Market Segmentation Analysis Summary

Company: Netflix

Profile: Netflix is an American subscription-based movie streaming company offering an extensive

online library of thousands of movies and TV shows to its users. The company also produces their
own exclusive Netflix Original content, and was revealed to have produced an estimated 126 original
content in 2016. Today, Netflix has as many as 130 million subscribers worldwide.

Deciding. Netflix is a market-oriented organisation that constantly seeks for new ideas to
enhance user experience, with the Netflix Prize[a] competition as the prime example for this
organisational culture. Being the movie streaming industry’s top player, Netflix possesses more
than enough financial resources, as well as marketing and data expertise to support market
segmentation strategy implementation.

Specifying the ideal market segment. Netflix’s services primarily appeals to young adults
aged 18 to 34 years, who are either studying or working, and come from a diverse
sociodemographic backgrounds. In accordance to the knockout criteria, members of each
segment are homogeneous (e.g. the university students segment are known for their binge-
watching habit), while members of one segment are clearly distinct from members of another
(e.g. university students and families may prefer to watch different content). The market as a
whole is large and matches the company’s strength to satisfy the needs of different segments
through its versatile recommendation algorithm. Each segment is clearly identifiable from their
user profiles and reachable through online channels.

Collecting data. The data should be sourced from Netflix’s internal user database. Basic
demographic variables, along with subscription tier, streaming pattern, party size, exclusive
content consumption, and other user activities as behavioural variables should be used as
segmentation variables for the segment extraction process.

Exploring data. Following the data cleaning procedure, the company may then explore the data
further before extraction. Univariate distribution and independence should be tested using
descriptive statistics and correlation analysis. Given Netflix’s large customer base, the sample
size should be sufficient according to the “100 consumers per segmentation variable rule”.

Extracting segments. A hierarchical and partitioning clustering hybrid distance-method will be

used to extract segments. Global and segment level stability analyses will be conducted to
identify promising segments prior to their assessment and possible elimination using the
knockout criteria. Surviving segments will then be moved onto the profiling phase.

Profiling segments. Segment profiling needs to be conducted due to the data-driven nature of
this market segmentation analysis. A segment profile plot will be used to visualise how each
segment differs from the overall sample for easier interpretation and practicality.

[a]
The Netflix Prize is an open competition to anyone with no ties to the company to produce the best algorithm to
predict movie ratings among its users.
Describing segments. Descriptor variables and a variety of visualisation techniques (e.g.
mosaic plot, boxplot) will be used to gain more insights on the extracted segments. The
statistical significance of segment differences will then be tested using crosstabulations, t-test,
ANOVA, and linear regression.

Selecting the target segment. Target segments will be collaboratively selected based on the
pre-specified knockout and attractiveness criteria. Overall attractiveness and relative
organisational competitiveness are to be calculated and plotted onto the segment evaluation
plot prior to the selection of the desired segments. Given Netflix’s versatile algorithm, multiple
segments may be selected in this stage as the company has the capability to satisfy a diverse
range of users through personalised service.

Customising the marketing mix. This step requires Netflix to devise a marketing mix most
suited to each segment. Focus should be placed on product, price, place and promotion. The
product and price aspects concern potential modifications to make on offer bundling for different
subscription tiers and the way they are priced. The place and promotion aspects concern how
Netflix can reach and appeal to untapped online users to begin using their services.

Evaluation and monitoring. Netflix may use the following performance metrics for strategy
evaluation: user engagement rate, subscriber retention rate, and new subscriber acquisition rate
measured on at least a monthly basis. Changes in market trends and behaviour should be
monitored closely using a data mining system, whereby significant changes will require
corresponding adjustments in marketing tactics.