The entertainment sector is facing the advancement of Netflix and Amazon today, and Disney+ tomorrow. HBO is already offering its service in many territories, while Warner and Universal are also gearing up to launch their own video services.
Consumers are enjoying the practicality of those all-you-can-watch services and are getting comfortable with the monthly payment of a small, affordable fee.
This model has propelled the early adopters to impressive heights: Netflix, as of Q3 2018, has 137 million subscribers worldwide. In the US it clocks 56 million subscribers. According to Reuters, Amazon Prime Videos stands at an estimated 26 million active users (this data is from 2017 though) and Hulu has 17 million subscribers.
Is it over? Have these big ones taken over the world? Is this the end for the entertainment sector as we know it? I believe that this is just the start.
It’s hard to imagine a world where a single content provider rules all of our entertainment needs. Just like we used to have multiple television channels, we will have multiple apps when it comes to being entertained.
The entry of Netflix and Amazon Prime Video means that a new market is opening. In it there is plenty of space for many different operators. “Verticals” are rife with opportunity.
By vertical I mean specific, bespoke, tailored content. And we start to see the rollout of specialized entertainment offerings, for example, in sports, lifestyle, or motors.
The traditional cinema theater is fighting back in the worst possible way: instead of adopting the new business models, they are entrenching even further in archaic positions. Netflix was absent from Cannes, because of outdated French law, while it was heavily criticized by cinema exhibitors for its presence at the Venice Film Festival.
But cinema chains are in the best position to be at the forefront of the future of cinema. It’s no coincidence that Amazon is buying Landmark Cinemas and that Netflix is releasing in theaters the same movies that just won the Venice Film Festival.
Also look at Curzon in the UK, where a theater chain, a cinema distributor and a VOD platform live not only in harmony, but contribute to each other’s profits.
The business models of entertainment are changing and subscription video on demand is on the rise. The Video on Demand market (VOD) that was born with the arrival of iTunes is less and less appealing. Subscription Video on Demand (SVOD), best exemplified by Netflix, seems to be winning over the market.
Cinema professionals have a great host of knowledge. Their artistic and technical knowledge is wide and deep. However – with some notable exceptions – they still ignore much of the specific marketing knowledge that is sorely needed in order to succeed in the SVOD market.
There are five concepts (and some corresponding metrics) that need to be familiar to anyone approaching this market.
1. Marketing Funnels
Marketing funnels are the metaphor of choice for the flow of a potential customer through a series of experiences that lead to a transaction.
The experiences could be: seeing an ad for Amazon Video, reading an article about the latest show “Jack Reacher”, receiving a newsletter about Amazon Prime Video, seeing a second ad for “Jack Reacher”, looking at the Amazon Prime Video Website.
The transaction would be the eventual subscription of an Amazon Prime membership.
Modern tracking tools allow for the user to be “followed” inside these experiences all the way to the (potential) final subscription.
However, a funnel is not enough. Most marketing campaigns have different funnels that lead to individual experiences for the potential customer.
In marketing jargon these experiences are called “touchpoints”. A touchpoint happens each time a potential customer interacts with your brand. These potential customers are often called “leads”.
Based on all this we can say that the role of a funnel is to transform leads (potential customers) into paying customers.
Funnels are everywhere and are not just used by subscriptions businesses. A typical funnel is the “abandoned cart funnel”. We’ve all found ourselves inside of it: you’re browsing an ecommerce website, you check out some products and even add a couple to the shopping cart. Then you close your browser and you forget about it. The ecommerce store will then target you with the same contents of the shopping cart for the days to come. It’s what is commonly called retargeting.
Your PR, digital PR, publicity and media should all have some sort of tracking that allows you to see where your transactions come from.
This is not always possible, but it’s hugely informative to have a constantly updated picture of the funnels that bring you the most or the cheapest subscribers.
2. Cost per Acquisition (CPA)
Setting up a funnel allows you to start looking into an interesting metric: the Cost per Acquisition. This is the cost that is required to get a new customer to sign up.
Add up all the expenses related to acquiring a customer and divide it by the total number of new customers. Expenses include costs at every stage of the funnel, i.e., the in-house marketing team salaries, expenses to book ads and even creative expenses.
