Social Media and Marketing Costs in Action

Social Media and Marketing Costs in Action

Netflix launched its social media strategy in early 2008 and since then, social media (e.g., offers on Facebook) has emerged as one of the most effective channels for Netflix to acquire new subscribers. While the retention rates for subscribers acquired through social media could be above average (given that a user is incentivized to become sub), cost of acquisition is much lower comparatively, making it a more lucrative customer acquisition channel compared with other channels such as direct mail, TV, or affiliates.

Many note that the company’s subscriber acquisition cost was down 12% Y/Y in 2009 and 8% in 1H10. Marketing communication on Facebook and Twitter also helped the company increase engagement with existing users and resulted in lower attrition. Netflix has steadily increased budgets for customer acquisition through social media over the last few years. Likewise over the last few years, while the overall brand awareness budgets have remained stable, the company has steadily increased the allocation for social media for brand awareness.

We believe that the social media (especially Facebook) strategy made sense for Netflix since it helped the company reach and raise awareness with a relatively newer audience—slightly younger demographic than its existing subscriber base. On the other hand, the company did not see much success with social features such as friends sharing their lists with other friends (only approximately 2% subs using friends’ list), which likely reflects on the strength of the company’s recommendation engine.

We believe that the company’s database of 20 million users and their preferences, and the company’s analytics and recommendation engine that helps users discover content is a meaningful competitive differentiator that helps the company broaden the tail by creating demand of catalog titles and lessening demand load for new content.  As of late, Netflix is putting greater focus (and committing money) on content acquisition than marketing, which has likely resulted in a couple departures from the marketing group.

Given our view that the competitive landscape could become tougher for streaming (with potential companies that could emerge as possible Netflix competitors including companies such as Amazon, Walmart, HBO, Hulu, Apple, Google, Microsoft, among others), we believe spending on content acquisition (especially for exclusive deals) makes sense, as it enables Netflix to lock-out potential competitors.

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