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Marketing 371.2 Rachel Frank Professor Esther L. Mead Matthew Hunter May 5TH, 2010 Breaunna Lake

Trevor Lewis Alexa Martz Desiree Roughton

NETFLIX INNOVATION, ADAPATATION, ACCOMODATION

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TABLE OF CONTENTS Executive Summary

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Introduction

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The Product: Netflix Current Service and Industry Market Share & Competitors Growth Outlook

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Demographics Age Gender Income Level Education Level

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Psychographics Magazine Subscriptions Online Activity Television Activity

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E-Commerce

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The Marketing Mix Word of Mouth: Buzz and Hype Direct Mail Product Inserts Netflix Red

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Diffusion of Innovation What is it?

Relative Advantage Complexity Trialability Observability

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Conclusion

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References

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EXECUTIVE SUMMARY Netflix is a subscription based movie and TV series rental service. This comprehensive report that discusses the strategically designed Netflix movie rental services—assessing what types of consumers use the service along with attributing various Consumer Behavior concepts to help further understand why it has become the preferred service of its kind. Following the introduction a general description of the company’s history along with its current operations are briefed. The report further discusses how the service has created a niche market surpassing similar businesses of its type. It also explains alterations that have been made in consumer market lifestyle and service expectations due to Netflix. The report then segments the demographics and psychographics of the Netflix consumer in the movie rental market using age, gender, income, ethnicity, education, and the exposure of entertainment/media mediums.

Introducing a new product service and altering the ‘usual’ routine of consumers is not an easy task, the next part of this report discusses some consumer behavior concepts that shape the campaign and success of this service. The first concept discussed focuses on the e-commerce business model of Netflix, including the challenges and triumphs associated with Netflix’s internet retailing. Later discussion reveals how Netflix has used several strategies in their marketing mix including word of mouth (buzz and hype), direct mail, product inserts, and color which are discussed. Finally, diffusion of innovation is discussed; focusing on how consumers react to a new product: what attracts them, why they try it, and what it will take for them to continue to use it. The five factors structuring this concept are explored: compatibility, trialability, observations, complexity and relative advantage. Each concept discussed is imperative to the adaption of the Netflix product and its resulting success.

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INTRODUCTION In the 1990’s, the Internet began to transform the lives of consumers worldwide. It offered a digital world without boundaries, a place where people from all over the globe could come together and connect through various websites, message boards, and e-mail systems. The home-based interaction provided by the Internet combined with continuous advancements in technology and changes in consumer lifestyle, lead ultimately to the creation of “e-commerce” and “online shopping”. Forced to meet the ever-changing needs of consumers, companies invested hundreds and thousands of dollars in the internet market and, although the passed twenty years has seen various rollercoaster trends within this market, there are several success stories. An online-based company that has managed to surpass the short-lived stages of hype and trend based consumer activity within the internet shopping market is Netflix. This online-based service was the first of its kind—it offered consumers a convenient, cheap alternative to the traditional “brick and mortar” style of renting movies. Netflix introduced a new era in the video rental market, along with an e-commerce business model and fulfillment of consumer expectations. This report will focus on the history of the Netflix service—how it started andwhat it offers, the demographics & psychographics of its consumers/market and several concepts explaining the elements of consumer behavior associated with the service: e-commerce, marketing mix, and diffusion of innovation.

THE PRODUCT Netflix started in August 1997 in Scotts Valley, California. Reed Hastings and Marc Randolph founded the company. Hastings was inspired to create a new kind of video rental service after being bombarded with late fees from a traditional store rental. The two entrepreneurs formed the online company to rent movies to consumers via mail. The company

4 officially opened for business on April 14, 1999. Originally launched with a classic pay per rental price plan, Netflix launched its highly successful subscription services in late1999 (The Gale Group, Inc.). Netflix.com has grown into an online community featuring member reviews and ratings along with custom recommendations based on users’ past rentals.

Current Service and Industry The movie rental industry has changed over the years due to the growth of technology and the changes in the needs of consumers. Before, when consumers wanted to rent a movie, they had to go to the local video store, but the e-commerce model of Netflix has made renting a movie much more convenient. Now consumers can rent movies without ever leaving their homes. Since the implementation of the Netflix service, movie rental companies have been forced to look for new ways to make their services non-intrusive and compatible in their customers’ lives.

