Case St Udies 1 CASE ASSIGNMENT: Netflix Ready for Primetime
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MKTG2_CasesQues_01-66.qxp 7/15/08 12:36 PM Page 11 AN OVERVIEW OF MARKETING Case St udies 1 CASE ASSIGNMENT: Netflix Ready For Primetime Shocked at the $40 fee he incurred for a late return of Apollo 13, Netflix founder Reed Hastings decided that in the age of the Internet, there had to be a better way to rent videos for home viewing. Thus, in 1997, he started an Internet- based, DVD rental service that offered direct-to-home deliveries with no late fees. A mere decade and 4 million sub- scribers later, Netflix has taken on established video rental companies such as Blockbuster, Hollywood Video, and Wal-Mart and emerged as the leader in innovation and customer service. In addition to betting that the Internet would be the future of the video rental market, Hastings made a few other key predictions that helped him develop a company with almost $700 million in revenue in under ten years. He watched as moviegoers fled public theaters for the comfort of home theater systems, and he observed those same consumers embracing the features, capacity, and high-quality format of the DVD. Realizing that the Internet could allow those same convenience seekers 24-hour browsing and selection access to an unprecedented volume of movie titles in a single digital catalog, Hastings shrewdly designed a service that outperforms traditional, store-based video rentals. Netflix allows consumers to choose from a variety of subscription plans. The most popular plan offers three DVDs for $17.99 per month. Once a subscriber builds a list of favorite movies and TV shows from a selection of over 60,000 titles, Netflix mails out the three titles at the top of the list, along with return-addressed prestamped envelopes. After viewing the DVDs, the customer simply mails them back to Netflix in the supplied packaging. When the titles are scanned in at one of the distribution warehouses, the customer is simultaneously sent the next selec- tions on the favorites list. With 34 strategically placed distribution centers, Netflix can deliver 92 percent of its movies within one day of being ordered. That outstand- ing delivery service is just the tip of the iceberg. Netflix’s Web site takes personalization to new levels through its high-powered recommenda- tion software, called Cinematch. Cinematch uses over a million lines of code and over half a billion customer-supplied ratings to suggest rental choices upon request. Amazingly, over 60 percent of the titles added to users’ favorites lists come from Cinematch recommendations, and over a million ratings are sent to Netflix every day. Just how effective is Cinematch? Netflix uses fewer than 50 customer service reps to support its entire customer base! Of those, 10 are authorized to make direct callbacks to customers with complaints to find out how the problem could have been pre- vented in the first place. It’s that kind of attention to customers that forced retail giant Wal-Mart to give up and turn over its entire customer list to Netflix. Netflix even added two key features to its service in response to customer requests. The first is the ability to generate multiple favorites lists for a single account, allowing families to build multiple wish lists that can differ as much as Steel Magnolias and Old School. The second is the addition of a community feature called “Friends.” Friends enables users to share the titles, ratings, and preferences for recently viewed shows with those they invite to be part of their network. Always looking to the future, Hastings wants to diversify Netflix by adding high-definition DVD rentals to its current service, selling previously rented DVDs in the rapidly growing used-DVD market, and developing an on-demand video download service. Though it’s impossible to tell exactly what blockbuster service Netflix will deliver next, it’s a safe bet its customers will applaud. SOURCES: Jena McGregor, “At Netflix, the Secret Sauce is Software,” Fast Company, December 2005, 48–51; Jennifer Netherby, “Netflix Delivers Big Earnings Increase: Sets 5.9 Million Subs as Modest 2006 Goal,” Video Business, January 30, 2006, 1; Steven Zeitchnik, “Download Dreams: Netflix Eager to Expand Online Efforts,” Daily Variety, January 25, 2006, 5; Jennifer Moeller, “You’ve Got (Movies in the) Mail,” The Christian Science Monitor , December 2, 2005, 15; B en Fritz, “Freaky Disc Biz: Netflix Grows at Blockbuster’s Expense,” Daily Variety, October 20, 2005, 1; “All Queued Up: How the Netflix Distribution Network Supports the Company ’s Business Model,” Material Handling Management, November 2005, 9. Discussion Questions: 1. Describe the elements of the exchange process as they occur between Netflix and its customers. 