The Perfect Case of Netflix's Subversive Innovation

I like Netflix, not only because they have produced such wonderful American dramas as House of Cards and Women's Prison in recent years, but also because Netflix has a short history of 20 years. Left many classic cases for the business community;

For example, how did Netflx, a small and weak company in the early days, start a business, survive in the cracks, and defeat bestv, the industry overlord? Later, I encountered changes in the wind direction of the whole industry, how it subverted itself to complete the transformation, how the content industry it represented changed, and so on. If you study Netflix deeply, you can master a lot of business wisdom and even life principles.

The Innovator's Dilemma is a classic business work by Professor Christensen of Harvard Business School. The most important content in it is to explain such a problem; How does subversive innovation happen? Or, how does an innovative small enterprise beat a big company? Finally, the book concludes that the three core steps of subversive innovation are;

First, use subversive new technologies;

Second, provide differentiated product experience;

Third, find your niche market and sell your products to them.

Looking back now, Netflix perfectly implemented this theory at the beginning of its business, thus completing the miracle that small companies challenged the industry hegemon.

The origin of Netflix

Netflix's use of disruptive new technologies.

Netflix was founded by Hastings and Randolph at 1997. However, Randolph left the company earlier, and Hastings served as CEO of Netflix for 20 years. 1997, two new technologies are about to change the world. One is the familiar Internet, and the other is that DVD has finally entered the civilian market.

In February of that year, several major film companies, including Columbi, MGM, Warner Bros. and Polaroid, announced their support for the DVD format standard. In March, DVD players began to be officially sold in the American market. Hastings and his team thought this should be an opportunity, so they set up a company to rent DVDs online, which is Netflix.

We all know that disruptive technology will definitely bring new product forms and user experience. So, how can Netflix use these new technologies to provide differentiated product experiences?

At that time, the dominant company that dominated the home entertainment market was bestv, whose model was home video rental. As a user, you can drive to the bestv store next to your home at any time, choose your favorite movies and TV series videos, and rent some discs to go home. How much has bestv achieved in this business? At that time, there were 50 million subscribers, and there were 8,000 physical stores at the peak. In addition, although bestv was eventually bankrupted by Netflix, there were actually many innovations.

For example, in the pre-Internet era, it began to use data to analyze the demographic characteristics of the people living around it, and then decided the types of movies and TV dramas collected by nearby video stores according to the data for everyone to rent. Today, this is also a kind of big data.

However, when subversive new technologies appeared, Netflix launched a "dimensionality reduction attack" on bestv, in the words popular in today's business circles. Netflix has made three changes in the whole product process and user experience:

First, don't open a physical store, just do online business. This saves the cost of store rent, service staff salary and so on. , greatly reducing the operating costs of Netflix. In addition, even if bestv's customer analysis is done well, it can't be as comprehensive and easy to use as the user data collected directly by Netflix online.

Second, send the DVD directly to the customer. Because DVD is much smaller than video tape, it is very convenient to mail and it is easy for customers to send it back after watching it. This will not only save trouble, but also have more choices. After all, no matter how many videos there are in the store, it is impossible to have a comprehensive choice online.

The first two points are the direct changes brought by technology. The last point is the changes made by Hastings team in the real user experience. That is, Netflx has introduced a "three noes" membership system with no expiration date, no late payment fee and no postage.

At that time, their practice was that anyone who paid $65,438+$09.95 per month could rent up to four discs at a time and watch them as long as they wanted. As long as you return it after watching it, Netflx will select four movies from the list of "movies you want to watch" collected in your online account and send them to your home. The whole process is very automatic and simple.

In contrast, if you are a user in bestv, you not only have to go to the store to select films in person, but also have a deadline to return them. Once you forget to return it, you have to pay a very expensive late fee. Later, people often mentioned a version of Netflix's entrepreneurial story: when Hastings founded Netflix, it was because when he returned the video, he found that his last one had expired and he didn't pay attention. As a result, the rent for a video is three or four yuan, but the late payment fee is forty yuan. So in a rage, Hastings founded Netflix-I think this story is somewhat interpreted by later generations, but it also shows that many consumers were somewhat dissatisfied with bestv's service at that time.

In addition, Netflix also has a killer service, which is overnight delivery. Netflix finds that people are usually impatient. Once you can promise to place an order today and the rented DVD will arrive tomorrow, both the registration rate of new users and the repeat order rate of old users will be greatly improved. Therefore, Netflix also promoted overnight delivery service.

bristle with/be beset with difficulties

You may think this is a perfect business story. Small enterprises have begun to subvert large companies through new technical means, advanced business ideas and friendly product and service experiences. However, if the analysis ends here, we will make the mistake of "simple attribution" and not look at business from a historical perspective. Netflix did do a lot of right things, but these are more of our summaries afterwards.

At that time, it actually faced many specific difficulties and even went bankrupt for a time. Later, it came to this day with its own efforts and a lot of luck. So what happened then?

First of all, disruptive new technologies are certainly good. But the problem is also very simple. When DVD technology first came out, too few people used it. And this is a "chicken and egg" problem: families who want to buy a DVD player think there are too few DVDs to play, and big entertainment companies want to make DVD content, but they think there are too few users with players to make it.

Say a number and you will have an intuitive feeling: by the end of 1997, there were only 500 movies in DVD format on the market, and most of them were old movies. This is about one thousandth of what bestv can offer.

Therefore, Netflix has been waiting for the outbreak of DVD for a long time-of course, now we know that it has finally waited for this wave, but at that time, there were many new formats to provide movies and TV content, and no one knew whether the DVD format could break through. However, Netflix has also made some very clever marketing moves. For example, it teamed up with some DVD manufacturers to put free experience coupons for Netflix in the box of DVD players, so that everyone can experience DVD rental service for free after buying the player and going home, which greatly improved its promotion speed.

In addition, Netflix also has very specific difficulties in the very good user experience we just talked about. For example, Netflix has been studying for several months, just to design envelopes for mailing DVDs and to study how to package DVD discs so that the sorting machine in the post office system will not be damaged. In addition, in order to ensure the timeliness of express delivery, how to choose the geographical location of your own inventory center and let the center best cover the surrounding users is also a great knowledge. Netflix spent unimaginable efforts on these problems and finally solved them better.

Finally, market acceptance of new technologies is always gradual. As a company, it is very important to find the earliest loyal users. In business history, many companies failed because their products and technologies were excellent, but they couldn't find a usage scenario.

Fortunately, Netflix has some luck in this respect-they found in the early days that many of their users are Indian students and skilled immigrants, because it is difficult for them to find movies from their hometown in traditional video stores, but Netflix has included many minority and foreign movies.

These movies are not popular, so the cost of Netflix is very low. The unpopular content also brought the first batch of loyal customers, which should be another excellent case of turning disadvantages into advantages. In the end, the superposition of all these factors made Netflix survive in the early days and really began to occupy a place in the market.

You should have a comprehensive understanding of the family history of Netflix. Just like the subversive innovation theory in The Innovator's Home, a small enterprise should be good at using subversive new technologies, provide differentiated product experiences and find its own market segments. Only in this way can we gain a foothold in the early stage.