Up until now Netflix had been relatively relaxed about subscribers sharing their screen allocations with friends and family. The company’s CEO, Reed Hastings, told reporters in 2016 that sharing account information was not necessarily bad for business.
“We love people sharing Netflix,” he explained, using the example of parents who allow their children to log in to the service using their account details to illustrate the point. “As kids move on in their life, they like to have control of their life, and as they have an income, we see them separately subscribe. It really hasn’t been a problem.”
Until last week, that is. Netflix has started to challenge the credentials of viewers when they login. “If you don’t live with the owner of this account, you need your own account to keep watching,” the home screen ominously declares. To continue watching, users are asked to verify their account with a code sent to them by text or email. Netflix has been cagey about discussing the move, but the company is testing this new protocol on a small proportion of accounts, presumably with a view to reviewing the impact it has on subscriber behaviour and rolling it out globally in the near future.
Why the shift from easy-going service-sharer to authoritarian issuer of stern warnings?
The simple answer is that Netflix is a victim of its own success. It has been growing at an impressive rate for many years and Covid merely increased that growth rate even further. All of sudden, in mature markets like the US and the UK, the streaming service can see the end of the runway.
Take the UK, for example. Around 60% of all British households now have a Netflix subscription and most have opted for one of the more expensive multiscreen options. When you grow this much, for this long, and with most consumers opting for the premium option – growth starts to become challenging. Not because there is anything wrong, but because you have done everything right.
Netflix’s changing funnel
The best way to illustrate the nature of Netflix’s challenge, and the rationale behind the new password pressure, is to look at a simple purchase funnel. A word on funnels before we go on. There has been a whole bunch of shit thrown at funnels in recent years by people who really should know better. I do not know of a way to build strategy without a funnel. It is the backbone of all marketing strategy and, along with targeting and positioning, sits at the centre of the dashboard of every well run brand.
There are nuances of course, usually missed by the critics. The main one is that the generic funnels from the textbooks that run through awareness, consideration, preference, purchase and advocacy are inevitably of little use. Consulting firm McKinsey keeps trying to design and redesign a generic funnel for all its clients and misses this point too.
You need to customise it to your business and your market. Use qualitative data to build the specific hierarchal steps in your purchase funnel, and then quant data from a representative sample and maybe some actual CRM data from your purchase systems to populate it. Then compare your conversions against competitors to find the problems and the opportunities, and let those discoveries speak to strategy in the form of smart, pointy objectives for the year ahead.
If you do that for Netflix it becomes apparent why they are on a mission to tighten subscriptions. I have used a bunch of different, often quite specious, data to populate the funnels below so please don’t start shouting at me for using dodgy data. I admit it here in advance. These funnels are built from shit and various unreliable data points and extrapolations that are probably far from the reality of things. I am sure Netflix have much better data than me. But I am equally sure that their funnel is telling them the same thing as I am about to say here.
Here is my estimated funnel for Q2 2019 for Netflix in the UK. On the far left are the 27.8 million households in the UK. Otherwise known as Netflix’s total potential market. Two years ago, just under half those households were watching some form of subscription VOD. That’s not the same thing as being a subscriber – as we will see in a few paragraphs. This is the number of households that had access to SVOD, not the smaller number who were paying for that access.
Netflix is the clear first mover and market leader when it comes to SVOD. It will take at least another five years for Disney to catch them. So almost all the households watching some form of SVOD were also watching Netflix back in 2019. Again, that number is slightly bigger than the total Netflix subscription base because of password sharing.
The biggest opportunity on the 2021 purchase funnel is no longer the households resisting the lure of SVOD. Instead, it’s the 20% of the market who watch Netflix but don’t pay for it.
The basic Netflix subscription is £5.99 and allows only one screen to be watched at a time and making password sharing all but impossible. Standard and premium tariffs add more screens for more money and are shown as Netflix++ in the chart above. The good news is that most Netflix subscribers opt for these multiscreen offers. The bad news is that, according to the estimates, around a third of these subscribers share some of this multiscreen access with others who do not live in the same household.
