The Origin of Netflix’s Success

How did Netflix develop its initial strategies, and how the early on lessons set the tone for its long-term growth?

Netflix disrupted Blockbuster by creating unrealized values for crowds and taking advantage of rising new technologies (DVD and internet adoption). I hope to assess how Netflix developed its initial strategies, and how the early on lessons set the tone for its long-term growth.

One core part of Netflix’s initial success was the fact that it piggybacked on up and coming technology platforms, such as the adoption of DVDs, that were already disrupting existing markets (VCRs).  Netflix created value in an innovative way that, at the time of launch, addressed an underserved customer group who was isolated from the core business of the industry incumbent, Blockbuster, not posing a threat.

Reed Hastings, the CEO of Netflix, was a great candidate to help revolutionize the movie rental experience. By centering the entire company around one singular goal – “to make the movie experience so much better than the regular video rental that everyone wants to do it” – Hastings was able to steer the company through their early years to a successful disruptive strategy. By setting a great customer experience as the benchmark by which to measure Netflix’s success, Hastings was able to move quickly and build a product/business plan that ensured success, both with their early adopters as well as their later markets. One example of this is to use delivery time as a key metric of customer happiness. By focusing on delivery time, Hastings was able to establish a lean operation with USPS that maximized efficiency and speed.

In addition to using customer happiness as a key metric, another key learning from the early years was to eliminate the “late fee” that traditional video rental stores used as a key component of their business plan. By experimenting with subscription plans and eliminating late fees, Hastings was able to incentivize the crowds in a way that incumbent players were not pursuing.

The final key aspect of Netflix’s strategy in their early years that set them up for success was their focus on technology, specifically website and movie personalization. By building a product that required users to place orders through the website, Netflix primed their customers to view the website as a key component to their Netflix account. This set them up for success down the road when they transitioned to video-on-demand. Not only was the use of technology help enable better service delivery, but it also led to greater customer happiness.

Looking back over Netflix’s 15+ year of disruptive technology, it’s evident that Netflix has always strived to create differentiation between themselves and their competitors. It is important to bake this desire for disruption directly into the DNA of the company. Because the CEO, Hastings put customer happiness front and center as their metric of success and as the main driver of product development, he was able to anticipate the move to online video streaming in the early 2000s, leading to bigger success down the road.

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