Five Lessons From the Netflix Startup Story by Jim Cook with Suzanne Taylor April 11, 2006 When we began building Netflix in 1997, most people thought we were nuts. DVD players had just started selling in the US in March, and by October we started executing our billion-dollar business plan with only $2 million in seed funding. Even with the dot-com era in full bloom, the idea of renting movies via mail struck most as somewhat ludicrous. Despite the odds and the obstacles, we persevered to create Netflix, which has revolutionized the movie rental industry. Looking back on Netflix's startup story, five customer-focused lessons stand out as critical in creating this innovative Internet business. 1. Don't let the naysayers get you down Starting a new company takes a lot of persistence, positive thinking, and a never-say-die attitude. Many experienced people gave us long lists of reasons why our business idea wouldn't succeed. Why would people wait for movies to come in the mail when they could just go down the street to Blockbuster? How can you cost-effectively mail out movies? Won't they get broken, stolen, or damaged? Seeing the negatives is always the easy part. Solving such problems requires a special kind of creative stubbornness. One by one, we went through the list of objections and eventually figured out each of them with unique solutions. Our customer research led us to several key customer insights, including the fact that over 60% of customers planned their video rental decisions. They knew what they wanted over a week in advance. We obsessed on our customized mailer packaging, our "per-package" economics, and 1-2 day delivery. The weight (and therefore cost) of the package was critical. We built everything from the ground up, step by step, and always with the end in mind. We mapped the processing logistics of each package backwards. We started with the intimate knowledge of US Postal Service operations, then customized our software and operational technologies to automate our picking/packing/shipping and finally linked it all to our customer-facing Web site. We defined our operational culture by speed, weight, and daily process improvement. In short, we figured out a way to make it all work. If we had listened too hard to the naysayers and not stubbornly found a way around their objections, there would be no Netflix today. 2. Build operations for a 'wow' customer experience We knew that if we didn't find a way to work within the US Post Office's systems, we wouldn't succeed. We had to build operations to create an exceptional customer experience (the "wow!"). To understand how the Post Office backend worked, I spent hundreds of hours at a few of the largest regional Postal Centers, observing and asking tons of questions. I noticed letters being sorted by several high spinning circular drums. While these crushing metal drums enabled the separation and processing of over 40,000 standard size letters per hour, it was obvious that a thin plastic DVD would not survive the journey. With a sinking stomach, I felt the business idea slip away. But then I noticed a separate conveyor belt sorting magazines and other larger pieces of "flat mail." How would I ensure that the package always used this flat mail machine and not the letter sorter? I found out that if an envelope had certain dimensions and other characteristics, it would be sorted by this alternate system instead of the large, crushing metal drums. Better yet, this flat mail sorting machine would read a bar coded delivery address and could automatically sort the item into "carrier walking route" sequence. Now the wheels were really turning. The fact that we could provide the right-size packaging, bar code, and other characteristics would make it possible for extremely fast processing of a mail piece with absolutely no human intervention or other physical touch. Our resulting "Netflix envelope" was one of our biggest "customer wows." Its design was critical not only for the customer experience but also for our operations and business model. We had to design the envelope so that it met several criteria: Naturally, it had to effectively hold and protect the DVD.   It had to meet stringent Post Office criteria so we could mail with the equivalent cost of a first-class stamp.   It had to transform into the return envelope so that DVDs would find their way back to Netflix quickly and in good condition.   It had to be "operational"—easy to insert and remove the discs and something that could be pre-printed in mass quantities.   Above all else, this envelope was our "product." It was the only thing that our customers would touch and see. Therefore, it had to have all the key features of a great marketing piece. Since 1998, there have been over 150 versions of this little red package. It wasn't always red, but we determined that red was the easiest color to see in the post office. It wasn't always paper thin—our first package was much thicker, and we shipped 3 DVDs in the same envelope. By testing, learning, and improving, we did such non-intuitive things as print the inside return address upside down to make processing more efficient. We had to build a mini "pocket" inside the package to ensure that the Post Office stamp-canceling machine wouldn't break the DVD inside. A very recent change added a little cut-out on the outside of the package, enabling one to check the disc in by "seeing" the inside disc barcode without having to open the package. The amount of time and motion this one little step saves is enormous given today's processing volumes of over 20 million DVD returns every month. 