Netflix stretch to supercharge the core

Video-streaming platform Netflix recently announced strong second quarter results, with revenues up 32% to $2.79bn (£2.13bn) versus year ago, and net profits up 60% to $65.6m. Netflix really is one of the best examples of growing the core, including the use of strategic brand stretching, as I explain below.

1. Focus on penetration

We’ve posted regularly about the importance of driving penetration to grow your brand. It is penetration levels, not loyalty, which is the difference between big and small brands. And driving up subscriber numbers has been the engine of Netflix’s growth. In the latest quarter the company added 5.2 million net new users. One of the key tools to drive this growth has been the 1 month free subscription. Nine out of ten people become members after this trial period, according to this presentation.

2. Drive distribution 

Distribution is like Viagra for growing your core business. It’s not as sexy as social media. But boy does it work. In the case of Netflix this distribution growth has come from international expansion: Latin America and UK/Ireland in 2011,  then France/Germany and other European countries in 2014. You can see the huge contribution made by international sales in the graph below. Roughly 2/3 of the subscriber growth between 2011 and 2016 came from international subscribers. And in the latest quarter international subscribers have actually overtaken the home user base for the first time: out of a total of 104 million subscribers worldwide 51.9 million are in the US and 52.0 million are international.

3. Stretch to grow the core

At the heart of Netflix’s growth is one on the most amazing examples of strategic brand stretching ever: the 2012 move into original content production, starting with House of Cards. Since then, other shows have followed including Orange is the New Black, The Crown, 13 Reasons Why, Stranger Things. The company plans to spend a mind-boggling $6billion on original content this year, according to this report! You can see the dramatic increase in investment in original content production in the chart below.

The genius of this move is that the stretch helps grow the core, not distract from or dilute it, as can sometimes be the case with brand stretching. As we saw earlier, nine of ten people trying out Netflix on a free one month trial period end up staying. And great content is a key driver of this conversion. 86% of member said they were less likely to cancel after watching House of Cards for example, according to this report. Netflix has created a ‘virtuous circle’ of growth. “As we grow the membership base, we want to grow the content budget to get more shows and more movies,” explained Reed Hastings here.

4. Upgrade the core

Netflix is not just growing the core by stretching into original content. It is has also invested in the core user-interface, with a major upgrade being rolled out in December 2016. This replaced static ‘poster images’ with custom-created preview videos that automatically play when you scroll over a title card. “The redesign encourages Netflix’s more than 93 million subscribers to serendipitously discover what to watch rather than tediously browse its catalog and wonder if something is worth sampling“, according this article. The upgrade was a company-wide initiative that took almost three years. As the article goes on to say, it “Demonstrates Netflix’s commitment to stand out from competitors such as Amazon for more than just content.

In conclusion, Netflix is a supreme example of how to stretch in a way that supercharges the core by driving penetration. It will be interesting to see if they can keep up this performance given the intense competition from both Amazon and also cable networks like HBO, who are moving into streaming.

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