Be it a cloud storage service like Dropbox or an on-demand video streaming service like Netflix, subscription-based models are rapidly growing and at a very unprecedented rate. A sphere that was previously monopolized by the services like Cable TV, Magazines, Newspapers and Telephones, now has been extended to a more broader market- live streaming and video-on-demand- and it is for a good reason.

Netflix business model- Recurrent earning with subscription billing

Netflix utilizes one of the trickiest and most stressful business models. No doubt, they have done so well with it. It offers video on demand services to watch TV shows, movies, Animations, documentaries and a lot more. Its sole method to earn from the services is to ask for a monthly subscription fee from the users. Americans didn’t hesitate to spend $420 billion on subscription of different services in 2015 alone, it was a well thought to believe that the subscription model is the future.

It is not just about the major players like Netflix, but HBO and Spotify have also utilized the same model to put their strongest feet forward in the market.

Businesses are built on happy customers

Netflix business model emphasizes on building long term-relationships rather than selling once and forgetting the further opportunities. As your earnings from a subscription model solely depend on how you keep your subscribers happy, you would want to do everything it takes to impress them. An unhappy customer is a lost subscription, and a lost earning in the end. For these reasons alone, business like Netflix has to invest fortune in their customer service and service quality. As a result, consumers are encouraged to believe that services would be good from the particular business. If not so, customers will simply unsubscribe and you lose some good recurring sales.

Services like Netflix boom in the recession

When economic slowdown forces many businesses to either, step back or shut down the operation, subscription-based services prevent themselves from subscription fatigue and continue to boom. Zuora CEO Tien Tzuo backs this argument: “In periods of economic downturn, people prefer subscription businesses. Why they would spend all their money upfront in buying a product when they can simply subscribe to one when in need and then turn it off when not needed?” Netflix follows the same approach that lets it operate sales by billing recurring and lesser amounts instead of high buying upfront cost.

Subscription model is futuristic and it will indefinably capture a gross market of $100 billion by the end of 2020.

Customers prefer convenience to cost

It is not just about entertainment, but the verticals like software, health, beauty products, gym equipment and even groceries are rapidly being multiplied into this futuristic model. The subscription-based businesses are offering unmatched convenience to the subscribers, which upfront sales fail to appeal. Customers are able to get the products and services exactly when they need them – ultimately, saving them from excessive costs. Saving this upfront investment, consumers are not minding to pay even a little extra if it is in the small chunks.

It is exactly like purchasing a car, which you would get from a loan or finance, rather than spending all of your savings on buying it upfront. You would not mind paying the extra interests on the EMI, because they are being charged in small chunks.

Things have become affordable with the subscription model

People consume subscribed services or products in accurate quantity, and with manageable small cost. This makes things affordable to the people, as they would have found them unaffordable while having to pay the one-time costs for owning them.

Take Prada, for instance.

Prada shoes are expensive. Paying upwards of $600 all at once is unthinkable by many consumers. Bombarding out less than $15 a month is more manageable since the cost would spread out over a longer period, and you can stop the subscription once it is out of fashion, and go for the newest option. Furthermore, you would not mind receiving a brand new pair of shoe every week. Likewise, Netflix gives its users the option to utilize its services as long as they want, and stop it according to their convenience.

Netflix shifted their business model to reinvent an old trend

Today, we take Netflix for granted in on-demand video streaming services. However, there was a time when it used to be an on-demand DVD rental services. During this time, upfront buying was also in trend as people used to purchase the DVDs of the movies and TV shows they love. Netflix moved a step forward by offering the same service, in a more accessible way- offering the movies in bulk for a fixed subscription cost.

Coming online with its services, Netflix could now break the physical boundaries on the globe, and extend its reach to the domestic as well as international market. As for the DVD rentals are considered, they continue to operate in the domestic market. The company’s DVD distribution center is now limited to 17 hubs around the U.S however.

Breakdown of Netflix Revenue model

The on-demand video streaming subscriptions are offered with three different plans to the users. Plans vary based on the level of HD you expect, and the number of users who’ll have access to the account.

Based on the above two aspects, the plans are:

  • Basic
  • Standard
  • Premium

The costs of plans are different in different countries. Here is a screenshot of current plans from the US:

Netflix is here to stay for a long time. It has undoubtedly nailed a futuristic business model. Be it one more Netflix original hit or a cheaper plan, we can expect an uninterrupted expansion of the giant. At least until a new Netflix clone comes into the play to offer something that the current players cannot.