#2 From DHM to Product Strategy

You have ideas to delight customers, to build hard to copy advantages and experiment with your business model. Now what?

In 2007, Netflix’s exclusive content effort, “Red Envelope Studios,” failed. But by 2012, with its economies of scale, Netflix had a hard to copy advantage through its original content.
  • Easy. Netflix wasn’t simple at launch but became simpler over time. Netflix learned to add features that customers value and remove those that do not. A surprising example in 2018: the decision to remove movie reviews. Now that members can quickly hit “play” or “quit” at any time, they no longer need reviews.
  • Social. Netflix experimented with “Friends” for six years. The hypothesis was that friends would suggest great long-tail movies (creating both delight and margin) but also create a hard to copy, network effect. The effort engaged only 6% of members, however, so Netflix cut it in 2010.
  • Unique movie-finding tools. In 2005, the vision was that personalized previews would begin to play on each member’s homepage, delivering both delight and margin. (The personalized choices would be lower-cost, long-tail titles.) The effort failed, however. Customers found the previews annoying, and the experiment did not move any of its proxy metrics.
  • Price and Plans. Given the need for ongoing business model experiments, there was non-stop price and plan testing. Today, prices range from nine to sixteen dollars (US).
  • Ads/Used DVD sales. In 2006, Netflix explored two alternate business models — advertising and used DVD sales. Both businesses generated profit but were killed in 2008 when Netflix began to deliver higher-margin through its core DVD rental business.
  • Next-day DVD delivery. A source of delight for members: DVDs arrived the next day in the mail. Netflix achieved this through a network of automated shipping hubs. It took Blockbuster years to replicate this capability.
  • Streaming. It’s an obvious win today, but it was unclear when Netflix should launch its streaming service and how to acquire content. Today, there’s hard to copy advantage in the technology that Netflix employs to encrypt and deliver video. And customers love watching movies instantly — anytime, anywhere.
  • Entertainment. In 2005, the Netflix product team worried it was building an undifferentiated, “automated vending machine.” Ultimately, Netflix tested “Max” — an animated host on the PlayStation — but the experiment failed. The incremental increase in delight did not outweigh the cost of the effort. And “an automated vending machine” was on-brand for a service whose brand promise is “movie enjoyment made easy.”
  • Open APIs. In 2006, when Facebook, LinkedIn, and others opened their Application Programming Interfaces to enable partners to innovate on their platforms, Netflix followed suit. The intent was to let a “thousand flowers bloom,” but none did. Later, however, the APIs became the foundation for Netflix’s device ecosystem.
  • Device ecosystem. Netflix launched streaming in January of 2007 on PC-based computers. The Mac followed shortly, but members wanted to stream movies to their TVs, which required partnerships with hardware manufacturers. In late 2008 Netflix launched on Xbox. Later, Playstation, Wii, Roku, Samsung, and nearly all DVD and Blu-ray manufacturers followed. By 2012, Netflix had critical mass with hardware partners; they created a hard to copy network effect that also delights customers who enjoy watching “anytime, anywhere.”
  • Exclusive DVD content. During the DVD era, Netflix tested exclusive content via “Red Envelope Studios,” but without the economies of scale Netflix has today, the effort failed.
  • Original content. Netflix launched its first episodic TV series, “Lilyhammer,” in 2012. By 2013, its $100M investment in “House of Cards” delivered a hit.
  • Interactive stories. In 2019, After experimenting with children’s “choose your own adventure” videos, Netflix launched an adult branching story movie: Black Mirror’s “Bandersnatch.” It’s early days for this experiment, so it’s hard to evaluate its effectiveness. We do know, however, that an interactive version of “The Unbreakable Kimmy Schmidt” will launch soon.
  • High-quality video & sound. One of the early lessons at Netflix was the importance of staying focused on making the core product better. Netflix’s continued effort to improve both video and sound quality is a good example, and the technology required to do this is quite hard-to-copy. And, today, Netflix generates higher margin through its higher-priced, Ultra HD plan.
Think of product strategy as hypotheses about how you hope to delight customers in hard to copy, margin-enhancing ways. The strategies in green accomplished all three. Those in yellow accomplished 1 or 2 of the objectives. The strategies in red failed to delight and consequently did not deliver either hard to copy advantage or margin. The two last strategies are current/future experiments — outcome unknown at this time.
  • Easy/simple
  • Social
  • Margin-enhancement
  • Unique movie-finding tools
  • Next-day DVD delivery

Product Strategy Exercise (#4)

Given your product’s potential “delighters,” hard to copy advantages, and business model explorations, what are four to six hypotheses you’d like to test in the next year or two?

Former VP/CPO at Netflix/Chegg. Now speaker, teacher, & workshop host. Learn more here: www.gibsonbiddle.com or here: https://www.linkedin.com/in/gibsonbiddle/