Netflix is a true leader of the Membership Economy. Back in 2002 when I first started working with them, I fell in love with their business model.
I loved their focus on doing one thing really well, their Forever Promise (FP). I describe that FP as “a huge selection of professionally created video content, delivered in the most efficient way possible, with cost certainty.”
I also loved their data-driven approach, the metrics they popularized around engagement and churn, and their continuous tinkering to always improve their model. And I loved their commitment to transparency.
But that doesn’t mean that every organization that wants predictable recurring revenue should copy everything Netflix does. Building a forever transaction with your own customers requires more than the “Netflix Playbook”.
Here are some times when you should consider charting your own course rather than doing what Netflix did.
1 When your subscription is only part of your business model
Netflix has one source of revenue–their subscription. There is no indirect revenue to offset their investment. But for many businesses, the subscription has a job other than just pure revenue generation. For example, Bain & Company’s NPS Loyalty Forum exists alongside Bain’s much larger consulting business–the membership in the Forum is a means of building and strengthening relationships with consulting clients and prospects. In addition to generating revenue, EA Play, Electronic Arts’ videogame subscription, builds relationships with game players and helps them discover new games which they may eventually choose to purchase. Before you determine your pricing, ask yourself, “Is our subscription the entire business model, or are we using subscription to attract, engage or retain customers for our other business lines?”
2 When you have high variable costs and unclear usage
Back when Netflix was all “3-DVDs Out-at-a-Time” there was some risk that edge case consumers could cost more than they generated, which was especially risky during their two-week free trial. That’s why they carefully studied usage of new subscribers, and really understood their variable costs. Streaming costs have much lower variable costs, which makes it easier to offer a free trial and provide unlimited access. But if your business has variable costs–you run a buffet, or a subscription box, or offer advisory services with human experts, or have real delivery or onboarding costs–you might need to be more discerning about who you let sign up, or the duration of the initial sign up (goodbye “cancel anytime”). Many businesses do have limitations on their offering, as a means of protecting themselves from edge-case subscribers, especially early on. It’s a reasonable strategy to consider.
3 When you aren’t providing entertainment
People consume video-entertainment very differently than they consume educational content, or software tools, or coaching. It’s important to understand what is driving your customers to sign up and what drives engagement and retention. For example, quantity might matter less than quality, and the content by itself, no matter how good, might not be enough to keep your subscribers on an ongoing basis. In these cases, you might consider incorporating other types of benefits, like community, expert advice or even subscription commerce to support your subscribers’ forever promise.
4 When your offering is limited in scope and very valuable
If you only have one really valuable thing, that will only be used once for a finite period of time (think wedding dresses, championship games, a hit movie, a great system for potty training), you might consider a business model other than subscription. A subscription is just a pricing tactic that can be used when a customer trusts your organization to solve an ongoing problem or to achieve an ongoing goal. If there is no ongoing goal or problem, maybe just charge for usage or ownership. If you have other offerings that can be combined to solve an ongoing problem (childrearing vs potty training, for example) that might be a point of entry into the world of subscriptions. But if you just have the one finite thing that you’re offering to someone who will only use it once, don’t force it into a subscription model just because subscriptions are popular with investors right now.
5 When you have distinctly different, customer segments
I am a big fan of simple pricing. The more complicated your pricing scheme, the more you are asking your customer to become an expert on your pricing if they want to get what’s right for them. And yet the whole point of a subscription is that the customer can relax into the subscription and just trust that you have their best interests at heart. Netflix is famous for their very simple pricing. The vast majority of subscribers get the same general all-you-care-to-eat streaming offering for the same price. They don’t do promotions, they don’t have different tiers, or even different pricing for annual commitments. But there are times to have multiple tiers or add on services. If you have high fixed costs, you may want to separate some of those costs out, as I mentioned before. But even if you don’t, if you have different customer segments with dramatically different needs–for example, solopreneurs vs corporate enterprises, or amateurs vs professionals, or people who live near Disneyland and can use the discounted admission vs Disney fans around the world–you might have a very good reason for multiple pricing levels. And in many cases offering a discount for annual pricing is a great way to recognize and reward your most loyal subscribers.
But here’s something we all should do “just like Netflix”…
Whatever business you have, there is one page from the Netflix Playbook that applies to just about everyone who wants to have a long-term, trusted relationship with customers. Take a step back, away from your products and services, and look at your customer’s broader objective. Why are they engaging with you in the first place? If you can tease out that bigger goal, and optimize your offering around helping them increase their likelihood of achieving that goal, you will enjoy greater loyalty and engagement, and increase the lifetime value of that customer relationship. At the end of the day, what Netflix does so well is less about subscriptions or free trials or their terrific user experience, and more about their continued evolution around striving to be the most efficient way to get the biggest solution of professionally created video content with cost certainty. It used to be 3 DVDs out at a time with someone else’s content. Today it’s streaming, proprietary content. Tomorrow maybe it will be holographs or mind-melds but the idea is not limited by the product features–it’s optimized for the ongoing impact.
And that’s what we all should be striving toward–ongoing impact on the goals that matter to our customers.
