Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options. HOMEPAGE

Netflix cofounder Marc Randolph on the 3 questions entrepreneurs should ask before starting a subscription business

Marc Randolph, Netflix co-founder and first CEO
"There's a lot of very, very powerful and compelling aspects to subscription business models," Marc Randolph said. "So I can see why that would be intriguing to people." Randolph

  • One year after Marc Randolph and Reed Hastings launched Netflix, they revamped the business model.
  • Netflix became a subscription service and has since grown into an entertainment behemoth.
  • Randolph says founders should ask three questions to determine whether the model is right for them.

One year after Marc Randolph and Reed Hastings launched Netflix, they saw a problem: Their business model, a mail-in video-rental business, wasn't working.

They changed gears, offering customers the option to subscribe to a digital video library. Today, Netflix is an entertainment behemoth that's collected Oscars for its original content and boasts more than 213 million paying subscribers.

While Randolph, who was also Netflix's first CEO, left the company in 2002, he helped build the subscription model that other businesses would later emulate. Subscriptions have boomed, with everything from makeup to full meals making their way into people's homes regularly. An online survey conducted by the subscription-management platform Zuora earlier this year found that 78% of adults in the 12 countries included in the survey had subscription services. Revenue among subscription-based businesses grew about five times as fast as the retail sector and the S&P 500 from January 2012 to June 2019, CB Insights said.

Randolph has acted as a board member helping companies scale, wrote a book about building Netflix, and now hosts a podcast called "That Will Never Work," where he advises other entrepreneurs on growing their businesses. Many of the entrepreneurs come to him for advice on tackling the subscription model that Netflix so successfully built.

"There's a lot of very, very powerful and compelling aspects to subscription business models," Randolph said. "So I can see why that would be intriguing to people."

Randolph shared the three questions founders should ask themselves when deciding whether a subscription model is right for their business.

1. Will a subscription make your product easier to use?

It seems simple, but founders should evaluate whether their business models make their products easy to use, Randolph said.

For example, a year after he and Hastings launched Netflix, several thousand DVDs were on the warehouse's shelves. When they asked themselves why Netflix charged customers each time they wanted to replace a disk, they saw an opportunity to pivot to a monthly fee, with the option to rent as often as they wanted.

Netflix's subscription model made the exchange easier for both the company and the customers: There were no late fees, customers did not have to frequently decide whether they'd pay for the next movie, and the company could retain the customers it already attracted.

Automatic renewal and a constant exchange of products don't work with all businesses. Some business owners will change their products and ultimately taint their reputation to make a subscription model work, he said.

"The problem is how badly do you have to completely contaminate your product to make it work that way?" Randolph said. "Product contamination is the biggest mistake a business can make in shifting to a subs model."

2. How often does a customer need the product, and how often are they willing to pay?

A subscription model must offer a product that a customer will continually want, Randolph said. For example, he added, if someone buys a house, they likely won't want to purchase another for at least seven years.

Once founders determine whether a customer has a continued want or need for the product, they should explore the frequency of purchase, he said. A founder can decide to bill customers weekly, monthly, quarterly, or annually, and they should weigh this choice depending on the age of their business, Randolph added.

"Annual billing is wonderful because of the cash flow — you get all this money up front," which can be helpful for more mature businesses, he said. But this strategy isn't best for younger companies, since annual billing tells the founder only once a year whether customers subscribed or not, he added.

"It's hugely valuable to find out one month in if everyone's canceling," Randolph said.

3. Should you offer a variety of membership options?

Another way to determine whether the subscription model is right for your business is to explore different levels of membership.

"That's the art of doing a subscription model," Randolph said. "There are a million different ways to do it."

Companies can set up subscription models based on features and their costs. For example, a lower-cost subscription might give a customer membership access but no extra benefits, while one, two, or three additional membership tiers increasingly add features, Randolph said.

Businesses can also tinker with the number of plans they offer customers. Even in the crowded market of subscription services, these decisions can help differentiate one company from a competitor, he said.

"There's infinite room to play with those variables to have two companies delivering an identical service and be positioned entirely different in how they address the market," he said.

Disclosure: Mathias Döpfner, CEO of Business Insider's parent company, Axel Springer, is a Netflix board member.

Netflix Small Business

Jump to

  1. Main content
  2. Search
  3. Account