"The rest of the company's business model also carries risks. Netflix's most popular plan allows unlimited rentals for $19.95 a month. Subscribers can keep three DVDs at once and get a new movie chosen from a list they maintain on the company Web site, when they return a DVD.
The offer of unlimited movies forces the company into a precarious balancing act. People who rent very few films are the most profitable, but aren't likely to stick around because the service is uneconomical. People who rent lots of movies can be money losers for Netflix , but they are generally satisfied customers who stick around a long time and spread the word about the service.
Netflix has opted to keep those customers happy, figuring they will be profitable in the long run. As a result of the strategy, customer turnover is down, but monthly disk usage per average paid subscriber has risen 18% to 5.9 movies this year. Netflix won't say at what point a customer becomes a money loser, but if the rental trend continues it could hurt profits.
But critics argue that to keep these movie addicts from bankrupting Netflix , the company denies its heavy users the movies they really want to see. One obsessive customer did a detailed, statistical analysis of several accounts and showed that customers who rent lots of movies get their first choices in new rentals far less than people who rent fewer DVDs."
How many movies do you think the average persons watches, I have several friends who have NFLX and most do 5 out and do that 3 times a month AT MOST. How many people sit and watch movie after movie, Get real
>Dirty little secret you never hear on this >board.Everytime you get a DVD from NFLX, it >costs them money. The more you order the more >it costs. Reading the article, it looks like >their costs are rising.
Actually there was quite a bit of analysis over the summer, let's see if I can rehash this. Operational costs are kinda a red herring in this type of model. Biggest incremental cost per DvD are the postage stamps and labor involved. Here's the rough break down.
For the sake of argument let's use the following assumptions:
Assume postage both ways (there and back), I believe NFLX gets bulk rates but for this example we'll use full postage rates.
Assume the labor can handle 80 DvD's per hour of time, that's 45 seconds per DvD and a very slow rate for any sort of really automated/efficient system, but then again we're using conservative numbers.
Assume labor costs for handling the DvD's amount to a burdened $40k/year (benefits etc.), that's a $19.23/hr warehouse worker.
Assume every customer is turning around 9 discs a month under the $19.95 plan, probably high side IMO but again, let's use a conservative argument.
In theory there are incremental costs for online ordering, but those would be so infintesimal per order that it's easier to throw that into the fixed costs rather than incremental per order.
Given those assumptions the major incremental costs per DvD rental are: 74 cents shipping 25 cents labor and handling or 99 cents per DvD x 9 Dvd's per month = $8.91/incremental costs per month Revenue of $19.95 Incremental Costs: $8.91 Gross Profit: $11.04 or about 55%
The gross profit then goes into the fixed costs of operations, marketing, admin expenses etc. But those are highly centralized compared to something like BBI which is paying retail staff and leases in probably a few hundred locations for each single NFLX DC. Even at a 9 Disc usage a 55% GM is nothing to sneeze at and *very* respectable for any operation.
What about a 12 or 14 disc user per month? 12 discs incremental of $11.88 GP of $8.07 (40% GM) 14 discs incremental of $13.86 GP of $6.09 (30% GM)
Now how many 14 disc users are out there per month on the $19.95 plan? You'd have to be watching and shipping pretty much every day to keep that pace up successfully on the 3 and out plan.
We don't know what the average blend of users are, but taking the conservative assumptions above even if they're a 9 disc user NFLX still has the opportunity to make a very health GP & GM for the industry.
So what should folks be watching? SAC & Churn. If the SAC is ~$30 then that 9 disc user will take three months of GP just to pay for the marketing costs to acquire him and if the churn is high you're continually bringing on new members which must be paid for. This is why I watch SAC & Churn like a hawk, people who focus on operational costs are missing the efficiencies of the centralized distribution model. Fortunately SAC & Churn are going down and I'm not sure what the blended disc usage per user rate is, but my gut tells me it's south of 9 discs a month on the $19.95 plan.
Do your own due diligence, the numbers above are assumptions from a decade in operations management focusing in distribution etc., but I have no access to NFLX's raw numbers.