Subscription-based streaming services have revolutionized the entertainment industry, infiltrating living rooms across the globe and slashing the revenues of pay-per-view competitors. But exactly why are streaming services so successful, and how do they keep consumers on the hook?
A vital component to the success of steaming services, particularly Netflix, is their unique ability to raise prices without losing many customers.
On the surface, entertainment giants like Netflix, Prime Video, Hulu, and Disney+ appear to offer consumers a myriad of choices. Yet as streaming services capitalize on users’ reluctance to cut ties with their favorite shows, they also highlight the lack of choice that sustains their business model. Streaming services subsist on their ability to make customers feel attached to their shows and platforms, which allows them to increase their prices and retain viewership—a notable phenomenon in the entertainment industry.
In simple terms, when the price of something increases, and people start buying less of it, economists deem this an elastic reaction. This is based on a fundamental economic principle: higher prices lead to lower demand. Goods and services that behave within the bounds of this law are considered elastic goods.
However, there are exceptions. Up-charging users while seeing a steady increase in subscribership, streaming services have slain the traditional law of demand, effectively behaving inelastically.
Since 2022, Netflix has hiked its basic plan price by 11%, its premium plan price by 100%, and has still seen nearly a 20% surge in subscribers. Netflix, wielding powers akin to the fictitious characters which it presents to users, has crept past subscribers’ judgment, defeated the law of demand, and become a market anomaly.
Despite new players’ recent entrance into the arena of streaming services, during which Netflix has ceded significant market share, the long-standing market leader saw its largest-ever fourth quarter growth in subscribership. After exceeding shareholder expectations in Q4 2023, Netflix’s stock (NFLX.O) jumped 8.3%, and Bank of America reported that “it is becoming increasingly clear that Netflix has won the ‘streaming wars.’”
Whether it was for Walter White, Sarah Cameron, or any other Netflix-hit protagonist, viewers have squeezed their pockets for more screen time. Netflix’s nearly irrational behavior in the world of economics reveals consumers’ soft spot for their favorite fictional worlds.
But how exactly do streaming services wield this ability to raise prices while effectively retaining customers? The answer goes beyond the simple fact that they host popular shows and viral content. Streaming companies dive into human psychology and consumer behavior, designing their services to maximize user loyalty.
While recruiting new customers is important to these companies, it is ultimately the long-term retention of these customers that determines the service’s survival. One of the most effective ways streaming services do this is by endlessly monitoring user habits. According to the Harvard Business Review, over half of our daily actions are driven by repetition. Netflix has capitalized tremendously on this tendency. By using algorithms to recommend a constant stream of uniquely tailored, juicy, and bingeable content to users, Netflix is able to sink its hooks into consumers. Once a customer establishes the habit of watching Netflix, they are less likely to switch to an unfamiliar streaming service.
We can further expose Netflix’s strategy for retaining user engagement by looking at it through the lens of Nir Eyal’s Hooked model. The hook model consists of four phases: a Trigger, an Action, a Variable reward, and an investment. For users, a trigger to open Netflix can be internal or external. An external trigger is one prompted by Netflix, such as a push notification. An internal trigger could simply be boredom or the itch to binge-watch something. Either way, triggers get consumers to put their foot through the door and open the Netflix app. The next phase, the action, consists of watching the content. Netflix optimizes its user interface to make this step as easy and straightforward as possible.
Next is the most important phase: a variable reward in the form of dopamine. Dopamine helps the brain remember behavior patterns that are potentially beneficial for the person and lead to a reward. The release of dopamine a user experiences while watching engaging content encourages them to come back for the reward.
The final phase, the investment, is the time the user invests in watching the content. By implementing an auto play feature, Netflix creates an external trigger that restarts this reward cycle.
Netflix’s grip on consumers’ wallets is ultimately not just a matter of its expansive content library or its pioneering role in the streaming service industry. It reflects a strategic understanding of consumer behavior, psychology, and market dynamics. Amidst a fiercely competitive landscape, Netflix has managed to not just survive but grow immensely. Its ability to adapt pricing without significant subscriber loss, coupled with an algorithm-driven content personalization, positions Netflix as a master of consumer retention. In a world where digital content is ubiquitous, Netflix’s approach to keeping viewers hooked is a lesson in how to remain indispensable in an ever-changing industry.