3. Develop three-step solutions When I worked at Intuit in the early days, cofounder Scott Cook used to espouse the value of three-step (or less) solutions. Many high-tech products build in unnecessary complexity for consumers. By contrast, the most successful products take tedious and difficult chores and make them easy—so easy that consumers can solve their problems in three steps or less. A great example of Netflix's three-step solution is the now famous and patented Subscription Queue. We knew our success would be limited if we required customers to come back to our Web site every time to place their next rental order. Our research told us that the average video rental customer rented 5-7 movies per month. Why make that customer come back to our Web site each and every time to rent something they already knew they wanted and could simply put on a list? So, in 1999, we created the first ever online queue—a list of movies that customer knew they wanted to eventually watch. Within a few short months, our customer base had an average of 20-25 movies in the queue—the research was right! Of course, now, we literally had to re-customize our operational software and Web site to enable this new subscription queuing process. Our new ability to automatically send out the next movie on the list also served another key customer goal of reducing delivery time and always ensuring a customer had at least one Netflix movie to watch at all times. This offered service customers could get nowhere else. It was fast and it was easy. 4. Copy the best Why reinvent the wheel if someone has already come up with an easy-to-use, useful, and elegant solution? When designing the Netflix Web site, we turned to the best: Amazon. Some of the ideas that we adapted for the Netflix Web site: Product and button placements Overall color schemes Size of DVD images for fast page loading Customer reviews and movie reviewer articles Easy-to-use search with categorized searching by movie genre Overall Web site navigation 5. Focus on rabid early adopters It's hard to believe, but Netflix launched and operated for the first five years without spending any significant advertising money. We had two secret weapons. First, we had a meaningful connection with the rabid early DVD adopters on Usenet groups, the equivalent of early 90s bulletin boards and today's blogs. When we launched our Web site, we made no public announcements. We hoped that this soft launch would bring in volumes of more than 10 or so "friends and family" orders per day. Unexpectedly, 500 orders arrived the first day, almost exclusively from our Usenet advocates who noticed the site was live and announced it to their networks. Within 30 days, we were consistently processing 1,000 orders per day, within three months over 2,000 orders per day, and thereafter continuing ahead of Amazon's historical growth curve. Our second key weapon was securing a coveted "ten free rental" coupon in every single DVD player sold by the big three manufacturers: Panasonic, Sony, and Toshiba. Combined, these big three had 85% market share. Ordinarily, it is extremely difficult to persuade major manufacturers to put promotional material in their packages. But at the time, these DVD player manufacturers were actually in fear of becoming another failed LaserDisc or Betamax. It was far from a foregone conclusion that DVD would catch on. By offering 10 free rentals to consumers when they opened up their new DVD players, we gave consumers access to a breadth of titles that were very hard to find in traditional retail stores. We paid nothing out of pocket for the placement of the 5" x 7" purple branded coupon inserts. It was in the manufacturers' interests to promote our service so that DVD technology wouldn't die. We made sure that the coupons were the "last in" on the assembly line and therefore one of the first items a consumer would see upon opening their new DVD player. Today, word of mouth still drives over 80% of all new customers. The customers are no longer early adopters, but they are just as rabid. * * * We started with an initial company goal of being bigger than the biggest single Blockbuster store in the US. Today, the company's market value is twice as big as Blockbuster's. Netflix now boasts over 4 million customers and a market value of over $1.5 billion. Eight years later, the company is still quite young and services only 4% of all US households. While the company faces many competitive pressures and a changing landscape of digital movie delivery, one thing is clear: Netflix's relentless focus on customer-driven innovations will continue to provide the golden keys to unlock its revolutionary and evolving business. Jim Cook and Suzanne Taylor: Jim is a Netflix cofounder and managing partner at BenchBoard Financial Management; contact him via jcook@benchboard.com or visit www.benchboard.com. Suzanne is a marketing strategy consultant and coauthor of Inside Intuit; contact her via staylor@serrano.com or visit www.suzannetaylor.com. Published in MarketingProfs.com newsletter on 4/11/06. Rated #1 most popular article for the week.

