With a 139 million large subscriber base, Netflix is undoubtedly one of the most successful video streaming companies out there. This success can be attributed to various implicit factors which enable the company to sustain its dominance in the marketplace.
These factors take the shape of certain cognitive processes which Netflix relies its customers to take. Elements ranging from its pricing policies to its recommendation algorithm all play integral roles in nudging the customers to think and behave in certain ways which tend to be beneficial the company.
The real question now is: what are those elements in Netflix’s plan which allows it to stay at the pinnacle of the streaming hierarchy?
1.Three Tier Pricing
Netflix offers three versions of its service- Basic, Standard and Premium. Three seems to be a momentous number, as this forms the basis of the three tier pricing approach.
There is a fairytale which goes by the title Goldilocks and the Three Bears. In that story, a child had to choose the right porridge to satisfy her hunger. After trial and error, she chose the porridge which was neither too hot, nor too cold. The porridge she had chosen was just right.
Her choice forms the rationale behind the Goldilocks Effect.
The Goldilocks Effect states that humans have the tendency to avoid extreme options. This perception to avoid extremity might lead the customers to view the basic option in an inferior manner, and the premium option in a superior manner. Therefore, the premium version might come across as a good to have, while the basic version might seem to be below par. As a result, the customers may be biased towards the standard version, which is ‘just right’.
In an experiment, subjects were shown five 35 mm cameras varying in quality and price. One group was then given a choice between two cameras: a Minolta X-370 priced at $170 and a Minolta 3000i priced at $240. A second group was given an additional option, the Minolta 7000i priced at $470.[1]
The results showed that the subjects in the first group were split evenly between the two options, while 57% of the subjects in the second group chose the middle option (Minolta 3000i), with the remaining divided about equally between the two extreme options.[1]
If Netflix offered only two versions of its subscription plans, Basic and Premium, the customers will have a greater tendency (compared to offering three versions) to pick the basic one, consequently decreasing the revenue generated by each subscriber.
By offering three options instead of two, Netflix attempts to push potential customers to pick the ‘compromise option’, thereby increasing the revenue so generated.
2.Left Digit Effect
Netflix has three subscription plans priced at $8.99, $12.99 and $15.99 respectively. Upon further inspection, one is bound to recognize that the prices end with .99.
This practice of ending the prices of products with .99 is called psychological pricing. This is indeed one of the most utilised strategies out there in the market. Nonetheless, the psychological processes which drive this effect need to be understood to truly appreciate the intricacies of the human mind.
With that being said, why did Netflix price their subscription plans to end with .99?
The mind of a customer reacts in a unique manner when exposed to prices ending with .99.
When exposed to such a price, customers tend to view the price as being much lower. This impression of a lower price is due to a certain perceptual flaw called the left digit effect.
A study which used data from wholesale auctions encompassing more than 22 million used car transactions found that cars with odometer values between 79,900 and 79,999 miles on average are sold for approximately $210 more than cars with odometer values between 80,000 and 80,100 miles.[2]
This indicates that people pay a disproportionate amount of attention to the leftmost digits in prices (like 7 in the range of 79,900 – 79,999) and these leftmost digits impact whether a product’s price is perceived to be relatively affordable or expensive.[3]
Netflix’s strategy to price its plans to include .99 indicates the effort on its part to lower the reference point by one dollar, and consequently make the customers to perceive product’s value to be more cheaper and affordable than it actually may be.
In Netflix’s case, psychological pricing works incredibly well as it perfectly complements the other factors described in this blog.
3.Endowment Effect
Netflix offers a 30 day free trial, where the customers can experience the service to its fullest. The ‘free’ trial is offered for a reason.
The endowment effect is a bias where people tend to overvalue an item which they possess. Humans tend to place a higher value on such a good, thereby being more reluctant to let go when the appropriate time comes.
Joe Girard, one of the greatest salesmen to have ever lived, used this principle to his favour. The following is an excerpt from his book, How To Close Every Sale, which shows his reliance on the endowment effect:
“In the automobile business, I get prospects into the act by letting them take the car for a demonstration ride. By putting customers behind the wheel, they begin to feel as though the car actually belongs to them. And that’s exactly the way I want them to feel. I want them to get used to owning my product. Once people feel ownership, closing the sale becomes a mere formality.”[4]
He couldn’t have said it better. Furthermore, experiments have shown how that very feeling of ownership develops the tendency to overvalue an item by many factors, irrespective of its actual market value. As a result, customers become more reluctant to let go once a bond has been established the product and themselves.
This connection between the product and the user is what Netflix tries to achieve by means of the free trial. Unrestricted use simulates ownership, and strengthens the bond which might prove to be enough for the customers to watch beyond the free trial.
4.Duration Of Free Trial
Netflix offers a free trial for thirty days. This duration is higher than those of several other streaming companies such as Crunchyroll and HBO Now, which offer two and one week(s) respectively. Though most streaming companies offer free trials, the duration determines the potency of the effect.
