How Does Netflix Make Money?

Netflix is a subscription-based service that makes its money by offering three simple membership plans: basic, standard, and premium. All plans include access to streaming content on a phone, tablet, computer, or television, and they differ in video quality:

• Basic: EUR 7.99/month: Good video quality in SD (480p).
• Standard: EUR 9.99/month: Great video quality in Full HD (1080p). 
• Premium: EUR 11.99/month: The best video quality in Ultra HD (4K) and HDR. 

Netflix is not tied to larger media organization (e.g. Apple TV), it is not supported by other products or services (e.g. Amazon Prime Video), nor does it earn from advertising. Netflix’s financial success is determined by its ability to gain and maintain subscribers. Consequently, company should do the best to prevent its existing customers from cancelling their subscription and switching to the competition. A critical component for this is the NRS, which is one of the most sophisticated recommendation systems offered by any video streaming service today (Pajkovic, 2021).

Netflix engineers Gómez-Uribe and Hunt in their report “The Netflix Recommender System: Algorithms, Business Value and Innovation” state that the service interface is designed to minimize the amount of time users spend choosing what to watch since it is a key factor in customer retention, a crucial aspect for the company’s financial success. According to these authors, Netflix aims to achieve the maximum amount of ‘moments of truth’—that is, a customer choosing to watch a specific title within seconds of logging in.

There are two main business segments in the Netflix:

• Domestic and international streaming: revenue from monthly membership fees for services that solely consist of streaming content.
• Domestic DVD: revenue from monthly membership fees for services that solely consist of DVDs to members within the United States.

It should be noted that the DVD rental division remained profitable for Netflix even its streaming services grew to become the company’s largest revenue generator. In its annual report about 2021, Netflix outlined the following financial results in both segments:

⬇️ REFERENCES:

• Netflix financial reports to investors: https://ir.netflix.net/ir-overview/profile/default.aspx

• Pajkovic N. Algorithms and taste-making: Exposing the Netflix Recommender System’s operational logics. Convergence. May 2021. doi: 10.1177/13548565211014464