By Eddie Yoon, Principal, The Cambridge Group
Netflix reported another great quarter last month, with big subscriber and stock growth. It's hard to believe it was just two years ago that the company and its CEO were widely ridiculed—and even subject of a Saturday Night Live parody.
Certainly much credit is due to the company’s drive to add new tricks to its tool kit by creating new content like House of Cards, a programming success that's highlighted how Netflix is using its analytic power to find new ways to satisfy customers.
I've written three posts for the Harvard Business Review on Netflix since its difficult 2011. All were bullish on the company’s future. I had many left-brain reasons why to be bullish—the quantified upside of digital streaming, the company’s leadership, the distribution and analytics advantages, etc. But I think there was emotional data that I've acquired as a 10-year subscriber that stitches all of the rational reasons together and amplifies them.
Put simply, Netflix is a generous company. And generosity can be a highly effective growth strategy.
Most business is viewed as zero sum when it comes to competition—and too often when it comes to consumers. But Nordstrom's generous return policy and customer service has been highly effective. Costco is well known for its veritable free lunch buffet with its samples. Gillette gives away free razors to teenagers for their first shave. And Southwest, known as a discount brand, touts a bags-fly-free campaign?
Here's the singular theme that’s common across these brands. They are all great products and experiences. And they know that giving you a little taste of something great will have you coming back for a lot more—at full price.
A more left brain way of articulating this is Value = Benefits/Price. When consumers see that the benefits exceed the price for something they want, they sign up. The trick is to find benefits that people want and deliver them in a way that costs less than the price you charge. Said another way, generosity can help you grow when Value = Benefits > Price > Costs.
There are several ways to make benefits > price > costs and profitably grow.
1. Offering things that make consumers feel great with low cost. Commerce Bank (now TD Bank) found that free coin changing machines drove new accounts. Consumers felt it meant the bank wouldn't nickel and dime them.
2. Seeing giveaways as high-impact, low-cost marketing. A sampling study from Knowledge Networks PDI noted that sampling programs (the kind Costco uses) drove a 475% sales lift on the day of the event.
3. Offering benefits in exchange for strategic information. Most free warranty programs are there to gather detailed consumer information for customer relationship management purposes.
4. Betting on lifetime value. A single transaction might be a loss leader, but generosity has a big impact on loyalty and lifetime value. That’s why Gillette samples its razors at age 18 and not 38.
All of these generosity strategies are at play in Netflix's strategy and execution with House of Cards.
1. Releasing all 13 episodes at once didn't increase the total production cost, but in made Netflix binge viewers very happy.
2. This generated a ton of positive PR buzz and goodwill among consumers. As CEO Reed Hastings noted, the big bang of releasing all 13 episodes at once "reinforced our brand attribute of giving customers complete control over how and when they enjoy entertainment."
3. It was a great way to quantify the emerging demand of binge watching—something that Netflix's competition on regular TV can't easily accommodate.
4. It drove far more new subscribers with lots of goodwill vs. people trying to cheat the system. Netflix has always offered consumers a free one-month trial of its service, and one of the main concerns of Wall Street was that people would take advantage of the free trial month, watch all 13 episodes of House of Cards, then quit. Netflix said that fewer than 8,000 people actually did this, or about 0.6% out of the 1.3 million people who signed on for the free trial in January. Consumers tend to respond in kind when they are treated generously and with respect for something they value.
But it's not just tactics. It’s also how generosity flows throughout the Netflix brand and business model. Last quarter, Netflix said that its subscribers (across a total subscriber base of 36 million) watched 4 billion hours of TV. Per Nielsen, the average person watches 34 hours of TV per week. That means Netflix subscribers watch about 15 billion hours in a quarter. The latest numbers suggest Netflix accounted for approximately one quarter of total TV viewing for its subscribers. But at $7.99 per month, Netflix only charges 10% of the cost of the average cable bill, which is around $80.
If some skepticism remains about generosity as a growth strategy, then consider the alternative... stinginess. Does that ever work in the long run? How does it work in the social era, where singular acts of generosity or stinginess spread like a virus? If Twitter is the TMZ for corporate behavior—good and bad—might generosity be the only viable choice in a digitally connected world?
The etymological root of generosity is the same as genesis, genius and generate. Generous companies appear to be proud of what they make. Panera is another example of a generous company. Panera knows that putting its great food in people's mouths—and letting those same people talk it up to others—is the best marketing for them. That's why Panera's donations-only cafés are breaking even on average. Panera estimates that about 60% of customers pay the suggested donation, 20% pay less (or nothing) and 20% pay more. And Panera knows that generosity is highly empowering for employees, and leads to wonderful stories (and PR).
Netflix’s Hastings recently expressed it this way in the New York Times, when he realized that changing its subscription fees in 2011 was a mistake from the thousands of emails that poured in from angry customers. "I realized, if our business is about making people happy, which it is, then I had made a mistake. The public shame didn't bother me. It was the private shame of having made a big mistake and hurt people's real love for Netflix that felt awful."
Most CEOs don't talk about love very often. But by giving consumers benefits that feel generous, Netflix and other companies are creating an effective way to grow.
This article was originally published on the Harvard Business Review.