Running head: RESEARCH PLAN FOR NETFLIX IN THE US 1

Research Plan for Netflix in the US

Julieta Randall

MKG470 – Marketing Research

Colorado State University – Global Campus

Reis, Robin

June 26t h, 2015

RESEARCH PLAN FOR NETFLIX IN THE US 2

Research Plan for Netflix in the US

Executive Summary

Already an American household name, Netflix is a successful company in the on-

demand Internet media streaming (VOD) and DVD/Blue-Ray rental business. They have

adapted to the changing times since their starting point in 1998 due to changes in technology,

distribution, consumer sentiment, and consumer behavior. Their pricing strategy has changed

overtime, which has impacted the company negatively in 2011 and 2014 respectively. For the

purpose of this paper, a company and organizational background will be developed in order to

understand where the company has been. A management decision problem for the business will

be defined in order to produce a marketing research question, hypotheses, an explorative survey,

and attached statistical tests. All of this is to find the correlation between customer loyalty with

all the key elements of value creation (i.e., library variety, library quality, streaming quality,

suggestions, and price) and what is the proclivity to cancel the service in case it were to change

its pricing strategy. The main hypothesis is that Netflix's increasing prices can be justified with a

constant maintenance of value creation, but that consumer loyalty may not be entirely respected

if prices go beyond a certain tipping point (i.e., two dollars).

Company History, Profile, and Organizational Background

Company Profile. Netflix Inc. is one of the most important providers of DVD, Blue-Ray

discs rentals and on-demand Internet streaming media internationally. Their online monthly subscription service

operates in fifty countries world-wide providing unlimited TV shows and movies streamed to TVs, computers and

mobile devices (Gansler, 2015). Their streaming content is self-produced or from content providers with whom

they have limited license contracts for streaming and/or DVD direct purchases/agreements. They promote their

services through various

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channels, including online advertising and social media, regular media such as TV and radio, and

direct mail advertising (including their well-known free-trial memberships to new members).

Even though their domestic and international segments differ in price sensitivity, sentiment

values, and loyalty, the company—with headquarters in Los Gatos, California—recorded a total

number of 62.3 million subscribers worldwide as of April 2015 with strong revenues of $4,374.6

million in the financial year ended December 2013 (Marketline, 2014; Forbes.com, 2015).

Their strategy has been simple: adapting to product life cycles, online retail market

penetration and beating rental chains (e.g., Blockbuster), logistics, intense promotions, creating

intelligence and predictive software, diversification, use of technology available, careful

customer relations management, allowing family household profiles, creating partnerships in the

past (e.g., Amazon.com), optimizing their distribution, and adapting their pricing strategies

emphasizing in value creation.

In such a competitive market, Netflix has had to change its strategies in order to fight the

competition (i.e., Hulu, Amazon Prime, or HBO Go) and technological changes. Their pricing is

divided into two sections which are DVD/Blue-Ray mail rental (varying in how many items at a

time are being delivered) and streaming, which is $8.99 a month for new users--while old users

were grandfathered to $7.99--and with four more dollars, four devices and personal profiles can

be created within one account (Netflix.com, 2015).

Company’s History. Created by CEO Reed Hastings as a DVD-by-mail service, Netflix

"built its success around online movie rentals with expedited delivery" opening their world's first

internet store in 1998 (Ferrell & Hartline, 2012, p. 472). The option of instantly watching movies on

personal computers started in 2007. From 2008 to 2011 they opened an agreement with Xbox 360,

Playstation, Nintendo WII to let users stream via their consoles; adapted 5.1 Dolby surround
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in their online service; implemented compatibility with smartphones and tablets; started opening

business in international markets; and gathered licensing agreements with independent and

major content providers and studios.

In the debated year of 2011, they foresaw the improvement in home entertainment,

connectivity, and online movie streaming, splitting initially into Netflix Streaming and Qwikster as

the DVD provider and changing their pricing strategies. The negative perception was quickly fixed,

keeping Netflix DVD streaming and DVD/Blue-Ray under one house, including their

changes in price. The end of that year resulted in Netflix's loss of 75% of their market share (Reeves,

2011). By 2014, their losses were balanced with gains, but even then they made another price

change (a £1 in the UK, a $1 in the US, an €1 in the EU). Even though the company fought its

changes in strategy, this price changes has been a background story of debate until this day.