Great marketers figure out how to make their customers' lives better, with the goal of attracting lots of profitable and happy customers. To measure how well marketing efforts help build a large and loyal customer base, it's essential to identify and use the metrics that matter most.

A recent poll conducted by the Silicon Valley American Marketing Association (SVAMA) among 3,500 of its members and their friends found that while 88% of respondents reported measuring their marketing activities, only 52% of them measure at least half of those activities. This finding means that marketers spend millions of dollars without accountability for results.

Why do half of Silicon Valley marketers measure half of their marketing programs?

Marketers need to take a disciplined approach to using accurate, timely and meaningful marketing metrics. To help develop more insightful and useful marketing metrics, focus on these five fundamentals:

1. Essential metrics criteria
2. Customer-acquisition metrics
3. Product "wow" metrics
4. Customer-retention metrics
5. Strategic accountability

Essential Metrics Criteria Simply put, useful and meaningful metrics help marketers track how well their marketing objectives are being met. Using a set of core metrics will not only help to determine goals but also serve as the yardstick by which success and progress are measured.

It's important not to have too many metrics. Focus on those that best meet the following criteria:

• Metric drives business results.
• Metric reflects business results.
• Metric is something you can influence.
• Metric is measured accurately.
• Metric is measured consistently.
• Metric is measured cost effectively.
• Key stakeholders agree that key metrics meet these criteria.

Customer-Acquisition Metrics

All marketers want to acquire new customers. So what metrics should be used to measure the effectiveness of acquisition marketing efforts? Key acquisition metrics include the following:

• Awareness levels
• Purchase-decision drivers
• Rate of customer acquisition
• Market share
• ROI of marketing programs
• Cost of customer acquisition

After spending over $700 million on Amazon television ads, Jeff Bezos realized that probably over half of that money was wasted. He now says, "Developing over one million affiliate sites is one of Amazon's best investments, and it is totally measurable. We have scaled back on TV and wish we had come to that conclusion earlier because television is simply not as measurable."

Product 'Wow' Metrics

A great product or service is the most important element for building an exceptional customer experience. Without a great product, customer acquisition efforts are a waste of time and money and customer retention efforts are futile. Examples of product "wow" metrics include the following:

• Ease of learning
• Ease of use
• Satisfaction versus expectations
• First-time user experience metrics
• Usability metrics
• Longitudinal usage metrics

There's nothing more powerful than a customer's first impression when using a new product. Making this first experience one that satisfies or even delights the customer reinforces the purchase decision and ensures the customer will continue using the product.

Another key element for continued product usage is product usability. Whether a software program, new pair of jeans or household cleaner, the product must be designed for easy and enjoyable usage. And, of course, the product absolutely must deliver on the benefits promised in marketing materials so that customers are at least satisfied and hopefully delighted in relation to their expectations.

Customer-Retention Metrics

Improving customer retention remains one of the most effective ways to drive profits to the bottom line. Marketers want customers not only to continue using products on an ongoing basis but also to buy other products and services. Current customers are also vitally important in spreading positive word-of-mouth, which attracts new customers.

By turning loyal customers into advocates, marketers can significantly reduce customer acquisition costs and significantly increase the value of current customers. Some key customer retention metrics include:

• Retention rate
• Abandonment rate
• RFM (recency, frequency, monetary value)
• LTV (lifetime value)
• Brand equity
• Net promoter score

The net promoter score measures the difference between customers who spread positive and negative word of mouth about your product. An accurate measure of customer loyalty, the net promoter score has recently gained momentum as a key retention metric. As Loyalty Rules book author (and Bain & Co. fellow) Frederick Reichheld states, "The net of promoters minus detractors doesn't show up in profit and loss statements, but detractors destroy your future."

Strategic Accountability

It's imperative to tie marketing metrics to marketing strategies. By measuring marketing effectiveness through quantifiable, insightful and useful benchmarks, you'll have the information you need to focus efforts and resources on what best builds the business. You'll also improve ROI, since you'll be able to spend on those strategies and programs that bring in the highest return for the money.

Marketing metrics also allow you to own accountability for your marketing efforts. What better way to prove the value of your work than to show how your marketing strategies, ideas and programs have directly built the business?

Even if your metrics are not as strong as you'd like, they can help you understand where you want to go and how you're going to get there. As revealers of true performance, metrics give marketers credibility and responsibility for the bottom line. Simply put, marketing metrics should be considered powerful and essential tools in every marketer's toolbox.

Published in MarketingProfs.com newsletter on 11/2/04. Rated #1 most popular article for the week.

Also published in a book called Measuring Marketing Performance from the Magnus School of Business in August 2005.

by Suzanne Taylor
November 16, 2004

What makes a customer's experience with a brand great? What makes it awful?

Think back to your own experiences. When were you wowed with an experience or, conversely, deeply disappointed?

I had a "wow" customer experience when the bulb in my car's brake light burned out. I dreaded having to take my car into the shop, and on a whim stopped at the nearby Shell station to see if they could replace it.

