NETFLIX.COM, INC Case Solution
This would show that whether the cash inflows per each subscriber exceed the cash outflows per each subscriber. If the NPV is positive, then this would show that the company is creating value from its each subscriber. This would be computed by subtracting the total corporate costs from the present value of the existing and the projected subscribers of the company.
Â Â Â Â Â Â Â Â Â Â Â Since the long run objective of the company is to retain as many paid subscribers as possible therefore, the company should always try to increase its conversion and the retention rate and make sure that the NPV of each subscriber and the total EV is positive and higher. Thus, this would enhance the performance of the company.
Constructing NetFlixâ€™s Subscriber model to Forecast Future Cash Flow Requirements
Â Â Â Â Â Â Â Â Â Â Â A subscriber model is used by those businesses whose entire revenue is dependent upon the total number of the paid subscribers and the tenure of the contracts of these subscribers. This model is mainly used by the rental companies, cell phone companies, newspapers, magazines, fitness centers, internet providers and cable television providers. The common factor among all these companies is that they grant their customers to periodic access to their services and products for usually a fixed monthly fee.
Â Â Â Â Â Â Â Â Â Â Â There are many reasons due to which NetFlix Company should use a subscriber model. First of all, the company rents its customers DVDs on a monthly basis for a fixed fee. Secondly, the objectives of the company are to retain as many subscribers as possible and to covert the trial users to paid subscriber and retain them for a longer period of time. These objectives are highly significant for the company because as the company enters into a contract with a subscriber the company books the cash inflows in advance so that uncertainly and risk is eliminated. Moreover, the duration of the contracts increases the probability for increasing the loyalty also increases. This increases the switching costs over the time for these subscribers and builds strong brand loyalty. Therefore, the use of a subscriber model makes sense for forecasting the future cash flow requirements of the company because the revenue generation and the business models of NetFlix fit into the subscriber model.
Â Â Â Â Â Â Â Â Â Â Â The basic elements of the subscriber model for NetFlix would include the shipping and the DVD disc acquisition costs, expected number of the total discs rented, the paid monthly subscription fees and all the other subscriber related cash flows of the company. Finally, the subscriber model of the company also needs to project the probability of retaining the subscribers over specific tenures and how many numbers of new subscribers would join the company in future.
Subscriber Value &Acquisition of New Subscribers
Â Â Â Â Â Â Â Â Â Â Â The value of a new NetFlix subscriber as been computed in the excel spreadsheet which is $ 37.09 by assuming the higher limit of the monthly revenue by the paid subscribers of $ 19.95. Even though the acquisition cost per subscriber is very high for the company currently, however it is highly important for the company to attract new subscribers and retain the existing subscribers of the company in order to increase the market share of the company. It could also be seen that the company is allocating large funds to its sales and marketing such as $ 16.4 million in 1999, but this is necessary for a startup company like NetFlix at this stage………………
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