Monday, June 21, 2004

Further analysis of reasons Netflix wants you to receive more discs

Form 10-Q

This information is from the Form 10-Q which Netflix filed with the Securities and Exchange Commission at the end of the first quarter of 2004. "Subscriber churn" is the term used to describe how many subscribers quit the service or fail to sign up following the end of their free trial. Lower subscriber churn is their goal, because it reduces marketing expenses and increases revenue.

increase in subscriber churn may signal a deterioration in the quality of our service, or it may signal an unfavorable behavioral change in the mix of new subscribers. Lower subscriber churn means higher customer retention, faster revenue growth and lower marketing expenses as a percent of revenues for any given level of subscriber acquisition.

"Subscriber acquisition cost" is the term for how much it costs Netflix to find and keep its customers, through advertising and promotions. They want to keep this low. It's cheaper to keep you as a customer than to try to find a replacement for you if you quit, which is why they want you happy. If you rent alot of discs, you'll be happy (if you watch and enjoy them, of course).

For example, disc usage may increase, which depresses our gross margin. However, increased disc usage may result in higher subscriber satisfaction, which reduces subscriber churn and increases word-of-mouth advertising about our service. As a result, marketing expense may fall as a percent of revenues and operating expenses margins rise, offsetting the impact of a reduction in gross margin.

It is also in their interest to increase the number of titles they distribute, because it makes you happy, you share the good news with your friends, and Netflix spends less on advertising.

We can also make trade-offs between our DVD library investments which have an inverse relationship with subscriber churn and subscriber acquisition cost. For example, an increase in our DVD library investments may improve customer satisfaction and lower subscriber churn, and hence increase the number of new subscribers acquired via word-of-mouth. This in turn may allow us to accelerate our subscriber growth for a given level of marketing spending.

These factors give me reason to disbelieve that Netflix would deliberately slow down the number of discs you receive under any circumstances. I realize this is contrary to the popular findings of DVD Rent Test, but it shows there would be no financial incentive for them to provide poor customer service.

I have observed a periodic slowdown in turnaround of discs, but I think there is an explanation other than that they are doing it on purpose. My theory is that disc delivery times experiences occasional slowdowns as Netflix adjusts to rapid growth. When a new distribution center opens, there is rapid overnight growth in the number of local subscribers, which puts a powerful strain on the new DC with its new, inexperienced staff and management. I think we should give them time to adjust. You'll see that your disc turnaround times will return to normal in about a month, if you hang in there.


  1. I have to disagree because these a--holes never send out new discs right away. Sometimes I receive an email that the my last movie has been received, and it takes 3 days from that point for them to send out a new one. By the time it reaches my mailbox, a whole week has went by. Their customer service email is buried somewhere on the site.

  2. I've been a Netflix subscriver for years. At first, DVDs came from and were returned to San Jose, California, which is the opposite side of the country. It took forever. Then they put in a distribution center in Georgia, which was closer and improved the turn-around time. Recently they added a site an hour an a half away and we can't keep up the with DVDs because there is no time to watch them all. My satisfaction with the company has increased, and I recommend it to everyone I know.

  3. This comment has been removed by a blog administrator.

  4. I agree with what "Jackie" said in her comment. I live in Dallas, and we have a distribution center here. I have a 3 day turnaround on disks. I mail it Monday, they receive it Tuesday and mail out a new movie, I get it Wednesday. I stagger my viewing, and seem to always have a new movie to watch.

    There have been a few instances where I have not had the typical 3-day turnaround, however those instances are few and far between, and can be attributed to several variables.

    Overall I am very happy with Netflix.

  5. i was somewhat satisfied with my Netflix experience... I saw some Movies that I haven't been able to find at Blockbuster.

    However, I am a young man. I have loins. I would like for Netflix to carry X-rated titles. This would be great. But since they do not, and I have seen all the movies i've wanted to see, I will terminate my netflix membership

  6. Thankyou, your site and the information you provided IE: DVD RENT TEST, now explains all the strange Netflix experiences i have had.
    I was a member for two years upon cancelling my service this month.
    I use to be a fan like you but not anymore.

    Netflix was a good service but something happened on the way to fame and success. I dont know how many times i got a damaged or lost DVD. When reporting these, Netflix responce was almost as if i stole it or broke it myself.

    I contacted customer service and was told every DVD was checked before being sent out. NO WAY--the damaged DVDs i received where so obvious there is no way it could have been missed. How do you miss a DVD broke in half? or smeared with peanut butter?
    Now after reading this site--i wonder if they where checked and sent out on purpose???

    Then of course the issue of actually getting the DVD! When i have to wait so long that i end up renting it else where anyway--then it is time to go. I am not even refering to "new releases" but older series with NO wait, or so i thought.
    Now thanks to you, it all makes sense and i am only sorry i allowed myself to be duped for so long.

    I did try, i upgraded and then went back to original plan, i filled my queue with movies less in demand, it did not help.
    Then came the price increase and that was it for me. I was not going to pay more for bad service.

    "Netflix" is a bad word to our local rental store and they have tried to show how we really are paying more and they are right! If one can not turn around there DVDs because Netflix slows you up--the cost becomes more than a local rental.

    Again thankyou and i fear Netflix will not fair well in the future.

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  9. I'm always surprised to hear such horror stories about Netflix. I've experienced only a couple "wait" statuses that interfered getting the movie I wanted and only one unexplained one-day delay between them receiving a disc and shipping the next (which was probably caused by the traffic of a holiday weekend in a fairly new warehouse). When I've received scratched and even one broken disk, there was nobody treating me in any manner, bad or good. I just used the web form to indicate a damaged disc and they sent me a replacement the next day, no questions asked.

    Granted, my average rental rate is pretty low... as few as five, and very rarely going over ten. But I've never experienced. My average is about 8.5 a month.

    In over sixty discs in seven months, I've had only a handful of "waits" and damaged discs. All but one of the instances of damage were the type that could have happened with Blockbuster as well (scratches that a clerk might have overlooked)... only one clearly broken disk.

    I'm very happy with Netflix, as I mentioned in my last A Netflix Odyssey post.

  10. Turnaround time has increased in the last month in New Jersey.

    Don't know why, but thought the new delay deserved remark since every delay - even by one day if across the boards - enriches Netflix by a whole lot.

    - Watson

  11. Hmmmm. I'm sorry for the bunch of people who aren't getting what they want from Netflix. In the four years I've used the service, I've had exactly 1 movie that was a "very long wait," and the couple of times that I received a movie that was badly scratched (mostly children's movies) I just checked the box on the sleeve it came in and sent it back.

    We're cranked all the way up to the 8-out plan because we go through phases of watching several movies in a week and then not watching any for a couple of weeks or more. There are a couple that we've kept for months because we just weren't in the mood to see them. And our movies are turned around just as fast as they always were.

    I guess if what you're looking for is the same selection and availability of BlockBuster, you're going to be disappointed. BlockBuster is for people who think to themselves "I want to see [Name of Current Hit Just Released on Video]" at seven on a Friday night and immediately go out and get it. Netflix is for people who are thinking "Yeah, that movies sounds interesting, I'd like to see it sometime." And "that movie" is usually an independent or foreign film (of which Netflix selection is vastly better than Blockbuster).

    I've also almost always like the things that have been recommended to me.