Via Harvard Business Review : Netflix just announced its best quarter ever. Its subscriber count went up 13 million worldwide, and investors are enthused. Its U.S. business ended 2014 with 39.1 million subscribers, not far off our 2012 prediction that there were at least 40 million U.S. households who seemed likely to sign up for its streaming video service.
The success Netflix is enjoying was far from certain if you recall the summer of 2011. That’s when the company suffered through the Quikster controversy and a protest over its price increase. I was in the minority when I wrote that the price increase was a good thing. I wrote that not as a growth strategist, but as a loyal, happy Netflix consumer. I was very pleased with my decade-long relationship with Netflix. I trusted the brand. I knew my demand for streaming would go up over time. And I felt certain that Netflix would take my extra $1 per month and invest it wisely for my benefit.
And it did. It took my dollar, combined it with many dollars from like-minded customers, and invested it in things like original content, including “House of Cards,” for which Kevin Spacey won the Golden Globe.
Netflix’s ability to make a big bet like this stemmed from its certainty of latent demand—in other words, that people signing up for a monthly service showed a real commitment not only to become customers but to stay customers. For that to happen, consumers must know their demand for a product or service is predictable and likely to go up. The consumer must also have sufficient trust in the brand’s willingness and ability to understand, predict, and invest in meeting that demand.
Both of these were true for Netflix. Americans’ demand for media is very high. As Steve Hasker, Nielsen Global President, says, American consumers now have a second 40 hour per week job: consuming media, much of which now streams over phones and computers. And consumers could be confident that Netflix, with its recommendations engine, could reliably meet that demand.
When customers can foresee their demand for a product or service rising and trust a company enough agree to a monthly payment (thus providing regular cash flow), they are essentially enabling the company to build what customers want. Think of it as Kickstarter for established companies and their consumers.
Converting consumer certainty into consumer cash flow is a key part of making money from digital business models, many of which use subscription models. From a consumer standpoint, digital payments can be more convenient and are potentially safer. But mostly it taps into the wisdom from Mark Cuban of creating as much transactional value from cash as possible. When consumers are certain about their latent demand, they are increasingly willing to provide positive cash flow in exchange for better value or more benefits. “Saving 30 to 50% buying in bulk — replenishable items from toothpaste to soup, or whatever I use a lot of—is the best guaranteed return on investment you can get anywhere,” as Cuban says.
Improving cash flow is extraordinarily healthy for any business. If you can better predict consumer demand with more certainty, whether via subscription business models like Netflix or Amazon Prime, you can improve forecasting. This allows you to better manage operating and capital expenses. It can also improve working capital. Consider the Starbucks loyalty card, which consumers buy pre-loaded with cash. In early 2014, Starbucks said consumers loaded $1.4 billion to those payment platforms. According to Bloomberg Businessweek, in 2013 Starbucks made $146MM on interest investing the float, or 8% of total profit.
Digital payment innovations that tap into consumers certain about their latent demand are at the heart of successful digital business models. And brands that have earned high degrees of trust with great loyalty and passion—whether in a sexy category or not—are in the best position to capitalize on it.