To find out how duration-of-ownership affects the way people value products, an experiment was conducted in Israel.
In the experiment, the subjects were given keychains. For half of the people, the researchers stated that they would buy it back a few minutes later. For the other half, the researchers offered to buy it back after an hour. The results of the experiment showed that people who kept the key chain for a few minutes sold it back for an average of 4.10 shekels.[4]
The longer the people held it for, the more they demanded. After an hour, people wanted an average of 5.31 shekels for the keychains.[5]
The experiment showed that there existed a positive relation between time and the sense of ownership developed by the subjects.
For instance, in my previous blog, I had written that Apple does not place a time limit on the usage of devices in its retail stores. By giving unlimited freedom of usage, this feeling of ownership is bound to increase, and again contributing to the increase of the chance of a sale.
Interestingly, several user reviews have also indicated that Netflix has allowed them to avail additional free trials (and in some cases up to 3) after the original one had been cancelled before the deadline.
Netflix, not only by allowing the duration of the additional free trail to remain at 30 days, but also by giving additional free trials, tries to increase the sense of ownership developed by the customers through means of time. This is done to significantly increase the perceived value of the service, in turn increasing the chances of converting into a sale.
5.Artwork Personalisation
With the exorbitant and ever increasing amount of content, Netflix needs to constantly engage viewers by recommending appropriate titles to them. This comes in the form of its recommendation algorithm, which is responsible for suggesting the viewers appropriate titles to satisfy their needs.
But the algorithm does more than just alter the position of titles and recommend personalised content. It elevates the concept of personalisation by going to the extent of personalising the artwork of titles.[6]
By doing so, Netflix can focus on one aspect of a show to encourage consumers to watch it. This specific appeal to consumers is able to ‘highlight the aspects of a title that are specifically relevant to them‘.[6]
For example, take the movie Kung Fu Panda 2.
Assuming that Netflix’s recommendation algorithm believes that Kung Fu Panda 2 is a suitable watch for the viewer, the artwork will display information which match the viewer’s preferences.
If a viewers’s watch history consisted of titles such as Ip Man 3, Body Of Lies and Black Hawk Down which all fall in the action genre, the artwork will feature Po in an intense action scene like the one below.
On the other hand, if the watch history is comprised of titles like Kevin Hart: Seriously Funny, Anthony Jeselnik: Fire In the Maternity Ward, and Gabriel “Fluffy” Iglesias: One Show Fits All which are all comedies, the artwork will feature Po in a comedic scene.
Now, suppose Netflix displayed the same artwork to all the viewers irrespective of their tastes, and in this scenario, showed the picture of Po’s face stuffed with rabbits to a viewer whose tastes resided in the sphere of action. There now exists a fair chance that the user may not pick the title, as conflict arises due to inappropriate visual cues which have been presented.
In addition, Netflix allows users to create separate accounts which allows an individual’s tastes and preferences to remain separated from another. This increases the efficiency of personalisation as likings do not get mixed, thereby enabling Netflix to hone in on the right artwork personalised to each viewer.
Yet, one might think that this level of personalisation comes with a cost.
To put into perspective, one of Netflix’s main competitors- Amazon Prime- neither allows the creation of multiple accounts nor personalises the artwork of titles, though its cost is similar to that of Netflix in the United States.
Finally…
To summarise, Netflix’s sales strategy consists of the following components:
- Three Tier Pricing
- Psychological Pricing
- Endowment Effect through free trial
- Offering free trial for 30 days
- Artwork Personalisation
These strategies in tandem work wonders for Netflix.
Stone Age. Bronze Age. Iron Age. We define entire epics of humanity by the technology they use.
Reed Hastings (CEO of Netflix)
And we are now in the Netflix age.
References
1.Simonson, Itamar, and Amos Tversky. 1992. “Choice In Context: Tradeoff Contrast And Extremeness Aversion”. Journal Of Marketing Research 29 (3): 281. doi:10.2307/3172740.
2.Lacetera, Nicola, Devin G. Pope, and Justin R. Sydnor. 2010. “Heuristic Thinking And Limited Attention In The Car Market”. SSRN Electronic Journal. doi:10.2139/ssrn.1682191.
3.Manning, Kenneth C., and David E. Sprott. 2009. “Price Endings, Left-Digit Effects, And Choice”. Journal Of Consumer Research 36 (2): 328-335. doi:10.1086/597215.
4.Girard, Joe, and Robert L Shook. 1989. How To Close Every Sale. New York, NY: Warner Books.
5.Strahilevitz, Michal A., and George Loewenstein. 1998. “The Effect Of Ownership History On The Valuation Of Objects”. Journal Of Consumer Research 25 (3): 276-289. doi:10.1086/209539.
6.”Artwork Personalization At Netflix”. 2019. Medium. https://medium.com/netflix-techblog/artwork-personalization-c589f074ad76.
Saailesh Boobalan 
Good research..nice read..keep it going…
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