Netflix has found a way to bounce back after what is said to be its worst year yet, with millions of subscribers lost and the value of its shares plunging steeply. The streaming giant intends to introduce a more affordable ad-supported membership plan compared to what Disney+ plans to launch before the end of the year. Some experts call it a genius turning point. What substantial results can Netflix expect from this venture? How successful will this new Netflix revenue model be in increasing profit margins and speeding up growth?

 


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In this article, we’ll look at Netflix’s revenue model and how it can offer more value to its customers even when most of them dislike having advertisements interrupt their viewing experience.

 

We argue that lower price points alone are insufficient to attract new subscribers. At Taylor Wells, we believe that every price point must be supported by a substantial value offering that customers will find justifiable and appealing. By the end, you’ll understand how to use pricing to recover from a profit margin decline.

 

 

What is the Future of the Revenue Generation Model of Netflix?

 

We’re pretty sure that almost everyone has heard of Netflix, even if they don’t use it. Netflix currently has a presence in nearly 200 countries and hundreds of millions of subscribers. Many would even say that it is the most popular content platform on the planet.

 

Netflix was launched 25 years ago by Marc Randolph and Reed Hastings. After more than two decades in business, the company is still going strong. What’s the secret to its success?

 

1. Business Revenue Model Of Netflix

 

Netflix’s ability to adapt to its environment is one of the primary reasons for its success. To meet the needs of its customers, the company has evolved from online DVD orders and rentals to a subscription model to streaming. The founders were well-versed in their value proposition for each customer segment. Furthermore, the company has the right partners in place to acquire key resources to help it grow.

 

2. Data And Content Strategy Of Netflix

 

Netflix is a perfect example of how to use software and data to offer its customers a quality viewing experience. Some of the ways the company has benefitted from big data and analytics include customer segmentation, offering a personalised experience, and foreseeing what genres, themes, and content formats are most likely to prove a hit with viewers.

 

3. Pricing Strategy Of Netflix

 

Pricing strategy can determine whether or not the business succeeds or fails. It is challenging to get a balance between a profitable price and how much your customers are willing to pay for your products or services. But Netflix has been nailing it for the past decades.

 

However, according to a report last April, Netflix lost 200, 000 users after raising its prices earlier this year. This is the first time this has happened since 2011. The streaming service expects to lose another 2 million subscribers in the coming months, putting it on track for its worst year ever. The stock has already fallen by 60% this year.

 

 

Netflix, on the other hand, is not giving up just yet. The company now intends to recoup its losses by launching an ad-supported tier and subscription plan. We only recently learned that Disney will do the same. Let us make some comparisons between their proposals. Can Netflix compete?

 

Netflix Subscription Plans

 

Basic ad-supported tier: $6.99

Basic: 10.99/month

Standard: $16.99/month

Premium: $22.99/month

 

Disney+ Subscription Plans

 

With ads: $7.99/month

Ad-free subscription: $11.99/month; or $119.99/year for an annual pass (working out at $9.99 per month)

 

Netflix has stated that they will not automatically update all existing customers’ plans, as proposed by Disney+. When it comes to the motivation for the new pricing strategy, Netflix’s comparatively low pricing for its ad-supported and basic ad-free plans shows that they believe low prices can win back and even gain new subscribers.

 

Nevertheless, many analysts believe that one of the reasons for Netflix’s success is its ad-free content. Ads are the driving force behind the increased popularity of ad-blocking software. It is understandable that people are irritated when advertisements interrupt their favourite shows. Will lower prices be enough to entice customers now that Netflix plans to offer an ad-supported version of its services?

 

netflix revenue model

 

Ad-Based Subscription as the Content Strategy and Revenue Model of Netflix

 

Some analysts argue that the new ad-supported plan will help Netflix recover its losses. They believe that an ad-supported offering would give Netflix a better chance of reviving subscriber growth and expanding its presence in the rapidly growing video streaming market, which is expected to reach $139 billion in revenue by 2027. This is a significant increase over the $80 billion estimate for this year.

 

The company still has nearly 221 million paid subscribers in the second quarter of this year. Thus, Netflix is about to enter a massive market, as video ad spending is projected to reach $180 billion this year; $318 billion by 2027.

