Source: Unsplash

How Much are You Worth to Netflix?

And What It Means For How Much Netflix Can Spend on Content

The Value of a Netflix Subscriber

Netflix makes money by directly charging consumers a subscription fee for its service. Therefore, the value of a subscriber is fairly straight forward to calculate and depends on a few key things:

  1. How much they charge (ARPU/user)
  2. How much it costs on average to provide the service (Cost of Revenue/per user)
  3. How long on average a subscriber continues to pay for Netflix
  • Customer lifetime value is dynamic and changes with variations in gross margins and churn, and so they can increase or decrease over time.
  • When calculating customer lifetime value, we only consider the direct costs to provide the service (which for Netflix also includes all the content costs) but not G&A and marketing costs.

The Cost to Acquire Customers

A customer is worth ~$450 to Netflix once they subscribe.

Bringing it Together

So Netflix spends ~$45 to acquire a customer that is worth ~$450 to it meaning that their ratio of subscriber value to acquisition cost is 10. This is a pretty remarkable number, with a ratio of even 5 usually considered excellent.²

Estimates calculated based on Netflix 2017 Financials
  • The acquisition cost in the US is a lot higher, which makes sense since the business is more mature and advertising CPMs tend to be higher and so Netflix needs to spend more to acquire each additional customer.
  • The value per subscriber internationally is lower, which might be expected given lower ARPUs but is growing quickly. The value of an international subscriber based on Q1 2018 ($340) was 85% higher than the same quarter the previous year, while the value of a domestic subscriber ($725) was only 15% higher.

What This Means for Content Spend

As I mentioned earlier, the actual costs for content are currently included in Netflix’s cost of revenue, and so in some sense, they’re being completely accounted as a cost to serve/engage/retain existing users, and not how at least a portion of it is actually helping in terms of bringing new users onto the service (i.e., as customer acquisition cost).

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Tanay Jaipuria

Curious about technology, economics, and business. You can find me on twitter (@tanayj) or substack: https://tanay.substack.com/