Business Model and Netflix Example
Considering that the return on investment in most e-commerce applications can be between 5 and 10 years, the first question that a conscious investor will ask the entrepreneur is the business model.
A model is defined in the dictionary as "a description or anology (analogy) used to help visualize something that cannot be directly observed" (https://www.merriam-webster.com/dictionary/model). In this context, the business model serves to explain the basic logic of the vital elements of a business.
In this context, the business model canvas (used here as a framework) developed by Alexander Osterwalder and Yves Pigneur consists of 9 different sections: customer segmentation (segment), value to be provided to the customer, type of relationship to be provided, distribution channel, revenue stream, core capabilities of the business, key activities, key partners, cost structure (For those interested; Business Model Generation: A Handbook for Visionaries, Rule Makers and Challengers, Optimist Publications).
The study of this business model framework in sufficient detail by entrepreneurs before establishing a business will minimize future problems.
Many entrepreneurs make large investments, especially in e-commerce platforms, but due to the nature of the process, they may seek investors in the future. Considering that the return on investment in most e-commerce applications can be between 5 and 10 years, the first question that a conscious investor will ask the entrepreneur is the business model.
Because defining the business model means determining all the elements necessary for the business to exist in the first place, like the vital organs of a human being. If some of these elements are not considered at the outset, it would be like a baby being born without a liver or heart.
However, an experienced investor will probably also request competition and market analysis data to ensure that the conditions of the market in which the business operates are adequately understood.
On the other hand, it is often the case that the house does not match the market. This is because market conditions are often dynamic due to internal actors and external influences. This means that the model may change at later stages for strategic reasons.
For example, Netflix Inc. has experimented with many different business models since it was founded in 1997 by Reed Hastings and Marc Randolph in California.
Initially established to rent and sell movies stored on VHS media via the internet, the company turned to DVD rental and sales services because these media are expensive for storing movies but sensitive for sending them by mail (Marc Randolph, 2020, This business never catches on NETFLIX, Istanbul: Konu Kitap).
Over the years, however, strong changes in internet infrastructure have prompted Netflix to look for a different value proposition than DVD rental in order to cope with intensifying competition. Today, the company describes itself as "a subscription-based streaming service that allows our members to watch television shows and movies on an internet-connected device, without commercials". (https://help.netflix.com/en/node/412#:~:text=Netflix%20is%20a%20subscription%2Dbased,watch%20without%20an%20internet%20connection).
On the other hand, in the first period, the company defined its target customer base as the US audience, which is technology-intensive and likes to watch movies for relaxation.
At first glance, one might think that the company was marginalized by choosing a very small segment of the market, a niche. However, such a definition is a correct approach for the target audience during the company's promotional (TDK dictionary term lansman) periods. It is known that especially in the case of technological products, system trial and loyalty among customers is very low, and therefore it would be appropriate to target a limited number of customers who are particularly fond of such products.
Nevertheless, in order to reach the target customers, the company made agreements with two different DVD player manufacturers, Sony and Toshiba. Each customer who purchased a DVD player was entitled to receive a certain amount of free DVD movies and free rentals if they registered with Netflix on the manufacturers' website. (These agreements were made as 3 free rentals for Toshiba customers, while 5 free DVDs and 10 free rentals for Sony customers, the market leader.) For a long time, the effort to acquire new customers caused Netflix to consume resources (Marc Randolph, 2020, sf 139,154).
Over time, in order not to divide their service strength in the face of strong competitors such as Amozon.com, they completely abandoned the DVD sales business and concentrated on the rental service they had originally planned.
Another element that changed in the business model was the revenue stream. Initially operating on a single DVD rental basis, the company subsequently experimented with unlimited rentals, and in February 2007, with video on demand pricing strategies, and finally with subscription pricing.
Today, it is stated that Netflix has more than 167 million paid memberships in more than 190 countries in 2016 (https://media.netflix.com/en/about-netflix). It is thought that the company has increased the number of subscribers many times over during the pandemic.