Netflix is currently considered the king of video rentals, serving over 13 million subscribers (Netflix.com). Overtime, it has evolved its subscription services to give consumers a choice of monthly plans to best fit their needs. Membership plans allow consumers to rent one DVD to eight DVDs at a time, starting at just $4.99 a month. One of Netflix’s competitive advantages is the absence of any due dates or late fees, usually acquired with traditional movie renting. Another aspect that sets Netflix apart from traditional movie renting is that it offers a free trial for potential customers before they commit to monthly membership. After a two-week period of using the services at no charge, many trial members decide to commit to membership and become official Netflix subscribers due to their positive experience; according to an article in Adweek, nearly “90% of people who try Netflix go on to be paying customers” (Ditlea)

5 Netflix’s latest addition to its services gives consumers various instant streaming options for game consoles, televisions, and blu-ray players. Streaming movies to these devices has become extremely successful, and, as a result, negotiations are currently taking place with production studios for more access to their movie content (Bulik). “We have broadened our service offering to include Internet distribution, we overlap more and more with the $66 billion market for subscription-based home entertainment” (Netlix.com). This new option is continuing to change the movie rental industry and offers an evolving alternative to mail rentals backed by continuous growth in technology. Netflix continues to stay ahead of the pack when it comes to consumer needs and trends.

Market Share & Competitors Since 2008, Netflix has been the leading competitor in the movie rental market. As an industry whole, kiosks represent 19% of the market, traditional methods represent 45% and the online rental industry represents the remaining 36% of the market (“DVD Rental…”). As of last year, Netflix had an 18.2% market share in the DVD rental industry (Beyer). In 2010, the company increased its forecast of profits to $137 million, up from $125 million in 2009 (Bloomberg). Netflix’s top competitors consist of Blockbuster, Inc., Wal-Mart Stores, Inc., and Redbox. Redbox offers their consumers new release movies at a rate of $1 per night. With upwards of 20,000 kiosks all over the United States, Redbox’s availability is helping them to compete with Netflix. Redbox is hoping to avoid the fate of Netflix’s other competitor, Blockbuster (Blandeburgo). Blockbuster has tried to keep up with Netflix by expanding their options of distribution, but has now faded into the background in the mind of the consumer.

Blockbuster’s shares have now lost 73% of their value and the company has started closing over 1,000 stores (theStockMasters). Wal-Mart entered the movie rental market after they began to

6 see the great success of Netflix’s product and services. Wal-Mart offered a service similar to that of Netflix, mailing DVDs to customers for a flat monthly rate. Eventually, Wal-Mart and Netflix made an agreement that Wal-Mart would no longer be in the online DVD rental business and would encourage their customers to subscribe to Netflix. In return, Netflix would promote DVD sales at Wal-Mart and honor their existing subscriber rates for a year (Regan). Netflix’s innovative service dominates the market and influences competitors to follow suit if they want any hope in keeping up.

Growth Outlook Although Netflix has been negatively affected by the economy like most other companies, the company continues to gain new subscribers, maintain a high retention rate and remain the strongest within their competitors. With the economy in its current state, Netflix knows it needs to try, now more than ever, to keep its business on top. With Netflix’s strong distribution system and customer loyalty, it will continue to be an on-going part of the business world (The Gale Group, Inc.). Netflix continuously focuses on growth and branching out its services and brand. An example of this growth is observed through the methods of transaction and delivery--originally starting with mailing movies out to its customers, Netflix is now able to send movies straight to the consumer’s television/computer/game console to watch instantly (Crum). Netflix plans to further expand this use of instant-streaming technology in the upcoming future. They have made a partnership with Nintendo for their Wii devices to be able to stream Netflix content; which they plan to use to target new consumers in the future. Netflix is also working on expanding their services to other digital devices such as the iPad, iPhone, and the iPod touch (Crum).

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DEMOGRAPHICS Demographics help advertisers and marketers identify their target audience. As defined in “Consumer Behavior: Buying, Having, and Being,� demographics are simply descriptive characteristics of a population (Solomon, 2008). By using demographics, marketers are able to segment consumers into different markets by age, gender, income, and ethnicity. In studying Netflix as a product, user age, gender, income, education, and race help explain consumer behavior in relation to the product.