Competitive Advantage. What makes Netflix a withstanding competitor is its value

proposition balanced with customer service, diversity in titles, an intelligent suggestion system,

and customization available to each and every customer. Another advantage is their recent

strategy of producing their own award-winning content (i.e., House of Cards, Orange is the New

Black, The Killing, Bloodline, Sense8, and Daredevil). Adapting to users' behaviors of binge

watching entire series, this investment—even though slightly risky due to the cost it brings to

the company—continues to keep consumers interested in their services.

The Management Decision Problem

History, Value Creation, and Pricing Strategies. What does Netflix need to do in order

keep its place a leader in online streaming services while leveraging between the rising cost of

content, consumers' shifting behavior, and price sensitivity? Netflix has opted to increase the

price of the services (once in 2011 and again in 2014) and to push an aggressive International

expansion in order to compensate the rising cost of DVDs and Blue-Rays (domestically), the cost
RESEARCH PLAN FOR NETFLIX IN THE US 5

of licensing TV shows and films, and to back their own self-produced content. In order to create

this self-produced content, Netflix took out a loan in 2013 of $500 million and in 2014 of $400

million, tapping at $1.5 billion by today with all the international expansions and interest rates

(Kalogeropoulos, 2015). They have been creating all sorts of programming—some costing more

than others—and this puts them in a position of a gamble.

New Problem. Let's say that Netflix is planning to introduce even higher prices and the

management decision problem should justify—once again—their move with stockholders and

consumers. The questions to be answered would be: how much is too much of a price increase?

Will consumers throw away their loyalty under the bus if the prices go beyond their

expectations? How much are people willing to spend for higher definition entertainment?

When is a good timing for pricing increase? What is the target demographic within heavy users

of streaming data?

The marketing research should then handle what the management decision just proposed.

The answers will help content managers to understand the risks of their investments and what

the future may hold. In short, Netflix wants to know if consumer loyalty in Millennial heavy

users can only go up to a certain threshold before their price sensitivity impacts their relationship

with the company (in case they were to increase their prices) and how brand loyalty is

intrinsically connected to brand value creation.

Hypotheses

H1: Consumer loyalty can be explained in terms of the service's value creation

(significant: scoring high in five elements of the Stapel scale).

H2: Low consumer loyalty can be explained in terms of the service’s value creation
RESEARCH PLAN FOR NETFLIX IN THE US 6
(not significant: scoring low in the five elements of the Stapel scale).

H3: Price sensitivity in loyal costumers has a tipping point (i.e., significant: two or more

dollars).

H4. Price sensitivity in loyal customers is not affected when there is not a significant

price increase (i.e., a dollar).

Research Objectives and Question

Research Approach. The approach is based on secondary data research stating how

Millennials are the prime users of streaming media and that the average streaming viewership is

1.55 hours a day (Spangler, 2014; Frizell, 2015; Han, 2014). Millennials are important to this

research do to their consumerist background, socialized to "fit in," be "materialistic," and be

shoppers at a younger age when compared to prior generations (Heugel, 2015).

The users will be prompted on their iPads, tablets, or personal computers (for easier

navigation) the online survey: "Dear valued customer: We value your business and would like to

invite you to participate in our quick survey that will help us improve our services to you. Please

click here for more information." This survey is done electronically via the Internet and all

online forms are sent to be analyzed by a team of 5 marketing research experts in the Los Gatos,

California office.

Research Objectives. A qualitative and quantitative investigation with ten semi-

structured interview questions and two statistical questions is important. The way to approach the

survey is to target 2,000 Millennial men and women ages 20-34 across the country (five

important cities: New York, Los Angeles, Chicago, Houston, and Philadelphia) who reach 2.5

hours or more of viewership time a day (higher than the average), have been members for 2 years
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or more, and stream over 2 or more devices at a time. This information would already be

known by Netflix which will target them due to its internal metadata.

Research Questions.

1. What is the relationship between Netflix's service brand value and

loyal customers?

2. What is the tipping point of price sensitivity in these loyal customers?

Ethical Issues. One may think that pinpointing heavy users via the company’s metadata

(i.e., 20-34 year olds, who have been using the service for more than 2 years, and use Netflix

across several devices) may be unethically targeted due to cookies or private information used

by the company. This is why it is important to let the respondents know that none of the

information that was used to reach them in the metadata is being used against them. The research

is for pure internal marketing reasons in order to tackle the improvement of service value

creation and to understand users' sensitivity to price hikes.

