Losing 200,000 customers in a company that has more than 220 million of them can hardly be as expensive as it was for the audiovisual giant Netflix in its last presentation of results. And it was more than a simple drop in the number of subscriptions. It was the first since there is data. In addition to this unusual jug of cold water, the US company warned that it does not believe it is something one-time, but revealed in a letter to shareholders that it expects the number of paying memberships to drop by another two million customers in the second quarter of 2022. As a result, Netflix shares plunged 35% in one day, losing the company’s market value of more than $54 billion. The price has not yet fully recovered, and last Thursday Netflix shares were around 187 dollars, 45% less than before the accounts were published.

Francisco Torreblanca, professor at ESIC Business & Marketing School, attributes this first drop in the number of paid memberships to five main factors. The intensity of competition, price increases in some markets, rumours, the desire to save in households in the face of uncertainty and the hunger for news are what he mentions. But the dynamics of how consumption works in general and the subscription model in particular also have an influence.

More and more companies have turned to this way of understanding consumption. Nowadays, it is possible to subscribe to printing services, to food delivery, to means of transport, to automobile companies, to the media, and so on. It is a way for companies to guarantee a more or less stable income stream in an increasingly uncertain environment. But although it works, and the proof is that more and more companies have joined, the model has limits. Its success depends on the sector, the target audience, the context or cultural and psychological elements.

“The subscription model has two important variables. In the short term, desire prevails in the consumer. In other words, I want to subscribe to Netflix to watch content, I want to subscribe to a media outlet to have access to its news… But in the medium and long term, the need prevails because the desire is gradually being lost. The long-term subscription model is based on need”, says Torreblanca. In other words, the subscription models that are most likely to continue working in the long term will be those that offer a solution to a need. Torreblanca gives the example of the Whim mobility platform, which, for a fee, allows access to different forms of transport, something that would be useful for professionals who travel frequently for their work.

Adrián Navalón, psychologist and economist, recalls that consumer purchases are often influenced by factors that are not the most mathematical. “In the case of subscription, growth is exponential when the economic, sociological and psychological circumstances are met. Because the psychological processes that make us make a decision are varied”, he assures.

Every time we decide whether to consume a product or service, a whole dance of psychological variables starts that will determine the outcome of the decision. “There is consensus that an increase in uncertainty is taking place everywhere. Decision making in this context of uncertainty increases the role of cognitive biases as they are part of human rationality due to the shortcuts we use when thinking”, he summarizes.

“The Netflix model offered expectations when consumers launched to buy their subscription en masse, product expectations, content expectations, also helped by all their communication campaigns and the prescription of people in our environment who already had Netflix. This led to a massive purchase; then, when you have the real purchase experience, that’s when we make the decision to continue or not. There will be people who stay to maintain that they have Netflix. Because one of the biases is the confirmation bias. Sometimes, when we make a decision, we realize that that decision was not the right one, but even so, we will defend it tooth and nail. And we ourselves are going to convince ourselves that the fact that we continue with that is good, ”he exemplifies about biases.

back to normal

During the pandemic, a number of businesses clearly benefited from it. Pharmaceutical companies, mask producers, food delivery services or Netflix itself are some of them. What may be happening is a return to normality after an exceptionally good period for these businesses.

“Although Netflix predates the Covid era, I believe that the years of the pandemic have benefited it a lot,” Navalón rightly says, since between December 2019 and the same month of 2021, the number of paid memberships on Netflix increased. at 54.75 million. “This has radically changed. People are now on the street much more, with more desire than before Covid. The consumption of certain products or services in a certain very specific way may go down ”, he foresees.

Torreblanca agrees with the reading that it is returning to more normal levels of business. “This has a lot to do with it. In the end it is another habit that changes. What happens is that we don’t realize it as much as the change in habit is not as sudden or obvious as in the pandemic. A certain consumption habit derived from it can be maintained, but not such pronounced consumption peaks. This fall is rational, since those factors that caused those levels of exceptional business have ended, ”he explains.

