What Netflix Can Teach Small Business Owners -

In college, my two favorite classes were Business Cases and Financial Cases. We would get one week to dissect a large business and determine an optimal path forward for a situation they would find themselves in. I loved this because larger businesses offer a massive amount of data typically not available for small businesses.

During these classes, it dawned on me that all businesses are the same – the strategic decisions are similar. The only difference is the scale. Concepts such as marketing channels, revenue streams, and mission statements –are all the same. No matter the size of the business, to be successful, an entrepreneur must execute specific strategies.

To this day, I love dissecting large businesses and figuring out what lessons I can take to work with my clients. Today I want to examine Netflix. Streaming has always been a fascinating business model and what is going on now in the space is captivating.

Netflix announced in March that they lost 200,000 subscribers during Q1 2022 (don’t fret, they still have 220 million). Upon that announcement, their stock price tumbled 25% in hours. To put this in perspective, the market currently values Netflix at roughly $180 million. In November last year, the market valued Netflix at $675 million. Pretty big hit to their value for losing less than 0.5% of their subscribers.

Regardless of whether you think the market values Netflix correctly, their stumble in enterprise value is eye-opening. The type of event leads to a deep analysis of a company’s past decisions.

As a small business owner, you might be wondering what this has to do with you. In this article, I will discuss 5 lessons that any small business owner can take from Netflix. The fun with this analysis for a small business owner is they see the potential on a large scale of specific strategies and concepts. It would be a shame to let good lessons go to waste. With that, here are 5 lessons every small business owner can learn from Netflix.

Lesson 1: Diversification of Revenue Streams

When Netflix started in 1997, it would send requested DVDs to members. In 2007, it first introduced streaming and essentially was the lone participant in that space until Hulu started offering a serious alternative in 2011. Even today, Netflix’s 222 million subscribers are 50 million more than Amazon Prime and 100 million more than Disney Plus.

However, one main difference between Netflix and both of its’ nearest two competitors is the diversification of revenue streams. Netflix remains mostly a one-trick pony– its revenue is almost entirely generated from streaming.

Alternatively, look at Disney – they have theme parks, traditional OTA TV, retail, and several other revenue streams. Amazon is the same. Meanwhile, Netflix has done little to diversify. Sure, they license out a few of their more popular entertainment properties to other interests. There are a few DVD sales (when was the last time you bought a DVD?). But the Company operates as a single business segment.

Fast forward to April 2022, when we saw Netflix’s stock drop by 44% in one month, and we began hearing ideas about an ad-supported option, perhaps movie theater releases of their films, or potentially live programming. The question I have is, why wasn’t any of this contemplated earlier? Many of these ideas have been implemented by competitors for years. Hulu has had an ad-supported option since 2010. Disney has had one since it launched.

Netflix’s success in a singular revenue stream created a dynamic that somewhat stymied innovation within the company. There was innovation within their single revenue stream, but none outside that.

Small businesses need to learn from this. Creating additional revenue streams is about diversifying and de-risking your business. Additional revenue streams should be complimentary to take advantage of natural cost advantages. However, relying on the success of any single revenue stream, no matter how successful, creates unnecessary risk.

Lesson 2: Focus is the Key to Building Success

I am going to contradict what I just said in lesson one. Netflix has had a sole focus on building the best streaming platform on the planet. While they lacked innovation in other parts of their business, they were cutting edge regarding their streaming.

Netflix puts out the most streaming content, using the best technology, on platforms more widely available than any competitors. This didn’t just happen from luck. It came from a laser focus on one mission – to entertain the world.

Too often business owners have a different focus every week. One week maybe they want to grow a particular segment of their business. The following week they are looking at cost-cutting measures. In the third week, they are focused on the potential of bringing on a new key employee. While all of these may be worthwhile, they have focused on so many areas that none of this gets done at a high level.

Netflix’s mission statement to entertain the world created a filter for what they were doing. If an activity or strategy didn’t fit this definition, they didn’t do it.

I get that business owners are under extreme pressure to participate in every area of their business. However, this often results in slower growth and a subpar customer experience. Business owners should take note of what focus can bring to a business.

Lesson 3: Pricing is Important

Netflix prices themselves as the Cadillac of streaming services (or Tesla for those millennials reading). From their point of view, why shouldn’t they – they spend more on content creation specifically for streaming services than anyone else. However, have they priced themselves out of households?

Several articles have pointed out that a customer can now choose between Netflix or all three ad-supported services from HBO, Hulu, and Peacock for essentially the same price. When Netflix announced its recent price change, I thought they had a problem brewing. The market seems to think the same.

Small businesses typically take one of two approaches to set prices. The first is a cost-plus model – they look at their costs and add a mark-up. The second is a competitor price model – they look at competitors and set pricing at similar levels.

Pricing is one of the most critical yet challenging aspects of owning a business. There are several pricing theories and models out there. However, no pricing model should be used alone. Once a price is set, a company needs to consider how customers perceive its pricing. Netflix has made a huge mistake, and you see them backtracking on pricing in specific markets.

