January 11, 2008

Netflix: 2001 to 2012 Sales Trajectory

I'm spending an increasing amount of time helping new online businesses develop long-range sales forecasts.

There are two important components of a long-range sales plan for a new business.

First, we have to estimate how likely customers are to defect.

Second, we have to estimate how many customers we can attract via marketing, and what those customers will spend.

By being a publicly traded company, Netflix freely provides us with a rich history of marketing spend, and the customers attracted by marketing spend.

If you like, download a Netflix 2001 - 2012 spreadsheet I created, a spreadsheet that outlines historical results and a projection for the future. Change marketing spend in row 13 for years 2008 - 2012, to get an idea of how Netflix sales and profit might vary based on different marketing spend levels.

The spreadsheet is driven by churn rate, and more importantly, the marginal effectiveness of marketing and customer acquisition. The graph at the top of the page illustrates this trend at Netflix. In the early years, Netflix was able to greatly improve the effectiveness of marketing activities.

But after 2003, cost per new subscriber steadily increases as marketing spend increases. One can play with different marketing spend levels, understanding the long-term sales and profit potential of Netflix.

Give this simplistic spreadsheet a try. Give me a holler if you want a model built for your new or existing online business.