Netflix and the Success of the Subscription-Based Revenue

What do software, magazines, certain types of television shows, phone service and fitness centers all have in common? All of these businesses operate according to a subscription-based revenue financial model.

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As Netflix has demonstrated, this model that has been around for ages, when coupled with technological innovation, can provide an edge to knock established industry giants off their feet.

The story of Netflix vs. Blockbuster is already being used in business schools as a case study in competitive business models. Blockbuster, as we know, has already filed for bankruptcy. Netflix, despite some serious and well-publicized setbacks in 2011 due to conflict with content providers, is still very much alive and kicking (and ultimately, those content providers will likely have to come around).

The Gourmet Retailer provides a synopsis of the trend in Has Business Really Changed?:

The neighborhood video rental store is on its last legs because guess what, streaming video from Netflix and others is rampaging into America’s living room. Netflix vs. Blockbuster was no contest. Blockbuster opened 4,000 stores in two decades. Netflix sales were up 43,101 percent from 1999. That’s not a mistake, sales were up 43,101 percent and Blockbuster filed for bankruptcy in 2010. And music stores keep closing. iTunes made its debut in 2003 with devastating effects on music retailers. Tower Records went out of business in 2004, and Musicland folded in 2006. Songs sold on iTunes: up 1,169,900 percent from 2003. The trend is clear.

It’s not that brick-and-mortar stores are on the way out. Clearly, some types of retailers are here to stay for the foreseeable future. People still like to shop for their own groceries in supermarkets. Plenty of customers still like to try on clothes at the Gap. Electronics retailers like Best Buy often have sophisticated e-shopping websites with discounts on their in-store products, but they still have enough walk-in traffic to justify giant big-box stores.

That said, a subscription model can offer competitive advantage in a number of ways. Importantly, revenue is more consistent. Yes, people do change or cancel their subscriptions, but those decisions are not made as often as purchasing decisions. Companies can continue to earn revenue for months or even years before a customer finally gets around to canceling. Most of us who got fitness club memberships and stopped showing at the gym can relate to this situation from the other side of the ledger.

Financial Models with Sensitivity Analysis: Subscription Revenue

Perhaps you’re already considering developing a subscription revenue model business. Success for these types of companies in particular depends on accurate financial projections. Our downloadable templates include revenue forecasting sheets, cost assumption sheets that then automatically generate financial statements such as Income, Balance Sheets and Cash Flow statements. These will help you understand how your business “pencils out”..

DOWNLOAD Financial Models with Sensitivity Analysis: Subscription Revenue

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