Netflix is the world’s largest online entertainment subscription service, providing more than U.S. 4 million customers with access to over 100,000 DVD titles. Netflix’s business is renting DVD titles on a subscription basis, with different plans ranging from $9.99 a month to $47.99 a month. Nearly 95% of Netflix subscribers are within a one day ship point, which means most customers will receive the movies within one day of ordering. Their deep movie selection, personalized recommendations, and quick delivery have made Netflix the top-ranked Internet company in customer satisfaction, which has driven rapid growth in subscribers, revenue and earnings (Netflix, 2008).
Netflix started out as a regionally based online movie store in 1998, servicing the San Francisco Bay Area. Their initial model was similar to ground based movie rental companies, such as Blockbuster and Hollywood Video, offering movie rental for a per-unit fee and charging late fees when necessary. The companies first year of operation resulted in a loss; expenses were far greater than revenue and it was clearly time for change.
Following the first year’s dismal financial results, with their knowledge of the video rental business and it shortcomings Netflix decided to change its business model. The traditional video rental business was based on the customer selecting videos to rent, for a predetermined period of time, and paying a set rental fee for each of the videos rented. This model inherently created late fees because customers either forgot to return the videos or they became too busy and didn’t have time to return them. Late fees are an additional revenue stream for the rental companies but it was a point of aggravation for the customers.
In 1999 Netflix saw an opportunity to eliminate both the rental fees and the late fees and implemented a subscription service. For a reasonable monthly membership fee a customer can rent a number of movies and keep them for... [continues]
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