2. Which marketing management philosophy does Netflix subscribe to? 3. How does Netflix’s approach to relationship marketing increase customer satisfaction? MKTG2_CasesQues_01-66.qxp 7/15/08 12:36 PM Page 22 Quiz Questions: Multiple Choice 1. What is Netflix’s marketing management philosophy? 7. If Netflix refocused its expertise in supply chain management on a. production orientation collecting and distributing new and used documentary DVDs to b. sales orientation schools, it would indicate the company was implementing a c. marketing orientation ________orientation. d. societal marketing orientation a. product e. Internet marketing orientation b. sales 2. When Hastings decided to use the Internet for his DVD rental c. marketing service he was: d. educational a. creating value e. societal marketing b. delivering value 8. By eliminating late fees, Netflix: c. communicating value a. improves customer value d. creating exchange b. improves customer satisfaction e. building relationships c. builds relationships with suppliers 3. Netflix’s recommendation software, Cinematch, helps the d. increases its catalog company to: e. advertises to a broader range of customers a. deliver sales messages 9. Netflix’s network of 34 distribution centers is a key factor in b. be socially responsible keeping _________ high. c. communicate value a. customer value d. certify exchange b. customer satisfaction e. build relationships c. exchange ratings 4. Which mission statement best describes Netflix’s business? d. teamwork a. We rent DVDs. e. revenue b. We are Internet-based. 10. According to the case, one reason Wal-Mart was forced out of c. We deliver videos. the movie rental business was because of Netflix’s: d. We are a 24-hour virtual media rental store. a. low pricing e. We are expanding into the used DVD market. b. value proposition 5. Which of the following demonstrates an outward organizational c. teamwork focus? d. customer-oriented personnel a. Netflix promotes from within. e. attractive promotions b. Netflix considered adding video game rentals because it would be convenient for the company to do so. c. Netflix added the Friends feature because of consumer requests. d. Wal-Mart turned its customer list over to Netflix. e. Netflix has distribution centers in a wide range of geographic locations. 6. Are consumers using Cinematch taking part in an exchange? a. No, because exchange must occur in person, not online. b. No, because consumers don’t always choose to rent the movies it recommends. c. Yes, because consumers are trading their time and willingness to use the service in exchange for movie recommendations. d. No, because consumers don’t pay extra for the service. e. Yes, because the service used consumer-supplied ratings. MKTG2_CasesQues_01-66.qxp 7/15/08 12:36 PM Page 33 STRATEGIC PLANNING FOR COMPETITIVE ADVANTAGE Case St udies 2 CASE ASSIGNMENT: Cirque du Soleil The Fire Within A 27-foot-long bronze clown shoe is the only indication that there is something otherworldly within the concrete walls of the large, rather nondescript building. Located in Montreal, the building is home to what many feel is the most suc- cessful entertainment company in the world—Cirque du Soleil. The company’s massive headquarters houses practice rooms the size of airplane hangars where cast members work on their routines. More than 300 seamstresses, engi- neers, and makeup artists sew, design, and build custom materials for exotic shows with stage lives of 10 to 12 years. In fact, the production staff often invents materials, such as the special waterproof makeup required for the production of O, a show performed mostly in a 1.5 million-gallon pool of water that was also specially designed and engineered by Cirque employees. Another key in-house resource is Cirque’s team of 32 talent scouts and casting staff that recruits and cultivates performers from all over the world. The department maintains a database of 20,000 names, any of whom could be called at any time to join the members of Cirque’s cast, who number 2,700 and speak 27 languages. Shows with exotic names like Mystère, La Nouba, O, Dralion, Varekai, and Zumanity communicate through style and tone that they are intended to do more than just amuse. Cirque designs productions with distinct personalities that are meant to evoke awe, wonder, inspiration, and reflection. As one cast member put it, “The goal of a Cirque performer is not just to perform a quadruple somersault, but to treat it as some manifestation of a spiritual, inner life. Like in dance, the goal is . to have a language, a conversation, with the audience.” Audiences have responded. Even with ticket prices that start at $45 and can run as high as $360, the company sells about 97 percent of all its seats at every show. For Cirque, that translates to about $500,000 a week in sales and yearly profits of $100 million on gross revenues of $500 million. Incredibly, every one of the 15 shows that Cirque has produced over its 20-year history has returned a profit.