Netflix Case Study

Netflix Case Study

1) What is the Netflix business model? (How do they make money? How does the service work?)

Netflix's DVD subscription service is very profitable, with contribution margins around 50%.They built a profit-making model focused to get DVDs to consumers within a day. Netflix initial business model was DVDs by mail service which consisted of flat-fee ($10.00) unlimited rentals without due dates or late fees. First, consumers will use the Web site to order/rent what they want to see and they would get their order in about one business day. Consumers had the option to keep the DVD for as long as they wanted without being charged late fees. They could also exchange as often as they want. After that, they would simply return the DVD in a prepaid envelope to get another DVD. For one low monthly price, Netflix members can watch as much as they want. In 2007, the firm introduced streaming video via video streaming option (enabled via a “Watch Now” button next to movies that can be viewed online), and offered unlimited streaming as part of the firm’s base subscription price.

2) Do a 5-forces industry analysis for Netflix. Your analysis should address the following.

a. power of customers: who are the customers, how powerful to dictate their requests?

Buyer power is ability of buyers to influence price they must pay for an item. Netflix is the world’s leading Internet television network and their customer base is a very large audience with more than 33 million members in over 40 countries. Although number of customers is a very important factor in determining how strong buyer power is, in this case buyer power is somewhat reduced because of the switching costs. Drop Netflix for a rival and the average user abandons the two hundred or more films they’ve rated. The effect of switching costs can clearly be seen in the year after “Blockbuster and Wal-Mart launched with copycat efforts, the rate at which customers left Netflix actually fell...