Things Netflix taught me about how people buy products

Reading how the coronavirus lockdown has led to a 60% increase of content consumption, the usual culprits were popping (Netflix, Amazon Prime etc).

Of course there was not mention of the free streaming solution: piracy and its enabling technology, BitTorrent.

In 2020, you might think: but of course, it’s illegal. Then again, more than 10% of the UK population has pirated a movie in 2018.

Combine that with the fact that Netflix alone, not to mention any other of the streaming players, has overpowered its free competitor by 2.5X in the UK (Netflix UK subscribers, UK piracy participants) and an interesting question arises.

Netflix: Paid service, allows users to see some movies.
Torrent: Free service, allows users to see any movie that has ever existed. Before Netflix. In good quality.

What did Netflix do so well to have people buying a subscription in swarms?

People don’t buy the price tag, they buy product value 

“FREE” is a very misunderstood pricing tool. FREE can actually be dangerous. Perhaps a good hook you’re selling a commodity amongst commodities. My electricity company can make me switch for a FREE month or so – but then hope I don’t set a reminder to got to the next one and the next one. 

But a FREE month of the newest great email client won’t make me drop my Gmail. If anything, it’s more likely to drop my gmail if I have to pay for email, making me wonder how good can it really be! 

This is also the reason why closely matching the price of a competitor is a good tactic whilst avoiding competition based on price which can erode long-term shareholder value.

For instance, take the streaming wars that have escalated in the past year. Netflix, Hulu, HBO, Disney, Apple, Amazon. 

I am signed up to Netflix and Amazon Prime video. I don’t know how much I pay at this point for Netflix ( premium account, up-sells, multiple devices) and I think* that for Amazon I only pay via my general Amazon Prime subscription i.e. that I have not purchased extra content.

A couple of things: 

  • I have never thought: “Amazon prime comes for FREE. Why am I paying for Netflix?”
  • I also have no idea what the competition (Hulu, HBO, Apple) costs. 

I was not buying a “streaming service for shows”. I was buying Netflix.

And what this meant was that as long as the price didn’t give me the chills, it was not part of the consideration.

Product value is beyond the feature set 

Think of enterprise software. Hubspot. Salesforce. How many features can you recall? 3? 5? there are x,000s. Literally. This only makes sense because on the enterprise level you’re not buying features, you’re buying a solution. 

Do you know exactly how many titles your streaming service offers at any given time? What about movie quality? Is it set at 720p or Blu-Ray? I doubt you do. What about about rich metadata, trailers and extra content? You know why? Because that is not what was important.

In consumer, and I would argue in SMB SaaS, no one buys a product as a result of a deliberate comparative analysis.

This is something business schools got really wrong. “Benchmarking” on features is wrong. 

It assumes that people make purchasing decisions following an analytical, logical approach in a sterile, static environment. Which is not the case.

People buy product value and that is inseparable from the context the user buys a service. Timing is context. The political environment is context. What their friend bought is context. 

Positioning is Product value 

Social representations and connotations that come with the product are also part of the context. 

People don’t sign up to Netflix because it has more movies or it’s faster than Amazon Prime video. They do because there’s became inextricably related to cultural standards of millennial audiences. We think of unwinding and we think of Netflix. We think of cool shows and we think of Netflix (original content). We even think of dating in relation to Netflix aka “Netflix and Chill”.

People buy product value and that is related to the brand, the context, the features, the price and every other connotation linking the company entity to our entire social fabric.

And engagement.. which is very much a habit. 

And there’s a final element which follows but also solidifies all the previous. Habits. It’s what keeps a user from switching. To be clear I am talking about dopamine inducing, visually stimulating, thoughtfully designed.. habits. The ones you just can’t help but do all the time.

For a long time I have been getting surprised how streaming services became such a huge industry when there’s piracy: an obvious, free, relatively low risk alternative. 

The argument is strong: If you were told that you can go to the movies and watch a movie for free, or you can pay, it’s reasonable to assume you’d take the FREE version. 

And so, for a very long time I was thinking the same analogy applies to streaming services vs piracy: Why would people a) wait way longer b) for something to maybe arrive on their streaming service c) only for then to have to pay to watch it? 

And it turns out the answer is very simple: 

  • Because Netflix did a great marketing job to create a solid brand (positioning)
  • and later because people don’t want to think – Netflix became a habit i.e. no cognitive tax for the action.

Piracy has two main disadvantages.

  • It relies on one form of peer to peer sharing or another – therefore it’s prone to lagging while streaming or requires upfront time to download. 
  • It requires a set up to transfer the movie from a computer to another device e.g. a Home cinema station.

In other words, you need to think 10’ minutes in advance to download the show (Any show you can think of!) and you need to port it on your TV either with cable, Bluetooth, usb. 

Yet the numbers are telling; people prefer to open their media streaming kit on their Smart TV (e.g. Fire TV, Apple TV etc), compromise on what movie they’re going to watch AND pay (if it’s a paid one on Amazon prime) to watch it. From an economic stand point it’s interesting because initially it looks that the rational agent theory goes out of the window. But I think it’s simply a matter of what “rational” means and what is the currency we are trading.

People are using their emotional, short-term reward seeking, hacky side, what Thinking Fast and Slow baptized “System 1”. We don’t want to think. We want rewards to be quick. We want no inconsistencies and disruptions. Under that light, it’s obvious why people will choose Netflix again and again. No bugs, no lags and above all, it’s convenient. No Extra work.

So there’s a few reason altogether that lead Netflix to be easier to find out about, sign up and keep using.

First, people by definition are deterred from being vocal about their online piracy related excursions. On the contrary, people are very vocal about what they watch on Netflix:

It’s easy, safe and “common” to subscribe.

Strong recommendations and autoplay like features activate users immediately and teach that you can get a reward (watch a nice movie) without lifting a finger.

And so even if the movie is not on Netflix, it might be the case that money-wise paying Amazon for the movie you’re searching costs £2.99 ( random number) but carries the cognitive cost of 1 thing to think or, in technical terms, 1 Elementary information process: choosing a movie.

Measured in terms of EIPs BitTorrent is much more expensive: 

  • Select the movie. 
  • Find the right torrent to download. 
  • Turn a VPN on (ideally if you don’t want to be tracked) 
  • Port the movie in a usb / find and connect a cable. 
  • Sync subs if necessary
  • Play from the computer and standup to pause OR add an app to control your PC from your phone 

This is 6 EIPs and TIME associated. 

So it turns out that it’s not FREE. It is costing you time and effort. 

So choosing the movie from Amazon video comes at a lower cost altogether. 

And sticking to it? Well, that’s easy right? You choose the movie, click play and 99% of the times you simply have a great experience with metadata, subs synced and the movie in HD quality. 

But here’s the most interesting thing streaming services and the king of the hill, Netflix act like they know all too well: People get used to the cue, not even the reward itself. 

In other words? Even when the pirated movie comes conveniently at the ease of one click within your streaming service (see Cinema V2, popcorntime for Amazon video) we are still more likely to click the Netflix thumbnail and spend our time looking for a movie there first. Why? Seeing Netflix’s thumbnail is already flooding our brain with chemicals, as if the reward that comes after having watched an enjoyable movie, has already occurred. 

And thus, even though we have a free alternative we are “hooked” on clicking on the paid version. 

Build value and they will buy it

This logic applies to other costs. Sharing data. Spending time.

So next time your company or investment is up against fierce feature, price or marketing budget competition, ask yourself: How are they delivering value beyond features and price?

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