Survey and Interview Guide

Structure of the Interview. While arranging the interview, it is important to let the

informants know that that interviews are being recorded and transcribed, guaranteeing them

anonymity and protection of privacy. It is also important to assure interviewees that there are no

"wrong answers" and that they have the right to not respond to questions if they don't want to.

There will be ten questions that will deal with demographics information (age, gender, and

household income), watching activity (dealing with “binge watching” behavior), image of the

service (e.g., elements of customer value), overall satisfaction sentiment, platforms used with the service (e.g.,

width of service usage), competition, price adjustment perceptions (e.g., proclivity to cancel the service), and

personal opinions on patronage and service improvement.

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The first two questions are quantitative in nature and will give demographic background

information on the respondents as well as binge-watching behavior habits; the third is a five-

point forced rating scale which will measure negative, positive, or no opinion (shedding the light

on the Millennial generation’s apathy levels); the fourth is a Rank Order Scaling question which

will shed light on the most use platform for streaming Netflix; the fifth is a Stapel Scale that

doesn’t allow neutral responses, so it forces the respondent to have either negative or positive

values which in turn will show customer value scores; the sixth, seventh, and eight questions are

Dichotomous Scales which give a definitive Yes or No answer; the ninth and tenth questions are

qualitative in format, which means that they are open-ended opinions on service improvement

and patronage background reasons.

Survey Design. Quantitative questions produce quantifiable, reliable data that can be

generalizable to a larger population (in this case, demographic and binge-watching habits). The

decision to choose the forced rating scale in the third question was because the respondents of

the survey are already targeted heavy users who would be more likely to voice their strong

opinion and conviction; if they choose a middle point, they would be considered apathetic. The

fourth rank order scaling question was placed to measure the preference among devices that play

Netflix as it “forces the respondent to discriminate among alternatives (Malhotra, 2012, p. 259).”

The Stapel scale, named after Jan Stapel, forces also opinion and is easy to be applied (p. 278).

The higher the positive score, the better “service value” describes Netflix; negative numbers

describe it the least. The dichotomous questions were applied because there is reason to believe

that the respondent can only think in Yes/No terms. Finally, the two last open-ended questions

allow the researcher look into detail what is the respondents’ sentiment for further research.
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Sample Questions.

1. Please introduce yourself stating your age, gender, and household income.

2. What is the most time in a day that you’ve found yourself watching Netflix?

3. How satisfied are you our overall service? Place an X under the applicable

blank space.

Neither
Very Satisfied nor Very
Dissatisfied Dissatisfied Dissatisfied Satisfied Satisfied

4. Which platforms do you use to watch Netflix? Please order the various platforms of

streaming medium in order of preference and/or usage. Begin by picking out the one

medium that you like most and assign it a rank “1.” Then, find the second most

preferred medium, and so on. The least preferred should have a ranking of “4.”
Medium Rank Order

TV/Entertainment
System ____________
Desktop ____________
Tablet ____________
Smartphone ____________

5. Please evaluate how accurately each phrase describes Netflix. Select a plus number

by placing an (X) beside it for the phrases you think describe us accurately. Select a

negative number by placing and (X) beside the least accurate descriptions.

+5 +5 +5 +5 +5
+4 +4 +4 +4 +4

+3 +3 +3 +3 +3

+2 +2 +2 +2 +2

+1 +1 +1 +1 +1

Library Variety Library Quality Streaming Quality Suggested Titles Price

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-1 -1 -1 -1 -1

-2 -2 -2 -2 -2

-3 -3 -3 -3 -3

-4 -4 -4 -4 -4

-5 -5 -5 -5 -5

6. Do you pay for other streaming services other than Netflix? Please answer Yes or No.

7. If the price of Netflix’ streaming video service went up by $2 a month, would

you cancel your subscription with us? Please answer Yes or No.

8. If the price of Netflix’ streaming video service went up by $1 a month, would you

cancel your subscription with us? Please answer Yes or No.

9. What do you think Netflix can do to improve its services? Please explain.

10. What is the most important characteristic of Netflix that justifies your

patronage? Please Explain.

Statistical Tests

With all being said, there are several ways that a marketing statistician can relate and

understand the associations of the data provided in this survey. A frequency distribution can

be produced (the mean, mode, median) as well as measures of variability (variance and

standard deviation) in order to see the relative comparison between those respondents who

would reject the service with a $1 or $2 dollar increase and pay or not for other similar

services (to measure competition values).

