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INCREDIBLE ADVENTURES
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Overnight Success

THE FIRST-EVER COMPANY TO OFFER RENTAL DVDS BY MAIL, NETFLIX IS THE INDUSTRY'S ONLY TRUE SUCCESS STORY, THANKS TO ITS REVOLUTIONARY, UNRIVALED PRODUCT OFFERINGS AND UNSURPASSED CUSTOMER SERVICE.
by SCOTT S. SMITH - July 2009

Published in Business :: Business

Every company has "Our customers are No. 1" as a slogan on the wall-but it often doesn't get much further than that. Badly trained employees, sales reps who over-promise, poor quality control and divisional rivalries can make the real-world consumer very dissatisfied. According to The Brookside Group, the average company consistently retains less than 74% of its customers.

But the customers of Netflix, the Los Gatos, CA-based firm that mails DVDs and streams movies over the internet to its members, are so happy that 90% recommend the service to their family and friends. Such vast word of mouth is so rare that it's surprising other companies haven't tried to adopt Netflix's innovations.

The subscription service began in 1999, and Netflix had 270,000 members by the end of 2000. Today, there are more than 10 million. In 2008, the company had $1.4 billion in revenues and a net income of $83 million (after investing $200 million in marketing). Michael Pachter, a financial analyst with Wedbush Morgan Securities, estimates that in 2010, it will have nearly $2 billion in revenues and a net income of $124 million.

Netflix's stunning success is mostly due to a rare ability to understand its target audience so well that it consistently over-delivers value, from the attractiveness of the service to the accessibility of support. Much of this is due to CEO Reed Hastings, who learned how to delight customers by focusing on a single product at his first company, Pure Software (which provided debugging tools).

The idea for Netflix began in 1997, when Hastings misplaced the Apollo 13 videotape he had rented and was stuck with a $40 late fee. Later, on the way to the gym, he thought about its flat fee that allowed members to exercise as much as they wanted. He thought, "Why couldn't a movie service offer the same deal, and let people watch as many as they want when they want- with no late fees?"

Before Netflix became a reality, Hastings had to overcome one little problem: videotapes, which were heavy to mail. He had only heard about DVDs, but had never seen one. "I bought a bunch and mailed them to myself," he says. "When they arrived and were fine, I thought, 'This is gonna work!"

Hastings refined the DVD-by-mail concept based on the milk delivery system he had experienced while living in the UK: You get a new bottle for every empty one left on the porch-a revolutionary concept as far as DVDs were concerned. He prophetically named the company Netflix, believing that streaming videos over the internet would be a viable option in the future.

Hastings' forward thinking worked to his advantage. In 2007, Netflix started streaming movies, and Hastings thinks half the company's business will be in streaming by 2013, allowing Netflix to save on postage and handling costs.

"It's been our most important move for the long-term, but we continue to build bigger and deeper moats around our core business of DVD rental, which will continue to grow for another four to nine years," he says. "People will still be renting DVDs in 2030."

The instant gratification of streaming has not only helped retain customers, but also attracted a mass of new ones. This was dramatically demonstrated in 2008, when Netflix offered the 8 million X-Box LIVE Gold members-who already had a variety of entertainment options-promotional access to its streamed flicks. According to Pachter, more than 200,000 were so taken by the packages that they became paying subscribers.

Fans of hard-to-find classics, obscure new releases or old TV series can find them among the 100,000 choices in 200 genres. More than 12,000 so far can be streamed to a computer or a number of Netflix Ready Devices. Despite the broad selection, half the titles are in the mail every day. "Every movie is a great movie to someone, which explains the beauty of Netflix," Hastings says. "Small movies that might not get mass distribution by the studios find a home-and a riveted audience."

Of all the packages available, the $16.99 membership has proven the most popular: Members borrow an unlimited number of DVDs (they can have three at a time) with no return deadline, delivered from one of 58 distribution centers, plus an unlimited amount of streamed movies. It's a deal no other company can remotely match-his competitors have tried with little success-and it's no wonder the average member spends twice as much time watching movies as they did before joining.

Also driving increased viewing is CineMatch, the company's proprietary recommendation program, which it claims has been 90% accurate in predicting what individuals will like based on past preferences. That's not good enough for Hastings, who in 2006 issued a $1 million challenge to improve it by 10% (developers are almost there). And Netflix allows customers to rate movies they've seen; the average user has rated 200 films.

Adding even more strength to the company is the easy-to-use website, which makes it simple for customers to rate their favorites, order DVDs or use internet streaming. And if anyone has questions, live help is available by phone 24/7. In fact, ForeSeeResults recently rated Netflix as No. 1 in e-commerce customer service for the ninth consecutive survey, beating out such formidable names as Apple and Amazon.

Any business owner will tell you that customer service is a top priority. But in reality, it seems that Hastings may be one of the only ones taking this idea to heart. For Netflix, "Our customers are No. 1" is more than just a sign on the wall.

QUALITY CONTROL

For Netflix, keeping employees happy is just as important as satisfying customers. Find out why Glassdoor.com recently ranked Netflix the third-best place to work, above Google, Whole Foods and Apple.

Hastings attributes much of Netflix's success to the company's high-quality employees (there are 500 salaried employees at the Los Gatos, CA, headquarters and in Beverly Hills, and 2,500 at the mail, call and central operations centers). "When you hire stunning colleagues, and increasingly empower them and turn both decision-making and development over to them," he says, "they in turn do the same with those they work with. It's a virtuous cycle."

How exactly does Hastings empower them? It's a system he calls "freedom and responsibility." Believing that rules and procedures can hinder innovation, Hastings gives his employees the opportunity to hypothesize, test and create in a high-performance culture. As part of this system, Netflix lets employees choose how much of their salary they want in cash and stock, and they can take as much vacation time as they want as long as their work gets done.

Published in Business :: Business

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