The no-nonsense mechanic, with a bushy mustache and grease-smeared uniform, took a look. Quietly and efficiently, he replaced the bulb in just minutes. I had neglected to ask him how much this service would cost. To my surprise, he charged me only $11 and change.

My reaction? Wow! I will definitely consider this Shell station for car tune-ups, and now buy my gasoline there as well.

At the other extreme, I had a miserable experience at the Department of Motor Vehicles. I received a notice in the mail that I had to go in person to the DMV office to renew my license. Fortunately, I was able to make an appointment ahead of time.

When I arrived at the DMV on a Saturday morning, I couldn't believe the crowds of irritable people waiting there. One woman in line in front of me started swearing at the hapless and weary customer service representative, who had clearly seen and heard it all before. Even though I had an appointment, I still had to wait 30 minutes to be served.

Once I met face-to-face with a service rep, the process went smoothly. But while waiting, I heard numerous people complain about how long they had been there, some for more than four hours.

To make matters worse, since licenses expire on birthdays, many people were forced to come in right before or even on their birthdays. What a sour way to celebrate your special day!

All of us have our own examples of great and terrible experiences as customers. These delightful and dreadful stories show that a brand stands for much more than a name, logo or image.

And a brand means much more even than its product and service features. Brands are built from nothing less than the sum of a customer's experiences with a product, service or company. Customers' total brand experience will determine whether they will buy anything more from the company and, just as importantly, whether they'll spread awesome or awful word-of-mouth to friends and family.

To create excellent customer experiences, it's essential to gain deep insight into customer needs and wants. Just as imperative is developing a core set of customer metrics that (1) accurately measure where your brand stands in areas most important to customers and (2) best reflect the health of your business.

The following metaphor is one way of thinking about a brand's multifaceted nature: you're house-hunting, and a brand is a house you're considering for purchase.

Certainly, you want the house to have a solid foundation. (The foundation of a strong brand is customer insight and metrics.) Naturally, you also want a house with high-quality construction. Without strong building blocks, a house will eventually fall down. (The building blocks of a brand are its product and service quality.)

If house hunters know about the house for sale and its location, they can consider buying it. (This knowledge represents a brand's awareness levels.) They may already have an opinion of the house based on the quality of the neighborhood and its proximity to good schools, restaurants and shops. (These preconceptions represent a brand's image.)

When you first see a house from the outside, its curb appeal makes an important impression. (Similarly, the outer appearance of a brand, such as a logo or symbol, communicates something to its prospects.) When a prospective buyer enters a house, he or she receives a strong first impression, positive or negative. (Likewise for brands; the first-time user experience is a critical customer experience touchpoint.)

Finally, a house buyer must decide whether he or she wants to live in that house for the long-term. Of course, this requires living with the house's quirks and improving or personalizing it to make it a home. (For brands, this long-term commitment and experience over time represents customer loyalty.)

In other words, brands are multifaceted and complex—certainly much more than a name or image. If you aren't aware of a brand, you'll never consider it even though it may be just what you want or need. First impressions and appearance are very important, and so is the quality of the foundation and building blocks, especially over the long term. Brands, like houses, have unique personalities. Customers develop relationships with brands that change over time as their needs and expectations evolve.

As you think about how your customers' experiences add up to create their overall brand experience, it's helpful to focus on the three most essential marketing objectives and the metrics that reveal how well you're meeting those objectives:

1. The first key objective for marketers is customer acquisition, with a goal of acquiring the right customers in a cost-effective way. Three critical customer experiences in the acquisition process are awareness, learning and persuasion.
   
    
2. Next, marketers must focus on product "wow" in delivering a "wow" customer experience that exceeds expectations. Three critical customer experiences required for product "wow" are great first-time usage, usability and benefit delivery.
   
    
3. Finally, marketers must focus on customer retention—retaining and nurturing loyal customers, and turning them into advocates. Three critical customer experience elements in the retention process are long-term usage and satisfaction, the purchase of more products and services, and positive word-of-mouth.

What will you do today to build your brand?

by Suzanne Taylor
June 21, 2005

Imagine walking into your favorite neighborhood store. The owner greets you by name with a smile. She knows right away what you're looking for and helps you find it. Helpful and knowledgeable, she answers any questions you have. She shows you some delightful new items that you didn't even know you wanted.

At this store, you get just what you want when you want it. You get attentive, personalized service, and you discover and learn new things. In other words, you're a happy and loyal customer who will be back for more.

