Netflix lifetime value

Netflix has emerged as one of the most disruptive and successful on-demand video and media service providers over the last decade. Started as a mail-order DVD company in 1997, Netflix has succeeded by changing its strategies to keep pace with changing technologies. By 2015, Netflix had acquired a 52 percent share of all U.S. broadband homes and, in the process, put the behemoth brick-and-mortar retailer Blockbuster out of business. Netflix uses a dual strategy of outstanding content and a powerful subscription model to succeed. At first, content came solely from movie and television production companies, including syndicated re-runs. However, in 2013, Netflix debuted its first original series, House of Cards, to great fanfare. It has continued to produce winners, including Orange is the New Black, Narcos, Making a Murderer, and most recently new episodes of Gilmore Girls. The company has also brought back award-winning shows, such as Full House. This content strategy keeps current customers engaged, as reflected in the fact that the average subscriber streams content for 2 hours a day—up 18 minutes over the prior year. It also continuously attracts new users to the platform. Netflix acquires customers by offering a free one-month trial that can be canceled at any time. This strategy has zero cost to the company given the trial only utilizes Netflix’s existing portfolio of offerings.

For current customers, Netflix uses four strategies to improve the value it offers and the value the company is able to extract from them. First, the low monthly subscription rate of $9.99 makes membership an affordable luxury for many customers. Of course, most people don’t just sign up for one month. The average person is an estimated Netflix subscriber for 25 months, creating a recurring source of revenue. Second, its “Watch Anywhere” option allows customers to watch shows on any device and even download them to use on computers or tablets, making it easier to watch Netflix on the go—thereby extending viewing opportunities to out-of-home, non-Wi-Fi settings. Third, Netflix tracks customer engagement and uses this information to recommend new content to users based on their past viewing behaviors. This impacts customer retention of which Netflix has the lowest churn rate in the on-demand video sector. In 2015, just 5 percent of U.S. broadband homes canceled their Netflix accounts. This also includes customers who left after the end of a trial period so it is not a pure CLV calculation, which would not count customers until they had made a more formal commitment. Such a high retention rate offers a strong indicator of long-term cash flows for the company.