Age Research shows that the largest portion of Netflix users in one age cohort is 25.3%, ages 35-44. The next biggest segment of Netflix users is a slightly younger market ranging from 2534 and accounts for 25% of the Netflix market, nearly the same as the 35-44 segment. With an estimated 50% of the market being held by an audience ages 25-44. The third largest market is middle-aged consumers, the 45-55 age segment, which accounts for 18.9% of the market (MRI, 2008). The 55-64 age group account for 14.5% of the market, and surprisingly the younger 18-24 crowd account for only 9% of the market. (MRI, 2008). Netflix has the challenge of advertising to a vast target audience that often has very different interests.

Gender Research shows that 50.6% of Netflix users are men and 49.4% are women, only a 1.2% difference which is likely related to uncontrollable variables. There does not appear to be much difference found in the gender of Netflix users. This slight variation could be attributed to a number of factors, such as whose credit card is used more in the household. Overall, gender does not have a significant role in defining a target market for Netflix users.

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Income Level Income level plays a large role in the defining consumers of the Netflix service. The largest portion of users have an income level of $75,000-$149,999 and make up 40.6% of the market (MRI, 2008), representing nearly half of the total market. Many Netflix users earn larger salaries and have good credit, which explains why these consumers represent such a large portion of the market. The next largest segment is users earning over $150,000 a year, which makes up 17% of the market. The numbers steadily decrease with 12.7% of the market earning $60,000-$74,999 and 10.3% earning $50,000-$59,999. This trend plateaus at the $75,000$149,999 segment and begins declining. There are multiple reasons this trend may occur.

Consumers earning $150,000 or more a year may be more likely to purchase DVDs rather than rent them, or the fact that users with such high incomes represent a smaller portion of the total population may be reflected in this proportion as well.

Education Level Education level also plays a large role in defining Netflix’s user base. The largest segment of Netflix users are college graduates who make up 49% of the market. The next biggest

9 portion of the market is users who have attended college, but did not graduate, making up 27.1%.

This reveals that college attendees make up a majority of Netflix’s consumer base and are an incredibly important segment for Netflix to reach and cater to. The next biggest market segment is those who have not gone to college, who account for a significant 23.9% of total users. Of the remaining users, 18.3% have graduated high school and 17.2% have post graduate education.

Race Race is a significant factor in describing Netflix users. Surprisingly, 88.4% of users are white, which is an incredible majority of all users. The rest of the user base is made up of 4.5% from African American descent, 2.6% Asian, 0.7% American Indian, and 2.6% some other race.

The lack of diversity in Netflix users may point to an untapped market of potential consumers marketers have failed to cater to.

PSYCHOGRAPHICS Psychographics help marketers identify their consumers by interests and the behaviors they engage in. As defined by Solomon, “Psychographics is the science that focuses on how the physical environment is integrated into the consumer’s subjective experience” (Solomon, 2008).

10 By observing the previous actions of consumers and identifying activities they engage in, marketers are better able to understand how to best advertise their product to the right target market.

Magazine Subscriptions Magazine subscriptions did not play a significant role in determining which readers are more likely to be Netflix users. Subscriptions for each magazine had very similar amounts of users. The highest portion, 19.9%, of Netflix users subscribe to People magazine (MRI, 2008).

The next highest portion of users subscribe to National Geographic and represent 18.8% of the total market. Lastly, Better Homes and Gardens subscribers account for 17.8% of the total amount of Netflix users. These numbers may simply be due to the popularity of each magazine rather than having a correlation with Netflix consumer behavior. Marketers can utilize these percentiles to better advertise to their market and earn a higher return on investment by reaching a large web of potential customers.

Netflix marketers specifically try to reach busy parents because they will generate the most income for Netflix. “With ads in parenting and entertainment magazines, it woos busy parents who would like to keep a steady stream of vetted DVDs available for their children without constant trips to the video store that always take twice as long as it should� (Stratford).

These numbers show how marketers focus on consumer’s lifestyle choices in order to market their product. Based on the data, Netflix has found specific magazines to reach their target market and gain the highest profits.

Online Activity As a business founded upon e-commerce, it is imperative that the behaviors of consumers online is observed. Because of the importance of online advertising and the fact that Netflix is an

11 online company it is important to take into account which websites consumers visit most. This information helps marketers make decisions in regards to banner advertisements, search engine marketing, and other interactive marketing techniques.

Email Accounts The largest amount of Netflix consumers, 35% of the total market, use Yahoo! mail accounts. The second largest portion of the market belongs to Hotmail with 20.4% of the market and Gmail with 16.4% (MRI, 2008).

