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Sludge On Demand: how Netflix makes use of behavioural science

With over 200 million viewers worldwide, Netflix is one of the most popular streaming services all around the world. It has become a cause of worry for its competitors because of its rising revenues and enormous influence. Netflix has deposed several companies with its massive bundling and binge-friendly releases, with hits such as The Queen's Gambit, Bridgerton, and Tiger King. But, to what extent does Behavioural science contribute to the success of the platform?


Netflix unconventional strategy

Netflix started as a DVD-rental company, much like Blockbuster. Unlike the latter, however, was able to steer its business direction towards a more sustainable model. Its presence in major movie award events like the Oscars and Golden Globe has advanced the company's status to more than just a streaming service even if they reject the conventional industrial norm of theatrical release.

To understand how Netflix became a 100-billion-dollar company in just 20 years with a few-dollars subscription fee it is important to understand the strategy used by others that have dominated the movies market, the economics of price discrimination. So, how does it work? To price discriminate and charge the highest price possible i.e., a price closer to the willingness to pay of each consumer, traditional movie producers opt for the theatrical screening. The idea is to vary the timing and quality of the movies, i.e., HD screening, sound quality, such that movie lovers are willing to pay higher prices for an exclusive release. Netflix, however, does not use this strategy. It does not aim to charge per movie but per bundle. With a bundle subscription, there is no need for an estimation of the value customers place on movies. The bundles themselves make it easier for the company to apply behavioural segmentation, meaning it could divide customers into groups depending on their behavior patterns when interacting with Netflix according to a specific algorithm. If then it can accurately predict the average amount a user is willing to pay for all movies in a bundle, Netflix can easily charge a price slightly below that level and maximize the willingness to pay of the customer. That is why Netflix has different values for different countries. For instance, acquiring a standard plan of Netflix in Belgium is almost 4 dollars more than acquiring the same standard plan in Portugal even if both countries have a comparable size library (3607 vs 3992).


Do they sludge or do they nudge?

In the last few years, companies have been trying to find ways to attract the attention of customers, disseminate information, and spread popularity. This led to using a different approach and the application of insights from behavioral economics in marketing. But to understand the implications of them, it is important to define a sludge. The opposite of a nudge, a sludge is a behavioral intervention that does not have the individual’s best interest in mind. It uses the same tools based on cognitive biases and choice architecture, to nudge people towards choices that will not necessarily increase the welfare of themselves but the welfare of others which is, in this case, Netflix itself. To the present day, various streaming platforms such as Netflix, Amazon, and YouTube use these nudges to obtain required behaviour from their customers and audience. The “next-up” feature on Netflix or “auto-play” on YouTube has been subject research that relates it to binge-watching.

Binge-watching is the practice of viewing for a prolonged period, multiple episodes of a TV show or several films in rapid succession. According to a 2019 survey from the U.S. Bureau of Labor Statistics, the average American watches 2.8 hours of TV per day or nearly 20 hours each week. Also, as reported by Deloitte, 38% of viewers were binge-watching weekly for an average of 4.2 hours session. Binge watchers reported higher levels of stress, anxiety, and depression. Researchers have noted that binge-watching streaming media is directly related to a reduction in sleep quality — an effect that is not seen with traditional TV series when new episodes are only released once each week.

Similarly, the policy of offering a one-month free subscription under the label of ‘free trial’ is misleading because it requires credit card information to turn the lazy and forgetful subscriber into a potential paying one. According to Yahoo Finance, 48% of people forget to cancel a free trial before they’re charged with auto-renewal. These are behavioural tactics to increase the revenues of the company at the expense of the customer. These nudges can be considered sludges because it pries on the weaknesses of the receiver rather than increasing their welfare.


What is Next?

Amongst other factors, Netflix’s globalization strategy with key behavioural insights has been a significant factor for the company’s success. Following this strategy, Netflix has expanded to 190 countries in just 7 years and according to the Wall Street Journal, the company generated total revenue of over $5.2 billion in 2019, which is an increase from 2018 of around $4 billion. With so much to learn from Netflix, success is in its bag. However, it is important to be aware of how sludges can impact everyday life and lead to real consequences and have the welfare of the customer in consideration.


Author:

Maria Sofia Murça - Research Analyst



References

"How Netflix Expanded To 190 Countries In 7 Years". 2018. Harvard Business Review. https://hbr.org/2018/10/how-netflix-expanded-to-190-countries-in-7-years.

Kaufman, Mark. 2019. "Binge-Watching Preys On Our Animal Instincts". Mashable. https://mashable.com/article/binge-watch-netflix-evolution-health/?europe=true.

"All You Wanted To Know About... Nudge Theory". 2018. The Hindu Business Line. https://www.thehindubusinessline.com/opinion/columns/slate/all-you-wanted-to-know-about-nudge-theory/article9920123.ece.

"Netflix And The Economics Of Bundling". 2019. Harvard Business Review. https://hbr.org/2019/02/netflix-and-the-economics-of-bundling.

Feliz, Kiara. 2018. "Nudge To Make Smarter Decisions". Yourstory.Com. https://yourstory.com/2018/01/nudge-make-smarter-decisions?utm_pageloadtype=scroll.

Hayes, Dade. 2019. "New Netflix Subscriber And Revenue Figures Underscore Boom Outside U.S. – Deadline". Deadline.Com. https://deadline.com/2019/12/new-netflix-subscriber-and-revenue-figures-underscore-boom-outside-u-s-1202810784/.

"Netflix - Quarterly Revenue 2011-2020 | Statista". 2019. Statista. https://www.statista.com/statistics/273883/netflixs-quarterly-revenue/.


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