With the coefficient of determination, 2 one can measure the strength and significance of association
between price sensitivity (proclivity to quit the service with one dollar or two
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dollar increase) and those achieving a high value coefficient in the “elements of customer
value” (customer loyalty). The formula is:
SSyy − SSE SSyy SSE SSE
2= = − − 1-
SSyy SSyy SSyy SSyy

With regression analysis, an association between a single metric-dependent variable

(i.e., the combined statistic for the service value of the Netflix brand) and one or more metric-

independent variables (i.e., the proclivity to quit the service if there is a dollar and another one

created for the two dollar increase) can show relationship of how brand loyalty can excuse the

users’ acceptance in the price change. The formula is:

Y = a + b1X1 + b2X2.

A one-sample t-test will allow the researcher make a statement about a single variable

against a known or given standard. The given standard is the likelihood or proclivity to cancel

the subscription if there is a dollar increase. Another t-test is produced for the two dollar

increase (same population, but different outcomes). The formula would be:

A Chi-square statistic (χ2) could analyze the population proportion of the two price changing

events in the past (i.e., 2011 and 2014). This will test the statistical significance of the observed association

between the two variables and the rate of subscription losses when compared to the prior total of subscribers

(before the pricing change event). It will give insight into the upcoming pricing change and the risk that this

move may have for the company. This test will include the hypothesis and the null hypothesis. The formula is:

2
(∫ −∫ )
2 ∑
=

∫
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Conclusions: Shortcomings and Problem Management

There are many challenges that come with statistical studies, including: the percentage

of the margin of error (whether it is less or more than five percent), the level of understanding of

the study in the respondents (i.e., how much they are just filling in automatically, without

thinking), time constraints, question formulation, sample size available, keypunching errors, or

confidence levels applied to the statistical computations. In this case, it’s important to look at all

the quantitative, qualitative, scaling, and statistical correlations in order to produce a bigger

picture of the actual problem and present the result to management. As previously mentioned, an

ethical concern would be the data-mining process that would help select the respondents in five

important cities, but since this is for internal marketing analysis, it wouldn’t be a problem. Either

way, the company should be extremely careful how this information is handled.
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References

Ferrell, O.C., & Hartline, M. (2012). Marketing Strategy, Text and Cases. Boston, MA:

Cengage Learning, Inc.

Frizell, S. (2015, February 18). Millennials Are Abandoning Their TV Sets Faster Than

Ever. Time. Retrieved from

http://time.com/3713134/millennials-tv-cord-cutting-cable/

Han, A. (2014, September 26). How Much Are You Really Using Your Netflix

Subscription? Slashfilm.Com. Retrieved from

http://www.slashfilm.com/netflix-streaming-average-93-minutes/

Heugel, A. (2015). Status Consumption and the Millennial Consumer: An Exploratory Study.

Georgia Southern University: University Honors Program. Retrieved from

http://digitalcommons.georgiasouthern.edu/cgi/viewcontent.cgi?article=1087&context=h

onors-theses

Gensler, L. (2015). Netflix Soars on Subscriber Growth. Forbes.Com, 14.

Kalogeropoulos, D. (2015, February 3). Why Netflix Inc. Needs Another $1.5 Billion of Debt.

Fool.Com. Retrieve from http://www.fool.com/investing/general/2015/02/03/why-netflix-

inc-needs-another-1-billion-of-debt.aspx

Malhotra, N. (2012). Basic Marketing Research. (4th ed.). Upper Saddle River, NJ:

Pearson Education, Inc.

Netflix, Inc. (2014). Netflix, Inc. MarketLine Company Profile, 1-27.

Reeves, J (2011, October 25). Netflix Stock May Never Recover from Qwikster

Calamity. InvestorPlace.Com. Retrieved from

RESEARCH PLAN FOR NETFLIX IN THE US 14

http://investorplace.com/2011/10/netflix-stock- nflx-qwikster-subscribers/

Trefis Team (2015, April 17). Netflix Q1 Earnings: The Stock Soars as Subscriber

Numbers Impress. Forbes.Com. Retrieved from

http://www.forbes.com/sites/greatspeculations/2015/04/17/netflix-q1-earnings-the-

stock-soars-as-subscriber-numbers- impress/