Entertainment Websites IMDb.com accounts for the largest market segment, representing 10% of the total market.

Ticketmaster.com accounts for 9.8% of the market and ABC.com accounts for 8.5% of the market (MRI, 2008).

Television Activity Television activity of consumers gives insight into preferences in general programming and cable viewing choices of the Netflix market. These statistics show how willing consumers are to spend money on cable programming and also where TV advertising will reach the most consumers.

12 Cable Activity According to the most recent reports, 83.3% of Netflix users have also watched cable within the past week, 20.7% have watched pay-per-view and 20.4% had watched on demand programming within the last 12 months (MRI, 2008).

Cable Channel Choices In regards to cable channel viewing The Discovery Channel has the largest percentage of Netflix users tuning in with 42.1% of consumers (MRI, 2008). Next, CNN accounts for 35.3% of the market and The Weather Channel is viewed by 34.2%. Although, these numbers do not vary significantly, identifying these popular networks helps with marketing and media buying decisions.

TV Special Events Reports indicate that 26.6% of Netflix consumers watch the Pro Football weekend, 23.5% watched professional Football specials, and 18.8% watched Baseball specials. By reviewing this information, marketers can make advertising decisions during various special TV events.

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E-COMMERCE Just a few years ago marketers were still questioning whether or not e-commerce companies were a sustainable frontier that was here to stay (Solomon 352). Today, this “clicks vs. bricks” rivalry is still standing strong as companies such as Amazon, Ebay, and, of course, Netflix have become leading competitors in the online retail market. The current population’s money rich and time poor position has created consumers who desire instant gratification and demand quality efficiency. These often times dichotomous demands have created both challenge and opportunity for online companies. On the one hand e-commerce serve consumers who are time poor. They can gather information, compare prices, and make purchases all from the comfort of their own home or office, which provides a convenient and efficient alternative to traditional retail shopping. On the other hand the lag time associated with online shopping can be a turn off to customers who “want it now.” Shopping online also eliminates any opportunities to touch or try products before purchase (Solomon 354). So how does an online only company like Netflix address these consumer needs? They give the people what they want and, more importantly, what tradition brick and mortar stores can’t: a wider selection of inventory, home delivery and instant access, and lower prices.

Netflix currently offers over 18,000 “watch instantly” titles and mails up to 56,000 unique titles on any given day (“Virtual Fun”, Netflix.com). This is one clear advantage of ecommerce: one location of inventory serving an entire market. By offering thousands more titles than an average rental store can hold, Netflix has expanded its consumer base, while continuing to set itself apart from other movie rental options. This wide selection also contributes to Netflix’s sense of community. By offering consumers obscure titles and onsite social outlets

14 (“Virtual Fun”), consumers can express their individuality and relate with other customers, all while Netflix builds a sense of brand identity and loyalty within its consumer base.

One downside to e-commerce is the wait customers experience while products ship to their homes. Today’s consumers are all about instant gratification. We expect every item in stock at every store and at every time. Falling in line with its cutting edge service and striving for customer satisfaction, Netflix started as a company that alleviated this issue and has continued to expand its technology to completely eliminate it. Netflix offers DVDs in the mail all within a day’s worth of shipping time. More recently the company has also started offering instant access to movies online streamed through an Xbox and more recently on the Nintendo Wii and your home television. Netflix is once again leading the pack by twisting the trend of bringing TV to the web by bringing the web to TV (LeGasse). Now, not only do Netflix subscribers have access to thousands of movie titles in DVD form, they can also fill in those down days with thousands of titles available to “watch instantly.”

Often times the physical elements lost in online retail purchases are counterbalanced with better prices than traditional retail stores. If Netflix’s attention to detail and ability to address the classic e-consumer concerns weren’t enough to help the company succeed it has also lived up to the financial benefits associated with shopping online. When Netflix first started in 1998 it was a traditional $4 a video rental system. According to creator, Reed Hastings, “people weren't coming back." That’s when it hit him; unlimited DVDs for one monthly price, just like a gym membership (Andrews). Subscriptions saved Netflix, but how do they affect consumers? As author Nick Wingfield puts it, “Netflix's "unlimited" rental policy has more psychological than economic value, just as the unlimited-mileage option on a rental car is a comfort even for drivers don't spend much time in their vehicles.” For consumers, the idea of getting unlimited rentals for

15 the price of only 4 or 5 classic rentals is appealing, all the while Netflix gets to capitalize on sloth users and an average of 5 or 6 rentals per Netflix consumer each month (Wingfield).