Pricing needs to be a regular process for small businesses. They should have a process that encompasses several different methodologies. A singular approach to pricing leads to adverse reactions from customers and may turn them away for good.

Lesson 4: Use the Data You Have

In 2000, Netflix announced that people had streamed over 57 billion minutes of The Office. It was the most streamed show anywhere. The next closest was Grey’s Anatomy at 39 billion minutes. To put this in perspective, if you watched The Office every minute of your life until you passed at 80 years old, you would need to live roughly 928 more lifetimes to watch this amount of The Office.

Netflix has long been praised for its algorithms that suggest what shows for you to watch. There have been countless articles that talk about Netflix’s data gathering. They know how much of a show you watched, when you stopped watching, and what time you watch certain shows. This data and more goes into a formula more complicated than any of us understands to suggest that you should watch Bob’s Burgers at midnight on Tuesday.

It was big news then when the upstart Peacock service said they would retain the right for The Office, and starting in 2021, the show would be exclusive to their network.

I must admit, I am a massive fan of The Office. I followed this all very closely. I have always been surprised that Netflix is not producing more shows that use some of The Office’s core traits. In fact, Netflix produces nothing close to anything that mirrors The Office.

I am not a TV critic, and outside of a few shows don’t watch enough to draw too many conclusions. But not only does Netflix not produce any Office clones, but ditto with Grey’s Anatomy. Going to IMDB and looking at suggested shows for each, none are currently on Netflix. This strikes me as a complete miss on using data to make business decisions.

If I told you that a business was about to lose its most successful product and wasn’t going to offer a replacement, you would tell me they may be in trouble. Well…let me introduce you to Netflix.

As a small business owner, you may be thinking that you don’t have nearly this amount of data. While you are correct, you’d be surprised how much data you have. Do you have a point-of-sale system? How about a customer management system? There are treasure troves of publicly available data to use and correlate to use on your own.

Too many small business owners make decisions from the “seat of the pants” instead of diving into the data. I understand why – data can be intimidating. You need to have the right mindset and background to slide and dice this data. You need to know what questions to ask about your data. If this is a skill that a small business owner doesn’t possess, call me (shameless plug). CFOs are data nerds. They know what questions to ask and how to interpret the data.

Lesson 5: It could still be a good idea if you didn’t do it first.

HBO, Peacock, Paramount, Netflix, Disney+, Amazon, and Hulu…..those are your Big 7 at the moment. Quick question, how many of these offers ad-supported option? The answer is 5. One of the outliers is Amazon. There are several strategic reasons Amazon does not, which could fill up another article. The other one that doesn’t is Netflix.

Apple TV, Peacock, and Amazon are all investing in live programming – sports. Hulu offers live content with its upgraded tiers. Disney+ offers a bundle with ESPN+, which offers live sports. Again, Netflix is in the minority.

Live programming is the last saving grace for a dying cable TV model. Most streaming services realize the profitability of live programming and are starting to offer it within their services. However, Netflix continues to hold off and says they have no plans.

F1 racing was essentially an afterthought in the US market. In 2017 Netflix started producing a documentary-style program following an F1 racing season. This documentary has been credited with increasing F1 TV ratings in the US by 54% from 2020 to 2021. The new interest in the US has been credited with bringing additional races to the region and creating additional revenue streams for F1.

The F1 racing TV contract with ESPN will expire after the 2022 season. Using all data above, it would make sense for Netflix to be a significant player bidding for F1 races. Do you know how much ESPN paid for the right to air F1 races in the US? Zero. Why do I mention this? To show that the dollar commitment to broadcast F1 races would be a small fraction of their $17 billion content budget.

However, Netflix seems to be resistant to any innovations its competition makes. Live programs and ad-supported content are just scratching the surface. As these big-budgeted competitors continue to innovate, we’ll see even more from them. Will Netflix remain resistant to “copy” anything their competitors are doing?

As a small business owner, you must keep tabs on your competition. Just because something is not your idea doesn’t mean it is not a good idea. I completely understand that Netflix has a philosophy on how entertainment should be consumed and building a customer experience. But looking back, they are missing out on possibilities to create a better customer experience and additional revenue streams due to their narrow-minded philosophies.

Small business owners are right to guard their business and be skeptical of ideas that may alter the customer experience as they see it. However, they owe it to their business to continue investigating ideas to push their business forward even if they aren’t there.

Conclusion

I believe Netflix is a fascinating company. The whole streaming industry is a lab for business ideas and innovation. The industry is less than 15 years old, so we see the participant’s wins and losses play out right in front of our eyes. As a small business owner, this is your chance to learn from where others are succeeding and failing.

Krieger Analytics Can Help

Running a small business can feal overwhelming. When you are analyzing business strategies, it can be good to have a professional at your side. Our CPAs at Krieger Analytics are trained in analyzing markets to determine which steps you should take to grow your business. Whether you need an accountant to get your business off the ground or if you need an CFO to help you get back on track, Krieger Analytics has someone for you.