Monitoring your CPA allows you to best understand the sustainability of your business: ideally you want this cost to be inferior to the profitability of that user.
However, you don’t calculate your CPA based on the long term retention of the customer. No matter if you have a free trial, if customers pay in full, if they give you their payment details or not: once they register they become a new customer in your system.
The first time you calculate CPA you should add up all the costs of all campaigns and divide by the number of acquired customers in the same period.
But once you have this general figure you can move on to calculating how the CPA varies channel by channel.
How much does a customer coming from Google cost? How much does it cost to convert a Facebook fan into a paying customer? How much does it cost to acquire a new customer through am editorial partnership with Variety?
If you know your channel specific CPA you can start making smart marketing decisions.
There is no absolute value, or required range for a CPA. What matters the most is how it compares to the revenue that a user is going to generate. For that you need to start measuring another metric.
3. Monthly Recurring Revenue
Once you have acquired subscribers you can start looking at the amount of revenue they are generating.
In a VOD business this would mean single transactions. After each sale you need to either convince your customer to buy a new unit, or find a brand new customer.
In the SVOD world revenue is recurring. Each month each subscriber will generate some monthly revenue.
Thus the moniker MRR or Monthly Recurring Revenue.
Calculating it is pretty straight forward. If you have 100 users paying 5 euros per month you will have a predictable 500 euros of MRR.
The whole concept of a subscription based business relies on the monthly availability of new funds and thus this figure is the lifeblood of any SVOD project.
4. Average Revenue Per User (ARPU)
Once you can calculate your Monthly Recurring Revenue it will be easy to figure out what the ARPU is.
ARPU stands for Average Revenue Per User and it’s the amount of revenue that you can extract on average from a user. For this example we will limit the time frame to a month, but ARPU can be used to represent the lifetime value of a user.
Your ARPU can be affected by different levels of service (you may offer your service at 5 euros in standard definition and 10 euros in HD) and by different offers (you may offer a discount to those that choose to pay a yearly fee). An average number allows you to predict more reliably how much more money you’re going to make once you add a new subscriber.
In the case above, 500 euros of revenue divided by 100 users results in 5 euros ARPU.
Numbers don’t always go up. And subscriber numbers are no exception. Even paying users can become non-members for a variety of reasons.
Their credit card can expire or they may cancel voluntarily for any reason (maybe they’re unsatisfied with your service or short on cash or even moving out of the country).
When a user cancels, they churn.
Let’s say that we start the month at 100 subscribers. And in this example we don’t have any marketing funnel, so we don’t add any new subscribers at the end of the month. Instead let’s say we lose 10.
Our monthly CHURN rate will be the percentage of users that left, compared to the total subscribers. In this case 10%.
Churn can be calculated as an average value over a longer period of time (Annual churn) or it can be calculated by type of users: for instance by comparing the churn tendency of yearly subscribers versus monthly ones.
If at any given time you have a firm grasp of these five concepts and know by heart what your CPA, MRR, ARPU and churn are, then you’ve got all the basic ingredients to win the SVOD game.
Guess who had the issue of one time sales like VOD has today? The software industry! These exact same concepts saved them. Many software businesses thrive today because they adopted the same model. I’m talking about Mailchimp, Adobe Creative Cloud but also about Microsoft with Office Live.
These concepts turned around an industry even closer to cinema: Spotify, Apple Music, Deezer, Tidal all adopt the same “Netflix model” and live by the 5 concepts above.
Start measuring and you will have the luxury of knowing exactly what is happening to your business. Don’t keep this data to yourself. Create dashboards that all your collaborators can access. Everyone should know the marketing and revenue situation of the business they are in.
Mingle with the marketers. They crunch and digest these numbers since ages. These figures may be new to you, but they are the lifeblood of a thriving business ecosystem. Mingle with the marketers until you become a little like them, and then start outsmarting them. Marketing is easy. Running a business: that’s the hard part.
Start today. Netflix and Amazon are only gripping more market share if you don’t take your stance. Stop shouting at the future. The future is coming either way. Adopt it, make it yours and thrive in the SVOD future.
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Some good resources if you want to dive deeper into these topics:
SaaS Metrics 2.0 – A Guide to Measuring and Improving what Matters