Now imagine that this entire interaction took place online. Instead of a friendly storeowner, a Web site gives you the relevant information you seek. With ever-evolving Internet technology comes a new era of personalization (or P13N for short).

Useful and sticky Web sites find out what's most important and relevant to their customers—and then customize their experiences in a meaningful way. By giving customers more of what they want, when they want it, Web companies can use the power of personalization to increase customer engagement and retention.

Let's look at some personalization principles that work, and Web companies that are doing a great job of applying them.

1. Keep it simple

Amazon has done a masterful job of keeping personalization simple. Returning customers get recommendations based on previous site purchases and browsing. One-click ordering makes repeat shopping a breeze. Customer reviews and related purchases help customers find more of what they're looking for. Emails give customized alerts and reminders of new products. And an easy-to-use account page lets customers quickly view and change their orders and personal settings.

If you work on an e-commerce site, why reinvent the wheel? Look and learn from Amazon's simple and effective approach for giving customers a personalized shopping experience.

2. Make a great first impression

We all know that first impressions make a big difference when you meet someone. The same holds true for Web sites. Companies making a great first impression have a better chance of holding on to customers for the long term.

Netflix sets a standard, especially for a service quite different from its bricks-and-mortar alternative. First-month-free trial offers lower the risk for new customers. The Web site makes it easy to find specific movies and browse by genre, popularity and actor across a wide selection of DVDs. Members can rate movies already seen, which Netflix then uses to offer customized recommendations. Similar to Amazon, Netflix offers customer and critic movie reviews, and it lists rentals made by others who have rented a given movie. It's easy to update rental queues and save movies not yet released on DVD in a separate queue.

Furthermore, Netflix's 35 shipping centers across the U.S. enable the company to provide one-day service for 90 percent of its customers. All these factors together create a "wow" first impression.

3. Make it relevant

Having a baby certainly qualifies as one of the most meaningful life changes a couple experiences. BabyCenter does a great job of offering personalized information for new and expectant parents. And the company does so by just asking one simple question: "When is your due date or baby's birth date?"

With that one fact, BabyCenter sends free personalized emails informing parents of what's going on, month by month during pregnancy or with their new baby, based on the child's age. The Web site offers answers to the numerous and varied questions that new parents have.

By presenting both expert and parent community opinions, BabyCenter offers a range of credible information for customers to evaluate. BabyCenter's online store offers parents' picks, checklists and buying guides to help customers wade through the large number of baby items available. By offering highly relevant information to customers at a critical life stage, BabyCenter has become a trusted resource for millions of new and expectant parents.

4. Keep it fresh

While the Web offers reams of information at your fingertips, many people feel overwhelmed with information overload. How can they get the information that matters most to them in an efficient way?

My Yahoo has created a free, easy-to-use personalized Web page with over 250,000 information sources. Customers simply choose their areas of interest and My Yahoo sets up their page in seconds. Customers can add specific news, sports, finance and other content they want. Options range from big brands like The New York Times and USA Today to blogs like BoingBoing and Engadget.

Customers can get Yahoo Mail previews, local weather forecasts, TV guide listings and an online calendar. They can customize the look and layout of their page and easily delete, add or edit content. RSS feeds continually update information so customers get the latest and greatest information. Many features change daily such as "word of the day," "recipe of the day" and cartoons.

By consolidating all this content on one easy-to-use page, My Yahoo gives its 25+ million customers the stuff they want all in one place.

5. Make it viral

By wowing customers, personalization can increase positive word of mouth, which can both drive customer acquisition and lower the costs of doing so. One Web company that does a great job of making its personalized product viral is WSJ.com. An online counterpart to the Wall Street Journal, WSJ.com offers a lower cost and a quicker, more personalized read of financial news that doesn't kill trees. Customers can input the stock quotes they're interested in, and get the company, industry and topic news they want. WSJ.com invites viral activity by making it easy to email articles to others, even if they are not paid subscribers.

Not only does this allow customers to pass on well-written, informative articles to friends and colleagues, it helps spread word of mouth about the service. Once an article is emailed, customers see a list of the most emailed articles. This list of popular articles in turn helps promote content on the site by surfacing articles that other readers find most valuable.

* * *

P13N has proven its power not only in helping Web companies acquire, engage and retain customers but also in increasing positive word of mouth. With new Web technologies, more customers will experience the power of personalization, which will cause them to expect even more customized services.

By getting what's most relevant and important to them, customers save time, discover more and want more. The companies described above have done a great job of applying personalization principles that work. One size does not fit all.