Fifteen years ago, Netflix wasn’t the media giant it is today. High-speed streaming technology wasn’t yet widely available, and Netflix still was battling traditional video retailers to satisfy the movie-watching public through its innovative distribution model of DVDs mailed to consumers.
At the time, retention was a challenge for Netflix. Notably, the first month retention for new members, during their critical free trial period, was 88%, which meant that 12% of members were abandoning the service after just one month. There was plenty of room to improve retention of new members, and improving it could significantly affect Netflix’s business performance.
Gibson Biddle, then the V.P. of Product at Netflix, knew that improving retention would require patience, and he realized that retention was a lagging indicator, not a leading indicator. He needed to identify a leading indicator metric that his team could directly influence. He needed a North Star.
So Gibson and his team dug into their data and customer patterns and discovered a characteristic that proved to be a leading indicator of retention for new members: the number of DVDs in a new member’s queue. They learned that if a customer had multiple movies waiting in their queue, that customer had become a more engaged user of the service and was thus far less likely to unsubscribe. So they chose to focus their product work on a very specific metric: the percentage of members who added at least three DVDs to their queue in their first session with the service.
“At Netflix, we knew that improving retention was the critical metric to improve—it would improve both customer and shareholder value. But retention is very hard to move and A/B tests for retention require lots of time to see a meaningful difference,” said Gibson. “So we developed more sensitive proxy metrics. Our ‘Percentage of new members who add at least three titles to their queue during their very first session with the service’ is a good example.”
At the time, only 60% of Netflix’s customers had three or more DVDs in their queue during the first month, which left a large portion of customers for Gibson and his team to focus on. They honed in on ways to make their product work increase the percentage of customers who put three or more DVDs in their queue, and most of their work focused on making the service simpler.
With their North Star, the Netflix team was able to prototype and deliver a number of innovative product features and user experience improvements.
That single metric, the percentage of new members with at least three DVDs in their queue, became their obsession, their North Star. They were able to prototype and deliver a number of innovative product features and user experience improvements that both simplified and encouraged users to build their queues.
Over time, Netflix increased this North Star Metric from 60% to 90%, where 90% of customers had at least three DVDs in queue. And this directly influenced first month retention. According to Gibson, an improvement of just two percentage points in first month retention (from 88% to 90%) had a significant influence on Netflix’s business results and profitability. Netflix has been able to repeat this approach with other key strategies, including their streaming service.
It’s no exaggeration to say that the careful, customer-centric implementation of a North Star Metric and the North Star Framework, combined with a disciplined focus on innovation and execution, fueled Netflix’s ability to become the cultural behemoth that it is today.