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The company that this market analysis will examine is Netflix, which is based in the United States. The headquarters is located in Los Gatos California, the founder is Reed Hastings. This report will examine the Netflix service, provide an accurate consumer profile, and review four distinct variables impacting the market size. Additionally, there will be an analysis of entry strategy, positioning themes, advertising, and distribution channels.
Major market segmentation for the DVD, Game & Video Rental Industry in the United States is divided into six major market segments. One market segment is in the consumer group ages 18-24 years old. Although this segment represents 18.5% of industry revenue in 2014, there is notable market decline. Individuals in this market segment are trending towards streaming services. Consumers ages 25-44, represent approximately 37.9 % of industry revenue in 2014 (IBIS WORLD, 2014).
Although consumers in this segment are trending toward kiosks and streaming services they also enjoy renting classic family films. Therefore the decline in this segment is less drastic. Finally, consumers ages 45 and older represent one of the most significant market shares at 43.6 %. This market segment due to their aversion to new technology (i.e. distribution channels) often avoids streaming services. Therefore, market segment is experiencing considerable growth (IBIS WORLD, 2014). Although consumers 45 and older represent almost half of total market share, they are not necessarily the ideal customer. Based on current and future market trends, the ideal customer would be the 18-24 and the 25-44 year old customer.
Four variables which impact product/service demand
The first variable which inextricably impacts the demand of the Netflix service is changing technology. When the company first began in 1997, Internet retailing was at the infancy stage. Netflix had a model that combined DVD rentals, with a web portal that was more comprehensive than a simply subscription service. At the infancy stage Netflix was buoyed by the rapid adoption rate of DVD players in the United States. The adoption rate of DVD players more than doubled from 1999 (5% market penetration) to 2000 (13% (Shih, Kaufman, & Spinola, 2009).
The second variable which is equally significant is pricing. In an analysis of declining subscriber volume, Forbes mentioned that Q3 2014 expectations was 1.33 million subscribers. The actual volume of new subscribers was less than 1 million (Forbes, 2014). This caused a 20% decline in stock pricing. The stated reason for membership decline was subscription pricing increase. This naturally leads to the third variable which is competition. Less expensive subscriber options include services like Xfinity Streampix and Amazon Prime (Forbes, 2014).
A fourth variable is operational expenses, especially those associated with expansion. For instance, Netflix’s expansion to Europe has included various investments in original content. Additionally, there are value-added-taxes and interconnection fees associated with the use of the internet. It is estimated that some of the aforementioned overhead costs will equal about 5% of revenue. This factor combined with Netflix’s total content obligation of $7.25 billion collectively minimize the profit margin (Forbes, 2014).
Market Entry Strategy
According to IBIS World (2014), the life cycle stage of the market is declining. Therefore, a recommended market entry strategy for a new company would be digital content. Overall revenue for older technology such as DVD’s and games are expected to decline at an average rate of 20.9% to $1.2 billion. This is combined with the rapid increase of broadband speeds which coupled with mobile and tablet devices create flexible viewing platforms. Nielsen’s recently conducted a digital consumer study that revealed consumers spend more time (6.7 hours per month) watching video on the internet. (IBIS World, 2014).
Considerations about Product/Service use Patterns
One trend that is evident is a shift from linear TV to Internet TV. So Netflix is focusing on not only capitalizing on that trend but also being cognizant of other market trends. This includes the creation of original content that is targeted toward a specific demographic. Currently according to David Wells (Netflix Inc. CFO) the company is striving for up to 50% of original content mixed with licensed content (Netflix, 2015). There are subsequently three key variables or targets including devices, networks, and content. One device that is seeing a significant upward spike in sales is smart TV. In places like Asia there is a huge market for mobile-oriented platforms (Netflix, 2015).
One positioning theme would be product differentiation. As Netflix continues to strive to be a market leader it can excel in this area. For example, as mentioned earlier Netflix is focusing on the creation of original content. Therefore, not only will they be able to separate themselves from the competition (which only licenses) but they will also be able to build their unique brand. Product differentiation also includes the flexibility of being able to provide content on a number of platforms. A second positioning theme would be niche strategy. The development of a niche strategy is complex as they are constantly competing against fierce competition. For example (VOD) voice-on-demand technology enables users to control the content they chose to view or hear. So Netflix in seeking to stay ahead of trends has already invested $10 million on VOD in 2006, and projected an investment of $40 million in 2007. However, the company did not want this to take away from its core online rental business (Shih, Kaufman, & Spinola, 2009).
Advertising Media & channels of Distribution
While Netflix originally began as an online presence that distributed movies through traditional mail (UPS) that has evolved. Now Netflix has begun distributing more content online. This works well in terms of efficacy and also as a distribution channel for content partners. For example if a company is looking to promote an independent film then Netflix has become a viable option due to its growing brand (Shih, Kaufman, & Spinola, 2009).
Also, Netflix has begun to acquire the distribution rights of certain independent films through its Red Envelope Entertainment Subsidiary. So these films have often already received promotional pushes from the studio’s and or been featured at Sundance film festivals. Such exposure makes the marketing of content easier (Shih, Kaufman, & Spinola, 2009).
In conclusion Netflix must maintain a flexible business model. While focusing on technology and products/services equal focus must include consumer trends. As consumers respond to quickly shifting technology the company must evaluate how that affects its product/service offerings. The sooner that the company can gain entry into a market segment the greater the likelihood of customer retention. The CEO Hastings stated that the focus or purpose of Netflix is to provide the best content viewing platform for consumers (Shih, Kaufman, & Spinola, 2009). This is a far broader and more expansive focus comparative to being a DVD rental business. Many DVD rental companies are no longer conducting business.
Forbes. (2014, October 17). Netflix Sinks on Subscriber Growth Decline, Is the Market Saturating. Retrieved from http://www.forbes.com/sites/greatspeculations/2014/10/17/netflix-sinks-on-subscriber-growth-decline-is-the-market-saturating/
IBIS WORLD. (2014, November). IBISWorld Industry Report 53223 DVD, Game & Video Rental in the US. Retrieved from http://www.ibisworld.com
NetFlix. (2015, April 15). Thomson Reuters StreetEvents Netflix Inc. Earnings Call. Retrieved from http://files.shareholder.com/downloads/NFLX/91110200x0x821953/CA9EDA04-D2BD-493F-A6E2-D83AA962C426/NFLX-Transcript-2015-04-15T22_00.pdf
Shih, W., Kaufman, S., & Spinola, D. (2009, April 27). Netflix. Retrieved from http://www.hbs.edu/faculty/Pages/item.aspx?num=34596