How a Competitive Advantage Led Netflix to Dominate Their Market

November 15, 2012 at 12:04 pm | Blog

Follow these Steps to Dominate Your Market

Movie megastar Netflix hit on an amazingly profitable competitive advantage shortly after its founding in 1997, by offering DVD rentals via mail at a flat monthly subscription rate. Their well known business model: subscribers enjoyed unlimited rentals, without the added worry of late fees or shipping & handling. Netflix quickly developed a reputation for revolutionizing the movie rental market. As a result, Netflix dominated the market and enjoyed minimal direct competition.

Netflix piechardFast forward to 2010. Netflix discovered another way to maintain their market positioning and outstanding competitive advantage by offering an app for the Apple iPad, iPhone and iTouch. In 2011, book store giant, Barnes and Noble, began pre-installing the Netflix app on its Nook tablets. Just last month, Netflix added a “Just for Kids” section to its app for the iPad family, offering movies and TV shows for those aged 12 and younger.

Netflix entered the mobile movie market in its infancy, effectively capturing the ‘first to market’ competitive advantage. The conglomerate didn’t sit on its laurels in terms of maintaining their competitive advantage, and its numbers prove it. Netflix now has a total of 27.6 million subscribers, in domestic and international markets combined.Smart, sharp, and evolving competitive advantages have contributed to their success, and may very well have saved the company from an early demise (remember Blockbuster?). There’s a lot you can learn from Netflix about the importance of competitive advantages.

What Netflix Has Done Right, and What You Can Do Right Too

1. Identify a Strong Competitive Advantage.

    • Netflix recognized that late fees were bringing in big bucks for Blockbuster – roughly $300 million annually – but the fees were alienating its customers.
    • Netflix understood that convenience is near the top of consumers’ hierarchy of purchasing criteria and used that knowledge to identify its winning competitive advantage: DVDs mailed right to your door, no limit on rental time, no late fees.

2. Evaluate Your Competitive Advantage.

    • Netflix realized that to remain competitive, and retain its leadership role in the market, it must reevaluate and evolve its competitive advantage as trends and technology transform.
    • When Netflix saw a competitive advantage weakening, it identified a new competitive advantage. Netflix monitored its competitive advantage to be sure it didn’t become obsolete.

3. Listen and Respond to Customers.

    • Netflix adjusted its business model to meet customers’ changing needs and wants. Convenience was still at the top of their customers’ buying criteria, so they focused their efforts on offering movies via phone and tablet.

4. Don’t Compete on Price Alone.

    • Instead of lowering price when faced with competition from Amazon, Hulu and HBOGo, Netflix raised the price of its combined streaming and DVD rental subscriptions by a whopping 60%.
    • Netflix didn’t have to compete on price because it had long established and communicated its competitive advantage – solidifying its position as a leader in the industry.

Despite increased competition and prices, Netflix’s usage numbers are higher than they were last year. Peter Kafka, Of All ThingsD, reported Sandvine’s research findings which link Netflix to over a third of all “downstream” traffic in North America. No single company comes close to that number. Sandvine’s CEO Dave Caputo said, “I thought the competitive threat would’ve been more significant against Netflix, but they seem to be holding their own.” Adding, “The rising popularity (of Netflix) underscores the strategic advantage Netflix has gained with its online service and efforts to make streaming accessible on everything from televisions and game consoles to mobile devices.”

All companies need to consistently monitor and evaluate their competitive advantages. A well defined, articulated and communicated relevant competitive advantage helps companies retain current customers, attract new prospects, and minimize the need to compete on price.

Reflections:

  • Have you considered how advancements in technology may threaten your competitive advantage?
  • How do you monitor your customers’ and prospects’ changing needs and wants?