Delight Customers in Margin-Enhancing Ways
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Customers are always beautifully, wonderfully dissatisfied, even when they report being happy and business is good. Great things happen if you chase their discomfort and address it.
Gibson Biddle’s main mission as VP of Product was to delight customers and experiment madly to invent a better future. In Gibson’s own words, early Netflix sucked but all early startups suck in some way.
What they had to come up with was a balancing act between delight and margin. They also factored in ‘hard-to-copy.’ What could they do that was unique? 20 years later, Netflix has a hard-to-copy device ecosystem where thousands of tv-based devices “automagically” stream Netflix. They also have their original content, massive amounts of data to aid personalization, and brand trust.
But it took a long time to get there.
Netflix’s Big Problem
In 2005 Netflix had a problem. Everyone wanted the new release DVDs as soon as possible. But when 50,000 people demand a DVD, and the company could only afford to buy 25,000, lots of people had to wait. Across the board, this was the main area for improvement reported by consumers and focus groups.
So they created the Perfect New Release Test, where 10,000 customers would add a new release DVD to the top of their queue and the very next day it would arrive in the mail.
Netflix then asked ‘are these 10,000 people delighted?’ and their metric for delight was retention. On average 4.5% of customers would cancel every month in 2005. In the ‘Perfect New Release Experience’ that number dropped to 4.45%.
Doing the math, if they rolled the experience out to all of their customers, they would “save” 5,000 customers, which was worth about $1 Million. The lifetime value was $100, which they doubled for word-of-mouth value — each customer would presumably tell a friend about Netflix.
However, the cost of rolling out the feature would cost $5 Million.
Gibson and his team were surprised.
They gave their customers the one thing everyone said they wanted, and they didn’t value it as much as they hoped. If the team increased the word of mouth factor to 8x instead of 2x, the math would work out (something which, Gibson reports, Amazon does all the time) but unfortunately they just didn’t have the money. They didn’t roll out the feature, but this case illustrates the balancing act between delight and margin.
You might also be interested in: How to Get a Product Management Job at Netflix
Stay Unique — Make Your Products Hard-to-Copy
Hard-to-Copy is very important for customer retention, as it creates an environment where you don’t have to worry about competition as much, and instead focus on delighting your customers.
A thought experiment: If you were given $500 million to create a startup to compete with Netflix, what would be hard-to-copy about what Netflix does?
- The first is their original content, which is difficult to copy given Netflix’s huge economy of scale — this year they will spend $19 billion on content as they can spread this cost against 150 million members.
- Next is Netflix’s unique personalization technology. Netflix knows the member tastes of 150 million members around the world, giving them lots of data to predict which TV shows and movies they should invest in.
- They have a huge device ecosystem network effect — every TV-connected device on the planet is pre-wired to enable you to stream Netflix.
- The last hard-to-copy advantage: the Netflix brand. Millions of people around the globe trust Netflix with their credit card each and every month.
“What’s Your Social Strategy?”
Finding the intersection of delighting customers in hard-to-copy, margin-enhancing ways is hard.
In Silicon Valley in 2008, as Facebook and social networks became more and more hyped, “What’s your social strategy?” was the main question on every Venture Capitalist’s lips.
So Netflix came up with “Friends”, their answer to social networking for movie lovers and their best guess about how to improve customer retention.
The idea was that you wouldn’t leave Netflix because you didn’t want to leave your friends, creating a hard-to-copy Network effect. You could get recommendations from your friends and see what they were watching.
What Netflix didn’t anticipate is that our friends’ tastes in movies were terrible, and no one wanted their friends to know their watching habits.
Social strategy worked for many companies, but it didn’t work for Netflix.
The Path to Personalization
Netflix created a personalized experience by encouraging members to rate billions of movies and then marrying that data with the information they had about the content through matching algorithms. Netflix’s personalization technology created a huge hard-to-copy advantage.
Netflix’s personalization delights members by making it easier to find great movies and TV shows, and personalization technology makes it easier for the company to “right-size” their investment in original content.
Netflix knew that 100 million members would enjoy “Stranger Things” — making the company comfortable investing huge sums — while correctly predicting that niche content like “Bojack Horseman” would find a smaller audience, necessitating a smaller investment.
Lots of projects also helped Netflix along the way to a more personalized experience. For instance, Netflix switched from using a five-star rating system to using thumbs up and down based on A/B test results. “Thumbs” got them twice as much taste data from members as their star rating system.
The road to personalization was full of surprises. The Product team tested whether demographics like age and gender improved their predictions. To their surprise, it was not. It was far more helpful to know the ratings of three movies or TV shows than to know a member’s demographics.
When streaming really took off and the company went worldwide, they tested whether knowing someone’s nationality and location would help. Again, it did not. This was yet another surprise along the road to creating a more personalized experience for each Netflix member.
Debate. Decide. Do
Finally, we finish with Gibson’s main secrets for success:
- Courage. It took Netflix 2 hours to decide to invest $100M in House of Cards, and only 30 minutes to cancel it when the star, Kevin Spacey, was accused of sexual harassment. Both of those decisions took courage, and both paid off. Sometimes you just have to take the leap.
- Patience. Netflix is one of the biggest entertainment streaming sites around, but it took 20 years and lots of hurdles to get there.
- Humility. Aside from Friends, Netflix experienced another blip in 2011 called Qwikster, now hailed as the biggest flop in the company’s history. The key to product success is admitting to your mistakes and moving on — it takes time and humility to invent the future.