Beyond the Surface: Netflix's Innovative Approach to LTV Analysis

Now, we all know and love Netflix the same way Netflix shows that they know and love us. And why is proving their love toward their customers so important? For any subscription company, the key to success is making sure their LTV (lifetime value) stays relatively high. But it’s not just about how they increase those numbers that makes Netflix such an outstanding company - it’s even more-so about how they measure those very numbers and how deeply they analyze them.

How Netflix Masters LTV

Here are two key metrics about Netflix:

1. The average Netflix subscriber stays subscribed for 25 months
2. The average Netflix subscriber provides $291.25 of earnings to Netflix (this is their LTV)

And these two metrics are absolutely fundamental to Netflix’s decision-making processes when it comes to marketing. Why? Because they indicate how much Netflix can and should spend in terms of both effort and money to keep their customers around. This LTV of $291.25 is a relatively high one compared to other streaming services, but it took Netflix a lot of time to get this number to where it is. Just think about it — what about Netflix would make you want to stay?

The key is their ability to personalize experiences and address customer needs over time. They invest in creating fantastic algorithms that keep their users wanting more. Content recommendations are personalized by user and are constantly changing based on shifting customer preferences, new features AND original content are continually rolled out based on customer feedback, and the digital user experience is made easy for anyone to navigate.

Understanding LTV Beyond the Surface

But no — just looking at LTV broadly is not enough for Netflix. Two data scientists at Netflix released a paper discussing optimal strategies for using and analyzing LTV most effectively. And what they found is that traditional LTV calculation methods tend to overvalue their customers — what’s most relevant in this day and age is understanding incremental LTV instead.

Incremental LTV is a metric that measures any additional long term value you can expect to receive from acquiring/retaining another user when compared a user that had not been acquired or retained at all. Analyzing incremental LTV is how Netflix more accurately quantifies how much value each individual investment in retention or acquisition provides, which helps to improve the success of forecasting future subscriber numbers and fully optimizing pricing strategies.

More specifically, what Netflix is trying to do is look beyond larger data to understand their customers on a deeper level. An average LTV number may give out some useful information, but being able to calculate incremental LTV to find out how much value customers might provide on an individual level matters even more if the goal is precision.

Takeaways

So seeing as how personalizing customer experiences on an individual level is so effective, it makes sense why looking at retention metrics on an individual level leads to more success too.

At Cotera, our goal is to help companies do exactly this — to understand customers on a personal level and make personalized marketing decisions based on these findings.

And knowing how important that LTV metric is for subscription companies, we offer each of our partners an LTV model that tells you all the information you need to know about an individual’s LTV so that you can more easily identify 1) what’s working, 2) what isn’t, and 3) how you can either stretch out LTV for each current customer or simply attract higher LTV customers down the line!

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