THE MARKETING MIX Netflix had a unique challenge ahead of them when it first entered the market: How could Netflix differentiate itself from other rental services? At the time of Netflix’s release, there were several video rental stores, such as Blockbuster and Hollywood Video, who dominated the market. Over time, consumers develop routine behaviors for purchasing goods or services and it can be difficult to break them of those habits. Leslie Kilgore, the VP of Marketing for Netflix said in a 2002 interview with Technology Marketing, "When people think of movie rentals, they don't think by subscription and they don't think by mail." It became part of the consumer’s routine to visit their local video store to rent a movie for a night in with their significant other, occupy the attention of their children, or just to catch up on the latest blockbusters. For Netflix to survive and break the consumer’s routine, they had to employ several advertising techniques, including the use of word-of-mouth, direct mail, product inserts, and appearance.

Word of Mouth: Buzz and Hype Word-of-mouth promotion, generated through buzz and hype, is an extremely efficient marketing technique in today’s marketing world that new and established companies utilize to gain recognition and attention from the public. For companies founded on new ideas and innovation, buzz and hype are often a main priority to gain exposure for the company. These techniques are especially beneficial because they require little to no cost from the company. One drawback to word of mouth marketing is that much of the content is out of a company’s control.

Buzz is content created outside the company through the positive or negative experiences of consumers. Buzz can be extremely effective because consumers are more opt to trust other

16 consumers. If this user generated content is positive, this organic technique can offer a huge boost to a company’s reputation.

Buzz is one of the most trusted forms of advertising. Friends and family are likely to tell each other about the positive aspects and great satisfaction they receive from a product or service.

Netflix has made it a priority to provide consumers with excellent customer service and an extremely convenient product. Satisfied customers praise their experience with a service in dayto-day discussion, assisting with creating buzz within the market . This kind of word-of-mouth generates a great amount of publicity for a company. When a product or service is praised positively in society, consumers’ and the media’s attention is easily captured. At the beginning of the Netflix service, the main aspect spread through buzz was price. This attribute continues to attract new membership because the cost to customers has continued to flex with economic demands (Bulik).

Word of mouth marketing is one of the most effective but hard to come by forms of marketing. A product or service must be considered exceptional in order to generate enough enthusiasm from a consumer to spread the information. In the last ten years, Netflix has done an incredible job at offering a quality product at a low price (Ditlea). With its continuous innovation of service (i.e. mail rentals to watch instantly) that tends to shifting consumer behaviors, Netflix continuously meets and exceeds consumers’ expectations and customers are quick to notice. Due to Netflix’s superior service options, not only do current customer stay loyal, but Netflix’s member count continues to grow (Ditlea).

Hype is the less stable counterpart to consumer generated buzz. If consumers begin to think that a company is artificially spreading good words about its products or services, they will often be turned off by the manufactured information (Belch). Damage caused by the potential backfire

17 can be irreversible. Netflix chooses to announce the evolution of its services and consumers paying attention to the company spread the word themselves. Netflix treads lightly in generating hype and relies on consumers to create buzz instead.

Direct Mail One of Netflix’s more effective techniques is direct mail. Many large companies shy away from this method because there is a negative image associated with the method and it often yields a low response rate and small return on investment. Often times, advertisers fear that consumers will write off their brand because they associate direct mailing techniques with low quality products (Belch). For Netflix this has not been the case, Netflix has relied on this tactic to refer potential consumers to their brand. The company sends out a free trial offer of the service on a regular basis in hopes of gaining new customers. The offer directs potential members to the Netflix homepage where he/she is directed to sign up for a subscription package.

One limitation to the free trial is that the consumer is required to enter their credit card to receive the trial. Netflix claims on its website that this is a convenience for the consumer so “[his/her] membership will not be interrupted after [his/her] free trial ends and to serve as security for any potentially unreturned DVDs.� It also states that the consumer is free to cancel their membership any time during his/her trial period with no penalty (Netflix.com). Free trials are a very effective promotional tool, but consumers are less likely to sign up when asked to give away his/her credit card information first. Consumers like to try before they buy, or in this case, offer up credit card information via the internet.

