Netflix Case

1. What part did pricing strategy play in the initial success of Netflix? Contrast the pricing in relation to traditional Video rental stores and describe how it evolved over time in support of Netflix's changing business strategy.

The pricing strategy had a huge hand on the initial success of Netflix. It used a market-oriented pricing approach and set its price based on analysis and research of the target market. Some of the factors incorporated by Netflix into its pricing strategy that contributed to its success were:

i. Rent 3 movies at the cost of one VOD rental

ii. Eliminated Late Fees / penalty pricing approach adopted by Blockbuster and other rental stores

iii. Transitioned from market-oriented pricing to value-based pricing through the introduction of unlimited rentals

iv. Movie recommendations to everyone whether / not they subscribed to Netflix services

Netflix captured the market for initial DVD player adopters by providing customers with DVD formats that weren't available in traditional movie rental stores yet. Netflix offered 3 movies for a month at $17.99 while rental stores offered a single hit movie at $18. The approach Netflix took to eliminate late fees and have a movie with the customer at all times helped Netflix capture market share instantly. As the stocking for DVD's grew more complex, the pricing remained the same but they provided an unlimited rental policy that greatly appealed to customers that were concerned with late fees and limited rentals. Hence as the market share grew Netflix successfully transitioned its pricing strategy from a market-oriented pricing approach to a value-based approach adopted by market leaders like Amazon.

2. What other measures did management take to support its pricing strategies and optimize financial performance?

The most crucial steps management took to support its pricing strategies and optimize its financial performance were:

i. Introduction of a recommendation system

ii. Tapped US postal services for DVD mail deliveries at low cost

iii. Optimized delivery logistics by reducing the steps involved in the supply chain to reduce shipment delays that ensured next day deliveries

The biggest problems Netflix faced that dampened finances hovered around the following areas:

i. Stocking up and building their initial inventory of movies

ii. High acquisition costs for per customer that went around $200 and lack of repeat renters

iii. The unavailability of hit movies that were always