A year and a half after Netflix launched, there was a big problem with its user base. No one was renting DVD’s and that’s an issue for a DVD rental company.
People would buy DVDs instead of renting them. This eliminated the late fees and the stress people faced with dropping the discs off on time in the mail. With no one renting discs, something had to change.
That change would be a subscription service.
Netflix decided to allow users to receive one free month of rentals. They could cancel anytime before the subscription renewed.
This was the missing link. Customers didn’t cancel their subscription and rentals were up across the board.
There was still one problem.
A fraction of the Netflix users liked paying per rental. They had a decision to make. Should they balance a subscription service with a pay per rental service? Or force everyone to pay the subscription?
They decided that it would be too difficult to manage both and said “so long” pay per rental model. Instead, they focused all their time and energy on building out the subscription-based model.
Randolph knew that was the right answer from something he calls “The Canada Principle”.
The Canada Principle
For the first twelve years of its existence, Netflix limited its sales to the United States. They considered going to Canada because it was close and the postage costs were low. If they did it, their revenue would increase by 10%.
They didn’t do it. Why not?
First, it was going to be more complicated than it seemed. French is the main language spoken in some parts of Canada. This would require a team to transcribe the website, instructions, and DVDs.
They would also have to use different envelopes because the postage was different. Plus Canadian currency was not the same, yet they called it a “dollar” which would make the website incredibly confusing.
The better reason for staying out was obvious.
“If we took the amount of effort, manpower, and mind-power Canadian expansion would require and applied it to other aspects of the business, we’d eventually get a far greater return than 10 percent.” — Marc Randolph, Netflix Founder
The expansion to Canada would pay off immediately but wasn’t sustainable. By focusing that manpower to bettering the website, the delivery service, and the subscription-based model, Netflix was able to break through the barrier they were facing and finally start to see a payoff.
Although expanding to Canada would have scaled the company immediately, it was a smarter and better option to be patient and focus on what they were already doing.
In 2019, Netflix’s annual revenue was $20 billion. They focused on the one thing at which their company was good, delivering movies at a low-price. By doing it exceptionally well, they created raving fans. When they were ready, they could expand to Canda with a strong user base and people ready to order, which happened in 2010.