1. A key business goal was to reduce the cost of building the DVD library. One tactic used to achieve this goal was to stimulate demand on older and lesser-know movie titles. Shifting demand away from higher cost new releases drove down the average price of acquiring DVDs and improved asset utilization. This produced increased margins and profitability.
To balance demand Netflix developed a proprietary recommendation system. The system enabled the transition from a manual one-size fits all promotion approach to an automated data driven marketing plan that delivered personalized recommendations across the entire movie library. Effectively, the recommendation system outsourced the task of marketing to the subscriber. The system harnessed subscriber specific preference data and analyzed this data via an algorithm to match subscriber preferences with ratings. It then presented each subscriber with a dynamic list of recommendations. In addition, by linking the recommendation system directly into the inventory management system Netflix was able to recommend more in-stock movies.
In 2006 new releases represented less than 30% of total rentals. Overall, the recommendation system was able to reduce the cost of building the DVD library and provide a better subscriber experience. Both were key competitive advantages.
2. Netflix prioritized technology projects based on underperforming yet high-value processes. They targeted processes that enhanced customer satisfaction and delivered the core benefits of convenience and value. Key success criteria used to evaluate technology projects include:
|Success Criteria |Metric | |Same day delivery |% of subscribers reached within one delivery day | |Subscriber growth |Number of subscribers | |Customer churn |% of canceled subscriptions | |Library utilization |% of new vs. old movie title rentals | |Subscriber queues |Average number of titles in queues |
Example technology projects include the development of the search engine, recommendation system, and subscriber queue. Each of these efforts provided a personalized customer experience that made using Netflix easy. These technologies differentiated Netflix form traditional retail movie stores and allowed them to streamline operations and control costs.
The key risks and mitigation approaches associated with technology projects include:
|Risk |Mitigation | |Lack of testing and prototyping in order to stay ahead of the|An iterative software development methodology and rapid | |competition (speed to market). |development approach could be used to deliver feature | | |enhancements (releases) and/or bug fixes quickly. | |Proprietary nature of technology used to power Netflix core |Retain in-house residual specific IT knowledge or build more | |business. |general IT knowledge. Outsourcing of strategic IT roles is | | |not recommended. | |High cost and lack of expertise to develop supporting |Build strategic partnerships with 3rd party technology | |technology for VOD/online delivery channels. |providers. |
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