Product Inserts Netflix also relies heavily on in-product inserts. Netflix has partnered with various distributors to include a free trial insert within their products. Some of these products include

18 DVD cases and DVD player boxes. DVD players were one of the fastest growing consumer products in the last few years due to their high availability and lowered prices (Ditlea). Netflix has positioned itself as a compliment to this device. With the recent rollout of the streaming Netflix service on Xbox Live, video-gamers have began discovering the free trial inserts inside new game cases. Xbox 360 is expanding as a multimedia device as manufacturers add on nongaming features (Kane). Nintendo and Sony are following suit by implementing streaming service into their devices. By associating itself with Xbox and other similar products, Netflix is embedding their service in the mind of the consumer as a staple of home entertainment.

Netflix Red One of Netflix’s most distinguishing brand attributes is the prominence and consistency of the color red. The color of a product is important to consider within the marketing mix because it is a strong communicator of emotion for the consumer and becomes an identifier for the product or service. Color has become so important to a brand that in a landmark 1995 Supreme Court ruling, color was deemed “such a potent brand identifier that a particular shade alone can serve as a legally defensible trademark” (Heath). Netflix uses the color red in every element of marketing, website design, and DVD envelopes to brand its service. Red is associated with feelings of warmth, strength and excitement (“Brand Design”). Netflix is able to catch the attention of its consumers and convey a message on an almost subconscious level by using this color consistently throughout their branding strategy.

DIFFUSION OF INNOVATION What is it?

Up until ten years ago, the process of renting a movie consisted of getting into a car, driving to the nearest ‘Blockbuster’ or ‘Video Stop’, signing up for a membership, finding a

19 movie (crossing your fingers that the desired title was in stock), being rung up at the counter, and getting in the car to drive home. On average, this process took 20-45 minutes depending on several extraneous factors. For the most part, consumers thought they were content with the process because it was the only option. Enter Netflix; a new movie rental company that ultimately transformed the way of movie rentals are done. Over the years Netflix has integrated itself into the lifestyle of consumers. Although the basic concept behind Netflix, movie rentals, was not anything new, the innovations structuring the business model and services offered were unlike any of its competitors. In order to attract and gain consumers for its new service, Netflix had to go through each stage of innovation: knowledge, persuasion, decision, implementation and confirmation (Solomon 327). The five main factors behind these stages of the diffusion of innovation are compatibility, relative advantage, trialability, complexibility, and observability.

The application of these factors and their influence are used within this section to describe the rate of diffusion and the consumer adaptation of the Netflix product.

Compatibility When a product is consistent with the consumer’s existing values or needs, it is compatible to his/her lifestyle and is likely to be purchased. In opposition, if a product does not offer anything to fulfill needs or desires of the consumer, it is likely to be rejected. Consumers had numerous issues with the traditional movie rental process: they despised high fees associated with late returns, the lack of options, as well as the long process and inconvenience it took to obtain the movies themselves. It is at these points of dissatisfaction that the Netflix service was modeled. Although quite different from the traditional movie rental service, Netflix is able to meet and exceed the needs of consumers by offering a once a month subscription rate, over “18,000 titles”, “no late fees”, online transaction processing, as well as delivery/return through

20 the U.S. postal mail service (Netflix.com). In addition to its standard online-mail-order service, Netflix has also expanded its services to “watch instantly” content through personal computers and at home television systems. It is due to these numerous positive attributes that Netflix is able to diffuse easily into the consumer lifestyle.

Relative Advantage Change is difficult to introduce because consumers like what they are familiar and comfortable with. However, if a service or product is perceived and proven to be better than what it supersedes they are more likely to try it. As mentioned above, the Netflix service is able to meet needs that a majority of traditional movie rental stores cannot. In addition to removing late fees, increasing variety, and providing an “order anywhere, at anytime” convenience for consumers, Netflix also rivals the movie theater industry by offering monthly subscription options for less than the price of a pair or movie tickets (Ditlea). The Netflix service also saves consumers time and money through free shipping on deliveries and returns. With the Netflix service consumers are able to eat dinner with the family while enjoying a movie, they are able to come home from work to find the latest movie release in their mailbox, they are able to watch a movie an return it three weeks later for no additional costs…with Netflix, the possibilities are endless. Although these advantages are perceived within the marketing campaign as well as with the service itself, it is up to the consumer to witness and believe these advantages before diffusion of the innovation occurs.

