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Netflix: Q1 2006 Update

Netflix controls subscriber acquisition costs and blasts new sub acquisition into orbit

Netflix MagnetLast August I wrote about the challenge faced by Netflix to retain subscribers as new subscriber acquisition costs grew. With its 2Q 2005 average monthly churn at 4.7 percent, Netflix was projected to churn more than half of its subscribers annually.

With its 1Q 2006 results, Netflix reported stunning performance in acquiring new subscribers and has reduced churn (vs. the same period in 2005) to 4.1 percent (49.2 percent projected annually) vs. 5.0 percent for 1Q 2005. This represents approximately 690,000 cancellations in the quarter. (Netflix, like many companies, has its own “churn” formula, which it defines as “customer cancellations in the quarter divided by the sum of beginning subscribers and gross subscriber additions, divided by three.”) The company added an amazing 1,377,000 new subscribers in the same period for a net increase of 687,000 (vs. 408,000 for Q1 2005).

At the same time, the company reported slightly lower subscriber acquisition costs of $38.47 per subscriber (vs. $38.68 for Q1 2005). If the U.S. Post Office continues to hold the line on postal rates, then Netflix should continue to have a great run although it still pains me to think about “losing” (churning) more than two MILLION customers a year! I’ll just never get used to that.

David M. Kalman is the president of Terrella Media, Inc. and editor of BrandMagnet.

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