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This article is bringing the previously described elements of the business model together into the Flywheel model. You will see that the investment cycle consisting of
(1) Content;
(2) Technology; and
(3) Marketing
is the linchpin that in relation to the competitor moves will determine Netflix’s trajectory…
Gain in-depth, real-world insights into Netflix’s business model now (btw, you can easily adapt the Flywheel concept on your own innovation idea and I’m showing how)…
Cash flows are important events in your business and free cash flow is a great metric that Netflix and other innovators pay great attention to:
“We believe free cash flow is an important liquidity metric because it measures, during a given period, the amount of cash generated that is available to repay debt obligations, make investments and for certain other activities or the amount of cash used in operations, including investments in global streaming content.” (Netflix, annual report 2018)
Free cash flow is an important metric in any innovator’s finances as we are often using cash (typically from outside sources) to create assets and operate our business until it generates sufficient profits to hold itself. If you look at Netflix, you will see that pattern supercharged. Here are the free (hugely negative, -$7 billion) cash flows of the recent years which show outside funds being injected into the business to invest in technology and content:
Today you will learn:
– How to calculate free cash flows
– Asset creation via capex
– Depreciation and amortisation
– Working capital as a liquidity measure
– External funding sources
We are continuing our mini-series of crucial metrics for growth companies using Netflix as an in-depth real-world example. Last time, I covered the crucial metric Contribution Margin that guides Netflix’ decision making on content investment on a macro level.
Today, we are going to look at a number of metrics that are being used in the context of assessing companies’ growth potential:
CAC: Customer Acquisition Cost
CLV (or LTV): Customer LifeTime Value
ARPU: Average Revenue per User
Churn
The important ratio of LTV/CAC
Profit per user
These metrics are helpful in the context of repeat users within the subscription business model but also the platform business model (e.g. Uber, Airbnb, TripAdvisor, Facebook, etc) which I have covered in extensive detail under those links.
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Our US contribution margin structure is set mostly top down. For any given future period, we estimate revenue, and decide what we want to spend, and how much margin we want in that period. Competitive pressures in bidding for content would lead us to have slightly less content than we would otherwise, rather than overspending. The same is true for our marketing budget. The output variable is membership growth that those spending choices influence.
This is what Netflix tells their investors in the long-term view (the wording has slightly changed just a few weeks ago but this is how it read for a long time until then).
With this, you know they are using the contribution margin metric in one of the most important business decisions: investing in content.
That is why we are covering the topic of contribution margins: it is one of the most important metrics and decision making tools for many companies like Netflix (I have an example from Lyft’s recent IPO filing at the end).
It is also a crucial tool in the break-even analysis (i.e. finding out when you start making money).
Find out more about one of the most crucial business metrics for many companies.
Last time I have covered economies of scale using Netflix as an excellent example of this important concept.
This time we will be looking at important concepts related to economies of scale:
– Diseconomies of Scale
– Economies of Scope
– Economies of Density and Economies of Agglomeration
I will continue using Netflix since we want to learn from real-world examples.
Join me for a tour through these concepts and more interesting facts about Netflix!
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