Complexity When consumers define a product/service as complex, they believe that an element of difficulty lies within its use. The more difficult a product/service is, the more time it takes to implement and understand which ultimately discourages consumers from purchase. In an article

21 published in MC Marketing Computers, Steve Ditlea states, “What makes marketing Netflix unique is that people have to make a behavior change.” Although the Netflix service is intended to make the lives of consumers easier through a more convenient movie rental process, it is challenging to alter the habits and rituals of consumers. As mentioned prior, consumers are less likely to use a service that requires change; they desire elements of comfort and ease. In order to encourage people to change their movie rental service expectations and reduce the problem of complexity Netflix offers a high level of trialability. By taking advantage of a risk-free, trial period consumers are able to experience the service to gauge the level of difficulty/complexity and satisfaction for themselves.

Trialability To encourage consumers to use their service, Netflix offers a 10-14 day trial period for first-time members (Ditlea). This trial period enables consumers to access all elements of Netflix: movie reviews, rental, and delivery, risk-free. Consumers are more likely to try a product/service when they have nothing to lose. During the trial period, consumers are able to gauge whether or not Netflix meets their need in terms of ease, convenience, and service. Within its first years of implementation, Netflix experienced a rate of “90%” turnover of trial members who become paying customers—proving that experience prompts purchase (Netflix.com).

Observability In order to have their needs met, consumers must have tangible results. In other words, the promises made by the product/service must be fulfilled; the more satisfied the consumer the faster rate of diffusion. Netflix promises, “low membership rates”, “no late fees”, “free and fast delivery in 1 business day”, “as many moves as you (the consumer) wants”, “instant streaming”, “convenience”, and a simple transaction process (Netflix.com). Through the trial and

22 membership period consumers engage in the Select-Receive-Watch-Exchange process of the Netflix service. The first step of the process, selection, has several observable advantages over traditional movie rental services—rather than walking up and down snake-like aisles within a store, consumers click & pick their selections based on release date and genre online. In addition to the easy of navigating through the selection of inventory, consumers also have a vast variety of over 12,000 titles to choose from (Ditlea, Netflix.com). After selection, the movie is either streamed immediately, to a computer/TV, or delivered to the consumer’s home within one business day. Since consumers do not have to drive to pick-up or return their rental movie they save the overhead costs of time and money. Once the movie is received, consumers can keep it for as long as they want at no additional charge. When the movie is returned a new movie is sent and the process starts over. The observable advantages ultimately contribute to the consumer’s decision to subscribe and continue using the Netflix service.

CONCLUSION In a time where the only constant is change, companies can never get too comfortable; they need to continue to predict and see what lies ahead— in technology, consumer behavior, and the economic market. Although consumers typically like to remain within their comfort zone, they also want their desires to be fulfilled in the fastest, cheapest, and most convenient way possible—all while maintaining an attractive image among other members of society. Netflix has revolutionized the video rental market.

Since its start in 1997 as a pay per-rental service, Netflix has continuously remained loyal to the satisfaction of its members offering improvements and options day-by-day. Nearly 13 years later, Netflix still finds itself recycling through the market/consumer driven diffusion of innovations process—most recently offering real-time streaming to consumers right to their

23 homes (televisions, computers, and game consoles). Rather than relying on flashy billboards and Super-Bowl Sunday advertisements, Netflix has been and continues to be founded upon relationship and relies heavily on the service recommendations made consumer to consumer; also known as ‘word of mouth’. As an e-commerce business, Netflix has several competitive advantages to offer above traditional ‘brick and mortar stores” as it brings ease, accessibility, and comfort to the entertainment rituals of consumers.

In spite of its ability to clench a vast amount of the video rental market, Netflix has to constantly keep moving with the fast-paced current of 21st century society. Although they have a seemingly loyal customer base, innovation is what lead them there and innovation is what they expect. By listening to it’s consumers and adjusting it’s services to fit their wants and needs, Netflix has quickly grown into the superior video rental service, combining an innovative business model and constantly evolving level of technology. Netflix continues to grow and meet the needs of consumers who have evolved to expect everyday life products to offer a sense of authenticity, quality, and attractiveness. As consumers struggle to balance a desire for instant gratification and the convenience of online commerce, Netflix has proven its ability to offer an attractive, quality product delivered by the most efficient means. Through constant adaptation and innovation Netflix stays ahead of consumer behavior, continually planning and adjusting to what customers want next.

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