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How does Netflix recommendation system manage to maintain a low churn rate?

Gokul
Co-founder, CEO
Netflix churn rate


Netflix believes in creating the best user experience that customers don’t hesitate to pay for. That's the only way to win the OTT streaming battle - allowing subscribers to keep watching what they want, without interruptions. Netflix churn rate is as low as 2.3% and it has

Netflix recommendation system produces $1 billion a year as value from customer retention.

"Netflix is still awesome after all these years. I have been using the platform since early days and still I  can always find something that tweaks my interest. The website/app is user friendly and the price is still great for what you get”, says Tony Montouri, a Netflix subscriber.

Netflix's growth increased massively during the pandemic. It added some 8.5 million new paid subscribers in the last quarter of 2020 to reach 203 million subscribers, managing to retain them till date. A few questions come to mind:

  • How did Netflix manage to retain customers?
  • How is the Netflix churn rate so low?
  • Is it the Netflix recommendation engine or some other technology?

 Let’s dive deeper to understand how Netflix does it.

 First thing first: What is customer churn rate? 

Customer churn is one of the most essential measurement techniques for a growing business to evaluate where it stands. It’s the number that shows how good the business is at customer retention.

Customer churn is the percentage of customers who stopped using your company's product or service during a certain time period. To calculate churn rate, divide the total number of customers you lost during a certain time period, by the number of customers you had at the beginning of the same time period.

For example, if you start your quarter with 500 customers and end with 480, your churn rate will be 4% because you lost 20 of your customers.

Customer churn on OTT platforms

OTT customer churn rate is a measure of the number of subscribers leaving your OTT service in a particular billing period compared to the total number of subscribers at the beginning of that period. Your subscription churn rate indicates whether your brand will successfully advance or slowly collapse.

 Churn management is essential in the OTT battle - constant optimisation of content and services is necessary for customer retention.

Why does customer churn happen?

There's no one single reason so I've listed some of the most common ones here:

Poor User Experience

Customers quickly become frustrated and confused when key features of your OTT platform don’t seem to work. Users unable to sign up, bugs while creating passwords, scenarios where the payment gateway doesn’t work or just gets stuck, have high chances of customer churn. Video/audio players with buffering issues or time lag is another key indicator of poor user experience.

Unappealing Content Library

Customers usually sign up for an OTT platform without fully understanding whether it meets their needs. And, if they feel that the content is unappealing, they switch to a competitor. Sometimes subscribers cannot find what they are looking for in a sea of content.

There are also chances that users get saturated with the content after a period of time so it’s important  to release content regularly. To engage your users is easy but to keep them with you, it’s essential to feature trending & exclusive content not offered anywhere else.

High-cost Subscription Plans

The best way to impress a customer is by offering them an affordable service. Most OTT platforms demand a high service fee after the free trial is over, which is often the reason why they experience a high churn rate. If your customers think that your platform is way too expensive, they’ll be more likely to switch to a lower-cost competitor, causing churn.

 

 Monthly Active churn rate
Source


Netflix masters customer retention with lowest churn rate

OTT players today mostly focus on gaining new users, but neglect the churn of existing users after the free trial. While Netflix churn rate, unlike its competitors, embraces reduction, analyses churn factors and optimises the service accordingly.

With more than 207.64 million members watching a combined million hours of television Netflix churn rate is the lowest which is about 2.3% to 2.4% in the last 2 years, and continues to constantly optimize content.

The Impact of the Netflix Recommendation Engine in lowering churn rate

Netflix recommendation engine is quite popular. With such a small time frame to convince you that there’s something worth watching, Netflix digs deeper into things such as the genre you watch and your ratings, and also what you don’t watch.

 Netflix recommendation engine has detailed information about user demographics and behavior. With the data, Netflix divides its audiences into different categories. Netflix recommendation engine analyses the performance of every single category and triggers the necessary actions required to the user.

Netflix uses several ranking algorithms for recommendations such as rows of different genres, including Top-N video ranking, personalized video ranking, trending now ranker, continue watching ranker and many more. Each algorithm then undergoes the process of row generation to find videos that fit a particular row.

Netflix first used analytics tools in 2000 to recommend DVDs for customers. Now, two decades later, the Netflix recommendation system is one of the most advanced in the business. The personalized recommendations drive customer retention, helping users discover their titles of interest with its ever-growing catalog.

