to its employees by not belittling them is what will certainly drive a startup to new levels.

  4. I’m a huge “old movie” fan – and Netflix just doesn’t cut it. And I’m not a movie pirate-r either. Right now there is no streaming solution for people like me (that I’m aware of). I’m actually blown away at the amount of “no-brainer” choices Netflix doesn’t have. I mean, you can’t even watch Godfather on Netflix….c’mon!

    • There are a lot of licensing issues. Netflix can’t add any movie they please – they got to get a deal with the studios. I think studios are really reluctant to move to movies in the cloud…but it’s what consumers want and where the world is headed. So they better adapt.

      The good thing is that you can still get the Godfather and many other older movies on Netflix via DVDs by mail, which is still a great option.

  5. Superb article Zach. Lots of new things i got from this article. I am too big fan of NetFlix….
    Don’t know why i am getting error on Netflix Apps for Windows 8.

    • I’m hearing bad things about Windows 8. You should definitely notify Netflix about the issue.

      Glad you learned a lot…I did too.

  6. Thanks for sharing this post , I’ve got some helpful details on NEtlex .
    I do really like your post.

  7. Hey,

    Very comprehensive post! Not sure what to add here:-)

    Thanks,
    Jenifer Taylor

  8. Netflix is a great product and I love the way they’re run and where they’re going.
    It helps alot to make your business successful :)
    Regards
    Saif

  9. well, they have taken a huge start and it seems to me that they are investing from their own pocket as they have not earned too much yet.

  10. Netflix just became the number one provider of subscription entertainment content in the United States, with 22.8 million subscribers. Comcast now comes in at number 2, with 22.76 million. And the trend lines indicate that Netflix will continue to grow.
    :)

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