Learning lessons from Netflix's losses
If a streaming giant like Netflix can experience such a sharp fall, subscription-based companies everywhere should be mindful of the difficult times
The news that Netflix suffered a significant drop in subscribers earlier this year may have come as a surprise to many. After all, prior to the pandemic, the brand was already a household name. The events of 2020 simply consolidated its position as market leader. Indeed, Wall Street had been expecting the streaming service to grow by 2.5 million subscribers. Instead, Netflix is likely to lose 2 million within the next quarter.
This was the first time in a decade that Netflix had experienced a fall in subscribers, something it blamed on a range of factors, including the emerging cost of living crisis. With some UK customers currently paying a third more for their service than they were two years ago, it's perhaps unsurprising that, when money's tight, their Netflix subscription was one of the first things to go.
Another factor is the increase in streaming services. The launch of Disney+, HBO Max and, most recently, Paramount+ have led to more competition and less content to distribute. Consumers have more choice than ever, and if they don't feel they're getting value for money, they're more than happy to cancel.
What, then, does Netflix's loss mean for other subscription-based businesses? And what can they do to retain the value of their existing subscribers in the light of increasing economic uncertainty?
The value of existing subscribers
The good news is that, despite Netflix's losses, streaming subscriptions are continuing to grow. In fact, new data shows that monthly churn rates remain low, decreasing by 19 percent over the last three years, and by 11 percent between March and May 2022. And not only are churn rates down, but spending per subscriber is increasing; it's about three times what it was pre-Covid.
This doesn't mean subscription businesses should be complacent, however. The current economic climate means consumers are scrutinising their spending like never before and will cancel any services they don't consider as providing value. That said, the beauty of a subscription service is the convenience it offers over owning something. That's why so many subscribers will keep the service they love - but only for as long as they love it.
In times like this, then, it's to these customers that businesses should look to maintain - and even grow - their bottom line. When subscription rates slow or decrease, they should focus less on acquiring new customers and instead consider ways of maximising the revenue from their existing subscribers.
Loaded with chances
Building strong, sustained customer relationships is fundamental to the success of the subscription economy. So, by offering their customers what they want - when they want it - subscription-based businesses will be better able to ride out the current wave of uncertainty.
By offering their US customers additional access to Disney+ for a few dollars on top of their existing subscriptions, ESPN and Hulu are good examples of companies that recently found the "sweet spot" of when to upsell at the right time and at the right price.
Analysing user metrics can indicate where that sweet spot is. Monitoring a customer's usage, for instance, can show how much they value a particular service. If they're a frequent user, then there's likely an opportunity to upsell, whereas if analytics reveal that if a user hasn't logged in for a while, there's a need to persuade them to do so, or risk losing them. Analysing subscribers' behaviour in this way will enable businesses to more accurately align their offerings with their customers' needs, adjusting them to suit, and generating a consistent source of revenue.
If they know where to look, a business will see that its subscriber base is loaded with chances to generate more revenue. Customers enjoying excellent value from a service will be ripe for upsell and cross-sell opportunities. Those who are receiving lower value, on the other hand, can be brought back into the fold if presented with the right offering at the right time. Whichever category - low or high value - a customer falls into, businesses should take advantage of every opportunity available to them to ensure they fully capitalise on their subscriber base.
Remaining mindful
The loss of 200,000 Netflix subscribers in early 2022 came as a surprise to many - not least its shareholders, who saw their stock fall by 20 percent when the news broke.
Even though the overall subscription economy appears to be in good health, it's clear that if a streaming giant like Netflix can experience such a sharp fall, subscription-based companies everywhere should be mindful of the impact that the current economic climate and market conditions could have on their business.
It's important, therefore, that while continuing to acquire new subscribers, they should also consider the value of their existing customers and, by monitoring their behaviour, focus on maximising the amount of revenue they represent. The cost of acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one, so it's critical that customer retention strategies are put in place. These strategies should take a customer-first approach, focusing on flexibility and offering customers the option to suspend and resume their subscription as it suits them.
John Phillips is general manager at Zuora