But even with the undeniable skyrocketing increase in subscribers brought about by the pandemic, it might not all be positive for Netflix in the medium term. Asked if it is possible that in the minds of some of the consumers the idea of ​​watching Netflix has been associated with the negative times of the pandemic, that it has remained as a kind of activity for when you are locked up at home, Navalón does not rule it out. . “It’s possible. Studies would have to be done to see this. Psychology is based on studies and should be seen. It is true that associations exist and, effectively, when we reject an option, all the elements associated with that option can be harmed. Various phenomena can occur. Possibly what you point to may be ”, he reflects. “There may be a rational reaction, but in this case not a conscious one, which invites that what you want to do now is different from what we did in the pandemic. Go for a walk, go for a walk, if you want to see a movie, go to a theater like it was done before the virus ”, he maintains.

the business cycle

Beyond this sum of reasons, the unstoppable trend of this company may have run into another phase of the cycle in its business.

“There is a sequence in marketing that is very important: novelty, trend and fashion”, explains Torreblanca. “Novelty is when something new comes out; trend, when it can interest people and you start to see more of it, and fashion is when everyone wears it or consumes it. This success of becoming a fashion causes the company that has achieved it, even if it has been a pioneer, to remain undifferentiated. Netflix was the pioneer, but how many platforms are there now? HBO, Amazon, Sky, Dazn, the traditional televisions themselves… In the end there is such a brutal saturation that it is normal that there is a peak and there is a ceiling, ”she asserts.

Navalón agrees: “All business models have their cycles. They have an exponential rise, then a kind of plateau or consolidation, and then there is a certain drop. There are many factors. The fact that they themselves anticipate that their subscribers will drop indicates that they must continue to modify their model”.

For Torreblanca, what has happened is a warning to sailors. “The same thing that is happening to Netflix could happen tomorrow to any of the other platforms. If it happens to the leader of the category, how can it not happen to the second, third or fifth… It is a contagious effect, that news of the fall in Netflix affects the rest because it has visibility. It doesn’t just affect the leader, it affects the business category itself. Just like if Amazon sales are affected, it will be seen as affecting online sales in general.”

The ESIC expert believes that the subscription model or even online shopping, megatrends in consumption in themselves, will also have a ceiling. “Tomorrow a new business model may come out that is better than the subscription model and overnight it may become obsolete. Examples are already seen in subscription businesses that allow you to pay only for what is consumed instead of paying a fixed fee; other ways will soon come to replace the original subscription model”, he concludes.

From the bell to the shark fin

bells and fins

The speed with which changes in mass consumption are taking place is capable of making companies rise or sink them faster than ever before. Torreblanca says that a few years ago it was explained in marketing schools that the life of products was like a bell that ran slowly in each phase. “There were the early innovators, the early adopters, the early majority that is the general public, the laggard majority, and then the laggards altogether,” he says. “Now we see business models that break through, grow exponentially in a sudden way but then fall sharply down because, either other business models emerge that replicate it or they are not sustained by a need. This model is called the shark fin, because of the sudden way in which a product or service is adopted by consumers”, he illustrates.

The direction of consumption

“Rather than a bunch of individualized demand, there are more and more rapid changes in mass consumption trends. On the other hand we have multiple examples of segmentation. Based on the Airbnb business model, Mr. B&B was created, which is an Airbnb designed especially for the gay community. The gay public thus has a platform that thinks more about their lifestyle. Another example would be MissCar, which is like Blablacar but only for girls”, Torreblanca cites as an example. Attending to these cases, a segmentation based on identities can be appreciated. “It has to do with the fact that we tend to imitate what our group does. Everything that they offer me related to that I will accept much more, ”says Navalón. With this, a certain degree of personalization is achieved without risking profitability too much, but the expert warns that, in the process of offering products to groups, other variables are lost that can enable a much deeper personalization if the entirety of the product is studied in depth. consumption process.

All subscribed?

Not all. “It is assumed that from the millennials downwards the trend is to rent instead of own, but then, when that becomes general, people realize that they really do not have anything and this can cause us to return to the traditional model of owning”, Torreblanca emphasizes.



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