This One Metric Explains Why Netflix Keeps Winning

Key Points

There are some services people can hardly go without in our modern world. The list includes utilities. Even when internet companies raise their prices, few people choose to opt out of paying for Wi-Fi. Even fewer would cancel their water or electricity service unless they are switching to a different company to save money.

The entertainment business doesn’t behave that way: People can go without cable and can skip the movies when things get tight. However, Netflix (NASDAQ: NFLX), which has established itself as a leading media company, is arguably one of the most “utility-like” businesses in its industry, and one metric proves it.

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Keeping customers satisfied

For any business with a subscription model, the challenge is ensuring clients renew their subscriptions. The churn rate refers to the percentage of customers who stop using the service for any reason. Obviously, the lower it is, the better. That brings us to Netflix. The streaming giant does not publicly publish its churn rate, but management has boasted about it on more than one occasion.

During the company’s fourth-quarterearnings conference call Netflix’s CEO, Gregory Peters, said the following:

Retention’s among the best in the industry, and we just completed a quarter where churn improved year on year.”

Industry watchers have corroborated management’s claims, usually ranking Netflix as the top company in the industry when it comes to this key metric. It’s especially impressive considering how often Netflix raises its prices nowadays. With the most recently announced price hike, Netflix has now pulled this move about five times in the past six years, at least in the U.S. Netflix’s industry-leading churn rate — especially amid higher prices — suggests its customers see significant value in what the business offers. It also has several implications for the future.

First, even though some worry that the most recent price increase will lead to a significant exodus, that’s unlikely to happen given historical trends. Netflix continues to raise its prices because it knows it can afford to do so while retaining most of its customers. Second, Netflix’s high retention rate helps strengthen its business.

The company’s deep ecosystem continues to be a valuable source of data and information it uses to decide which content to produce or license, which, in turn, leads to even more subs as successful shows spread through word of mouth. Third, a low churn rate likely has a positive impact on the company’s profits and margins. High retention means the company has a predictable revenue base and spends less on customer acquisition, boosting margins.

Now, to be clear, Netflix isn’t a utility, nor does its business behave exactly like one. However, as media and entertainment companies go, Netflix is closer to the utility model than most of its peers, which is a significant strength that could help it maintain its lead in streaming and perform well over the long run.

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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.