Netflix subscriber growth
Source

More than 80% of the shows watched by people  are discovered through Netflix recommendation system. Netflix pushes original content up on its pages with personalized recommendations and it grants a flat fee to content owners, so there’s no reason for its recommendation algorithm to favor a particular piece of content.

Everything the recommendation engine suggests is based on your previous behavioral pattern. The recommendation system creates a uniquely personalized website for each user. The personalization algorithm resets itself every 24 hours, optimizing the content so that users will keep discovering from Netflix’s most updated catalog. Such features keep customers glued to their screens and ensure customer retention for the long term.

5 reasons why Netflix is ahead in the OTT race

Here is why I think Netflix is far ahead in the OTT race:

A powerful recommendation engine

Netflix recommendation engine is one of the most sophisticated. Choice is a crucial aspect of our lives, mostly around media such as videos, music, and podcasts. And Netflix's recommendation system plays a pivotal role by using the vast amount of data available to help us make choices effortlessly, with personalized recommendations guiding people to the best few options for them, resulting in better decisions.

Split Testing

Netflix does a good amount of split testing every year, around 200 tests each year. It randomly selects around 300,000 subscribers globally and tests everything from their user preferences to their behavior.

Split testing is used mainly whenever major changes are made, such as a new homepage. This opportunity is used to understand the views of users about the changes. And users are made comfortable with the new changes, improving user retention rate. 

Well researched user preferences 

Netflix recommendation system monitors the number of users watching an episode, entire series and also the gap between two episodes. And going deeper into when the users pause, rewind and forward.

Some of the other metrics used to analyze user preferences are user views of episodes, browsing and scrolling habits, type of devices used (mobile/ laptop), ratings, etc. With analysis of user preferences, the recommendation engine can provide personalized recommendations  to boost customer engagement.

Netflix recommendations
Source

Push notifications

Netflix does not miss a chance to remind users about new seasons or shows, customizing what may be a priority interest for a user. For example, if you followed season 1 of Money Heist, Netflix lets you know that Season 2 is now streaming. Netflix push notification is redesigned, based on data from the user's behavior. This way, Netflix doesn’t irritate customers but builds curiosity instead.


Push notifications by Netflix
Source

Personalized email recommendations

Netflix doesn’t just send pop-ups, but also sends recommendations via email, personalizing the experience when a show is added as per your viewing history.

The personalized email itself is on point and you can play the episode right from the email within your mobile device, or even add it to your watch list. Emails with latest episodes, new subscription plans, and new features are sent to users. There is a call-to-action button in every email which takes you to the page.

Netflix's data-driven email
Source


Is Netflix losing Subscribers? Here's what Happened...

In the US and Canada market, 75 million out of a total 142 million households have a subscription to Netflix. When you add in password sharing, Netflix says 30 million additional households are using the service in North America. Netflix had predicted a growth of 2.5 million subscribers but managed to gain only 500,000 additions in the last quarter. In a recent turn of events, Netflix's stock dropped more than 35% on April 27, 2022 , wiping out $55 billion in market value, after the company disclosed a net loss of 200,000 subscribers worldwide, with another 2 million forecasted to leave in the following three months.

Why did Netflix lose subscribers?

  • Netflix raised the prices of its subscription services in January 2022 for the US and Canada market.The last increase was in 2020, where standard plan was increased from $13 to $14, and before that 2019, from $11 to $13.
  • Due to the ongoing geo-political unrest (Russia-Ukraine conflict), Netflix decided to suspend its services in Russia which resulted in a loss of 700,000 subscribers.
  • Password sharing which first worked as a boon for Netflix and helped it reach a larger audience, has now become a bane as terms of password sharing remain unclear.
  • Fierce competition; as various new OTT platforms which have emerged that offer streaming services at a lower price with greater variety and more categories of content  such as sports and news.

What is the Impact?

Strategy to retain customers?

  • Netflix has hinted towards an ad-supported-lower-price model similar to its rivals HBO Max and Disney+.
  • In a few South American countries, Netflix has begun to charge a small additional fee to members who wish to share their service with people outside their household, which it might soon implement in North America as well.

Final Words

Netflix continues to innovate and refine its algorithms to prevent churn and retain its users by providing the best customer experience. Netflix churn rate is the least which directly implies better customer  retention. The key to customer retention is to understand the intent behind users’ actions and improve personalized recommendations, with a powerful recommender system. You could enable a Netflix-like customer experience for your users, and reduce the churn rate of your OTT platform, with Argoid. Schedule a demo here. 


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