 

However, is the company’s confidence buoyed by the โ€˜low priceโ€™ plan or the compelling revenue forecast driven by new advertising revenue?ย What value Netflix will propose to counteract people’s dislike of advertisements interrupting their viewing experience? We know that Disney+ offers discounts and incentives based on its network of theme parks, hotels, merchandise etc.ย 

 

So, what else can Netflix offer? They must give this careful consideration. Otherwise, lower prices may not be enough to achieve the promising prospect of bouncing back and expanding their market further.

 

 

According to many industry experts, the pandemic fueled the home entertainment boom, which benefited Netflix and its competitors. However, now that the pandemic restrictions have begun to ease, streaming platforms must face an unpleasant reality: the streaming revolution has peaked. And this assertion is valid. Why do we say this?

 

Even if Netflix introduces a new revenue model through a lower-cost ad-supported tier plan, gaining more subscribers won’t be a piece of cake.

 

At present, the market is confronted with a slew of challenges; after a decade of easy converts, streaming companies are experiencing significantly slower growth and increased competition, fueling an unsustainable content war. Additionally, households are beginning to reduce their spending on entertainment services.

 

A low price for an ad-supported version may lead prospective customers to believe that Netflix will have to include more advertisements in its shows to compensate for the lower price. Consequently, their viewing experience is further interrupted. If this occurs, customers are unlikely to take this offer or even change their subscription over time.

 

Of course, if no one is watching the ad-supported version, ad payers will begin to leave Netflix. Thus, leveraging on low prices is insufficient. For the initiative to be successful in bringing them more customers, Netflix must offer meaningful value.

 

 

Implications of the New Netflix Revenue Model and Content Strategy

 

Netflix’s cheapest plan, without ads, is currently $10.99 per month. The slight price difference between their ad and no-ad plans does create an easy upsell opportunity for Netflix whereby subscribers are more likely to choose the no-ads plan as it’s not that much more to pay. But, in order to enter the massive ad-spending market, Netflix must find a way to persuade customers to choose the ad-supported offer.

 

Despite the presence of advertisements, members can still enjoy the convenience of being able to choose what content they want to watch and when they want to watch it. This sense of freedom and choice is what distinguishes streaming services from traditional TV broadcasting formats. So, the key is for streaming services like Netflix to concentrate their efforts on creating and acquiring content that their subscribers want and enjoy.

 

To make a better value proposition and revenue model, Netflix must strengthen its partnerships.

 

Netflix has formed several partnerships in the media industry. This enabled Netflix to provide millions of different genres for subscribers to choose from. The company can now use these partnerships to offer more value to subscribers, similar to how Disney does.

 

Netflix has formed partnerships with Wii, X-Box, PlayStation, and numerous other gaming companies. They can use these partnerships to create incentives that give more value to gamer clients, for example.

 

The company also recently expanded its anime originals lineup by teaming up with Japanese anime creators such as CLAMP, The Kindaichi Case Files, Mobile Suit Gundam, Goth, Mardock Scramble, and Thermae Romae. The anime industry is massive, with a current market value of US$ 26.89 billion. Hence, with more partners, cross-selling (merchandise such as cosplay items) is also possible.

 

Furthermore, Netflix is a Samsung business partner. This was done to improve the integration of its streaming platform with Galaxy smartphones. In exchange, Samsung users will gain access to Netflix’s original shows as well as special bonus content. Netflix could try to expand on these perks. In the long-run, this can improve the new Netflix revenue model.

 


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Bottom Line

 

Any business cannot afford to rely solely on lower price points. Even for established streaming service providers like Netflix and its new revenue model. The market is becoming more competitive, and household budgets are becoming more constrained. Businesses must focus on value creation to truly win more customers, maximise profits, and enter new markets. Work on developing an adaptive business model, utilising data, and building a pricing strategy.

 

Our findings show that with the right set-up and pricing team in place, incremental earnings gains can begin to occur in less than 12 weeks. After 6 months, the team can capture at least 1.0-3.25% more margin using better price management processes. After 9-12 months, businesses often generate between 7-11% additional margin each year. As they identify more complex and previously unrealised opportunities, efficiencies, and risks.

 


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Are you a business in need of help to align your pricing strategy, people and operations to deliver an immediate impact on profit?

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