Netflix's initial strategy required revising one key element: swapping the convenience of DVD home

delivery with the inconvenience of long waiting periods. This contradicted the concept of a movie night
where obtaining the newest releases quickly was a priority. Additionally, Netflix made no tangible
progress in terms of value proposition. They still imposed late fees in the pay-per-use model and charged
high rental prices ($6 per movie) compared to competing retail stores. Furthermore, their slower
delivery services dissatisfied high-volume customers. Another element that needed attention was the
subscription costs. The cost of acquiring movies for rent was influenced by customer demand, especially
considering the growing subscriber base. The availability of high-demand and brand-new movies was
often limited due to stock-outs, making them expensive to acquire despite their strong demand. To
counter this, Netflix needed to stimulate demand for older and lesser-known movies, which could help
bring down the average cost of building the film catalog. Moreover, Netflix's traditional merchandising
system, which was meant to complement its search engine and connect subscribers to the library of
titles, was not effective. The initial editorial team provided the same movie recommendations to all
subscribers, lacking personalization and customization.

Two key elements that played a crucial role in Netflix's ultimate triumph were the transition to a
subscription model and the implementation of a personalized recommendation system.

1. The transition to a subscription model occurred in 1999 when Netflix introduced a flat-rate
subscription service. This shift from a pay-per-rental model allowed customers to have multiple
movies in their possession at once and receive new films each month. By offering unlimited
rentals for a fixed monthly fee, Netflix differentiated itself from traditional video rental stores,
which charged per-day rental fees. This change provided customers with greater value and
convenience, contributing significantly to Netflix's success.
2. The implementation of a personalized recommendation system was another pivotal element in
Netflix's strategy. In 2000, the company developed a recommendation algorithm based on
customer preferences, which helped users discover films they might enjoy from Netflix's existing
catalog. This recommendation system had a twofold impact on the distribution centers. Firstly,
the recommendation system helped increase the utilization of Netflix's library of films, including
older and less-known titles. Traditional video rental stores relied heavily on new movie releases,
with new releases representing around 70% of their rentals compared to Netflix’s 30% because
the recommendation algorithm encouraged subscribers to explore a wider range of films based
on their individual preferences. As a result, the demand for older and lesser-known movies
increased, ensuring a more even distribution of rentals across Netflix's library. This diversification
in movie selections reduced the strain on acquiring new releases. Secondly, the recommendation
system allowed Netflix to better manage its inventory and diversify its distribution centers
strategically. As customer preferences varied, the algorithm identified popular movies and
genres in different regions. Netflix used this information to optimize its inventory placement by
stocking specific films in distribution centers closer to the target audience, By tailoring the movie
selection to local preferences, Netflix minimized shipping times and improved the overall
customer experience.