Netflix Case Study

Mark Cantrell

MGMT 493

Gentry

10/14/13

NETFLIX CASE ANALYSIS

1. In 2006 Netflix saw an increase in sales of approximately 30% from 2005, which could indicate that net income would increase accordingly. However due to Netflix's operating expenses that increased exponentially compared to net income, the net income remained relatively unchanged from 2005 to 2006. These operating expenses, specifically marketing expenses, were increased due to the commitment of Netflix to giving consumers the largest selection of independently made films in the market. These independent films, which were selected through the Sundance Film Festival, had to be brought to the consumer solely by Netflix. Which means that the selection process and marketing process had to be financed by the company. This increase in expenses would explain the jump in marketing costs. Due to the fact that Netflix would have been relatively inexperienced at the movie marketing process making them financially inefficient at doing so. From 2005 to 2006, marketing expenses increased by approximately 6%, which meant that by end of 2006, Netflix's operating expenses consisted 73% of marketing expenses. A figure that had not yet been experienced by the internet movie company. The graph below shows the percentage of make-up of Netflix's operating expenses over the nine year period from 1998-2006.

2. The most notable advantage of Netflix's business model is the broad idea of serving the customer based on their specific likes and needs. In several aspects of compliance, marketing and product delivery, Netflix easily outlasts competitors such as Blockbuster due to the consumers' opinion and time being valued so highly by product placement systems. In its most raw form, this business concept allows Netflix to know what the consumer wants before the consumer knows what they want. Which allows Netflix to keep that individuals commitment longer through a higher perceived value.

The primary example of this includes how Netflix allows its subscribers to set what is called a "Movie Que". This system developed in 2004, makes the sending of movies much simpler by letting subscribers pick up to 50 movies that they would like to see over a given period. After a movie has been viewed by the customer and sent via the United States Postal Service back to Netflix, another movie is ready to send to the customer. This all happens within a 48 hour period, which keeps subscribers pleased with Netflix movie selection as well as the time spent using the company versus other traditional movie rental services. Thus, increasing Netflix's value exponentially.

Netflix also has control