The Wall Street Journal reports that streaming companies are finally becoming profitable. The article describes how streaming company profitability derives from offering customers a plethora of options at multiple price points associated with varying entertainment and sports packages.
“The streaming revolution has entered its next era. It’s one of the abundant choices for consumers, and green shoots of profitability for entertainment companies.
Consumers have a seemingly endless array of services and pricing levels to choose from these days, including ad-supported tiers and bundles that package different services together for a discount. It’s a dizzying menu of options, but one that is starting to yield real profits for entertainment companies.”
However, is the streaming company profitability true profitability? Is the goal enduring profitable growth or just being profitable? Are we seeing an enduring financial flourishment or engineered financial finagling? Does profitable growth lead to true prosperity or false prosperity? Does the brand – Netflix, HBO Max, Disney – matter in the equation?
Brands must aim for enduring, profitable growth. Growing without enduring profit is not a good idea, and being profitable without enduring growth is not a wise strategy. Enduring but without growth or profit is also a non-starter. Unlike horse racing, where you can be one of three—win, place, show—brands need all three elements: enduring, profitable, and growth.
You cannot be a great, powerful brand without enduring profitable growth.
Unfortunately, many observers see profitable growth as the answer. Just read one of the latest Harvard Business Review online articles about finding the right customers for your business. It is all about profit and growth. But why invest in a business if you are only interested in profit and growth? Well, financial engineers have recast the view about business. Medium and long-term strategies are no longer a viable alternative. Instead, make money for shareholders and then get out. You are not in this stock for the long term. You are only interested in money now. Brands are ongoing responsibilities. Why wait?
But back to streaming companies. The current streaming brands have drawbacks that threaten the prosperity of entertainment companies.
The Wall Street Journal continues its story on the money-making approach that streaming businesses are using with this caveat:
“Subscribers now regularly cycle in and out of services, which means streamers are constantly adding and losing meaningful numbers of customers.
“… consumers cycle in and out of streaming services frequently, timing their subscriptions to popular show releases or sporting events. For streamers, that means they are constantly adding and losing meaningful numbers of subscribers.
“In the December 2024 quarter—a period jam-packed with streamed sporting events— streaming services saw a significant jump in net adds to 13.9 million.
“Netflix has industry-leading customer retention, while other services continue to seek new ways to keep subscribers long term. One of the reasons Disney has leaned into bundles, for example, is to reduce churn.
“While premium streaming services duke it out for customers and viewing time, Google’s YouTube has ascended. More Americans are turning to the video-sharing service to watch their favorite podcasts, talk shows, and clips.
“YouTube accounted for 12% of U.S. TV-viewing time in March, according to Nielsen data, more than any other entertainment company.”
What you just read is a tale of churn. Churn is the rate at which customers stop doing business with a company. And, guess what? Churn costs money. Churn costs big money. The cost of churn has financial impact on a business. Churn is a crucial metric for understanding profitability and improving customer retention. The cost of churn includes lost revenue, the expense of acquiring new customers to replace those who churn, and potentially other costs like refunds and negative reviews.
Brands must attract and retain customers out of necessity. And, yes, it is important to attract the right customers. Deal customers—those who follow the deal—are not real customers. Core customers are your most valuable customers.
In the 1980s, in a seminal study, Fredrich Reichheld, a Bain & Company executive, provided extraordinary data and insight on customer loyalty and its nemesis, churn. Using comprehensive research, Mr. Reichheld identified customer loyalty as a crucial driver of profitability and growth. He wrote a book titled “Loyalty Effect.” Mr. Reichheld’s position was that companies must prioritize retaining and attracting loyal customers, employees, and investors to generate superior results.
One of the startling outcomes of Reichheld’s research is that even small increases in customer retention could lead to significant profit improvements, upwards of 25%.
The antidote for churn is customer loyalty. Mr. Reichheld’s research showed that customer loyalty is a more important determinant of profit than market share in service industries. Reichheld’s research revealed that a focus on loyalty, along with creating value for customers, leads to growth, profit, and continued, as in enduring, value creation.
In addition to his conclusions on customer loyalty, Friederich Reichheld highlighted the absolute necessity for employee loyalty. Employee loyalty helps to build and cement customer loyalty.
The recent HBR article on finding the right customers does not allude to the necessity for brand loyalty, leading to shareholder loyalty and enduring profitable growth. Even though over the years, research continues to show that 40% of profits are generated by around 10% of a brand’s loyal customer base in most cases. In fact, about 9 years ago, during one of its turnarounds, Macy’s, the department store, showed that the 10:40 Rule was propelling Macy’s performance.
It has always cost more to attract a new customer than to keep an existing one. In today’s world, with all the different platforms, devices, and viewing options, the cost of attracting a new customer is even higher.
Streaming companies tend to focus on attracting new customers rather than on their customer bases and the loyal customers within those customer bases. It is one thing to dazzle Wall Street and investors with high subscription numbers and revenues. But, with all the churn, are these numbers quality revenue growth or just quantity revenue growth? Is it false prosperity or true prosperity?
Of course, brands need short-term and long-term approaches. After all, there is no long-term if there is no short-term. But an obsessive approach focusing on attracting customers at all costs has the potential to attract any and all customers. This sets up a brand for churn, which is not a viable pathway to true prosperity. At some point soon, streaming companies will need to focus on generating, maintaining, and growing brand loyalty.
Contributed to Branding Strategy Insider by: Joan Kiddon, Partner, The Blake Project, Author of The Paradox Planet: Creating Brand Experiences For The Age Of I
At The Blake Project, we help clients worldwide, in all stages of development, define and articulate what makes them competitive at pivotal moments of change. This includes pricing strategies that propel their businesses and brands forward. Please email us to learn how we can help you compete differently.
Branding Strategy Insider is a service of The Blake Project: A strategic brand consultancy specializing in Brand Research, Brand Strategy, Brand Growth, and Brand Education
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