Netflix continues to represent more than half the total minutes of SVOD watched in the UK. And with an NPS of around +45 it continues to offer an excellent service that is significantly more satisfying than any of the other options available. As is the usual practice, I’ve used NPS here in a different format for the funnel, showing not the net total but the estimated number of premium Netflix subscribers who rate the service with a 9 or 10. That might create what looks like a big drop off for that final bar, but it’s actually a hell of an achievement. Very few brands can create that kind of conversion.
Now gaze at that 2019 funnel and talk to me about strategy. What would you focus on if you were running Netflix two years ago in the UK? You always fix funnels from right to left for the same reason you fix a hole in the bucket before turning on the tap.
The NPS drop-off looks big, but its actually the natural result of setting such a high bar of 9 or 10 on an 11 point scale. You wouldn’t try and make this much higher because its already high. It’s a similar story for the drop off from the basic tariff to the more expensive Netflix++ options of standard and premium. You could focus on trading up basic subscribers to a higher rate. But almost 80% of the customer base already sign up for a higher tier and as subscribers experience the frustrations of multiple screens and only one subscription, they will do that upgrading for you. Just give them time.
The only obvious objective in 2019 was for Netflix to keep targeting the other half of the market: those British households that still have not signed up for SVOD or Netflix. Back in 2019 you would have set an ambitious goal along the lines of ‘increase the proportion of British households that subscribe to Netflix from 42% to 50% by December 2019’. You would have targeted mainstream households that were yet to signup for SVOD and pushed all the hot, exclusive shows to hopefully attract new subscribers. You’d have used a decent ‘long’ emotional campaign with a tagline about stories and a showcase of new programming. You’d have spent your money online, outdoor and (of course) on TV where your target consumer is already consuming the competition.
And that is exactly what Netflix did. Thanks to increased marketing activity and a handy little global pandemic, households in the UK signed up in their millions for Netflix. Best estimates would suggest that more than 17 million households, 61% of the total in the UK, now subscribe to the service. Normally when you reach beyond the 60th percentile you start to feel scratchy about further penetration. The ceiling is suddenly visible and you worry about the oxygen left in the room.
But things are much worse for Netflix because of the sharing issue. If 61% of the market has a subscription, it means almost 50% have a premium subscription. And that means that around a third of these households – around 17% – now provide free access with another household. That means there are almost 5 million households in this country watching Netflix but not paying for it. The company is missing out on around half a billion quid a year because Uncle Terry is a good sport and Jane will save money whenever she can.
Now slip into the shoes of Netflix’s UK marketing team and work through the strategic objective options once again, this time for 2021. The number of households now watching SVOD has grown so much that it will make recruiting the same numbers for the coming year much harder. There are some families that will simply never sign up and we must be getting close to the bottom of the SVOD barrel. At the very least, recruitment of new households will start to slow down. And because of the huge base of premium subscribers that Netflix has already recruited, the sharing issue is all the more problematic, and it will only worsen as more premium users sign up. It’s not just that sharing has become a bigger source of missed revenue, it’s that the other avenues of growth are also becoming less attractive.
The biggest opportunity on the 2021 purchase funnel is no longer the households resisting the lure of SVOD. Instead, it’s the 20% of the market who watch Netflix but don’t pay for it. There is no need to sell these customers on the quality of the shows or the many benefits of Netflix with an ad campaign: they have been appreciating these things for years. No need to target them with clever programmatic advertising: they tune into Netflix’s home screen every night. What the company now urgently needs is to persuade/cajole/intimidate these freeloaders to take out a proper subscription.
A new marketing objective has been created. Something along the lines of ‘convert 25% of the households who currently watch Netflix on someone else’s subscription to pay for their own service by December 2021’. And next to it is the estimated value of success, something along the lines of £100m. And all of it at 100% gross margin.
That is why Netflix is testing a stricter approach to passwords and subscription. Not because they have suddenly become mean spirited or more authoritarian. But because their funnel is telling them do it.