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Netflix Churn Prediction Case Study

Data Science
Netflix believes in providing the best user experience possible, which customers are willing to pay for. That is the only way to win the OTT streaming war; allow subscribers to continue watching what they want without interruption. Netflix has a churn rate as low as 2.3% and a recommendation system that generates US$1 billion from customer retention each year.
Netflix Churn Prediction Case Study

During the pandemic, Netflix's growth skyrocketed. It added 8.5 million new paid subscribers in the fourth quarter of 2020 to reach a total of 203 million subscribers, which it has maintained till date. Several questions arise:

  1. How did Netflix keep its customers?
  2. How does Netflix maintain such a low churn rate?
  3. Is it Netflix's recommendation engine or another technology?

Let's take a closer look at how Netflix does it.

What is the customer churn rate?

Customer churn is one of the most important measurement techniques for a growing business to assess its position. It is the figure that indicates how effective the company is at customer retention.

Customer churn is defined as the percentage of customers that cease using your company's product or service within a specific time period.

Churn rate formula:

churn-rate-formula-example.png

For example, if you have 10,000 new customers in January and lose 2,000 of them by the end of the month, your churn rate would be 20%.

Customer churn on OTT platforms

The OTT customer churn rate compares the number of customers leaving your OTT service in a given billing cycle to the total number of subscribers at the start of that period. Your subscriber churn rate shows if your brand will succeed or gradually decline. Churn management is critical in the OTT struggle; ongoing optimization of content and services is required for client retention.

Why does customer churn happen?

There is no single reason, thus here are some of the most common ones:

Inadequate user experience

Customers soon grow dissatisfied and perplexed when important aspects of your OTT platform fail to function properly. Users that are unable to sign up, encounter issues when setting passwords, or encounter instances in which the payment gateway fails or gets stuck, have a significant risk of churn. Another sign of a poor user experience is video or audio players that have buffering issues or time lag.

Uninteresting content library

Customers frequently sign up for an OTT platform without completely comprehending whether it suits their requirements. If consumers find the content uninteresting, they will switch to a competitor. In a sea of content, subscribers may not always be able to find what they are looking for.

Users may become saturated with content after a certain amount of time, so it is critical to provide information on a frequent basis. Engaging your users is simple, but keeping them engaged requires you to provide trendy and exclusive material that is not available elsewhere.

Subscription plans that are expensive

Offering a low-cost service is the best way to impress a customer. Most OTT platforms charge a significant service fee after the free trial period ends, which is often the cause of their high churn rate. If your clients believe your platform is too expensive, they will be more inclined to migrate to a lower-cost competitor, resulting in churn.

Netflix excels at customer retention, with the lowest churn rate

Today's OTT players are primarily concerned with acquiring new consumers while ignoring the churn of existing users after the free trial period. Unlike its competitors, Netflix accepts reductions, analyzes churn factors, and optimizes the service accordingly.

With over 207.64 million subscribers watching a combined million hours of television, Netflix has the lowest churn rate, which has been around 2.3% to 2.4% in the last two years, and it continues to constantly optimize content.

The effect of Netflix's recommendation engine on churn rate

The Netflix recommendation engine is widely used. With so little time to persuade you that there is something worth watching, Netflix delves further into factors like the genre you watch, your ratings, and what you don't watch.

The Netflix recommendation engine includes extensive data on user demographics and activity. It separates its audience into multiple categories using statistics. The Netflix recommendation engine analyzes the performance of each category and prompts the user to take the necessary actions.

For suggestions, Netflix employs a variety of ranking algorithms, including “Top-N” video ranking, customized video ranking, “Trending now” ranker, “Continue viewing” ranker, and many others. Each algorithm then goes through the row-generating process to discover videos that fit a specific row.

In the year 2000, Netflix began using analytics technologies to propose DVDs to customers. Two decades later, the Netflix recommendation algorithm is among the most sophisticated in the industry. The personalized recommendations increase client retention by assisting users in discovering titles of interest in an ever-expanding catalog.

People discover more than 80% of the shows they watch through Netflix's recommendation algorithm. Netflix promotes original material on its pages through personalized suggestions and pays content owners a set price, so there's no need for its recommendation algorithm to favor a certain piece of content.

Everything the recommendation engine suggests is based on your previous behavioral patterns. The recommendation algorithm generates a webpage that is uniquely tailored for each user. Every 24 hours, the personalization algorithm resets itself, improving the content so that consumers can continue to find new things from Netflix's most recent collection. These features keep clients glued to their screens and ensure long-term customer retention.

5 reasons why Netflix is the OTT leader

Here are some of the reasons because of which we believe Netflix is far ahead in the OTT race:

A strong recommendation engine

Netflix has one of the most sophisticated recommendation engines. Choice is an important component of our lives, especially when it comes to media such as films, music, and podcasts. In addition, Netflix's recommendation engine plays a critical part in bringing people to the best few selections for them, resulting in better decisions by utilizing the massive quantity of data accessible to assist us in making choices easily.

Split testing

Netflix performs a significant amount of split testing each year, approximately 200 tests per year. It chooses roughly 300,000 subscribers at random around the world and tests everything from their user preferences to their conduct.

Split testing is primarily employed when big changes, such as a new homepage, are implemented. This chance is used to learn about users' reactions to the modifications. Users are also made more comfortable with the new adjustments, which increases user retention.

User preferences have been thoroughly examined

The Netflix recommendation algorithm tracks the number of users who watch an episode, a whole series, and the time between two episodes. and delving deeper into when users pause, rewind, and fast forward.

Other metrics used to study user preferences include user views of episodes, browsing, scrolling behaviors, device type (mobile/laptop), ratings, and so on. The recommendation engine can deliver customized recommendations based on user preferences to increase client engagement.

Push notifications

Netflix does not miss an opportunity to inform customers about new seasons or episodes, tailoring them to what may be a user's top interest. For example, if you watched Season 1 of Money Heist, Netflix will notify you that Season 2 is now available to view. Netflix push notifications continue to change based on data from user behavior. Netflix avoids irritating customers by creating curiosity instead.

Email recommendations tailored to you

Netflix not only sends pop-ups but also email recommendations, personalizing the experience when a new show is added based on your viewing history.

The personalized email is excellent, and you can play the episode directly from the email on your mobile device or add it to your watch list. Users receive emails with the most recent episodes, new subscription plans, and new features. Every email contains a call-to-action button that directs you to the page.

Netflix is losing subscribers. This is what happened:

In the US and Canada, 75 million households out of 142 million households have a Netflix subscription. When password sharing is included, Netflix claims that 30 million more homes in North America are utilizing the service. Netflix had expected a 2.5 million subscriber increase, but only added 500,000 in the latest quarter. Netflix's stock plunged more than 35% on April 27, 2022, wiping out US $55 billion in market value, after the company announced a net loss of 200,000 customers worldwide, with another 2 million expected to leave in the next three months.

What caused Netflix to lose subscribers?

  • Netflix raised the cost of its subscription services in the United States and Canada in January 2022. The price rise before that was in 2020, when the regular plan was raised from $13 to $14, and the year before that, from $11 to $13.

  • Due to continuous geopolitical upheaval (Russia-Ukraine conflict), Netflix chose to cease its services in Russia causing a loss of 700,000 members.

  • Password-sharing, which was once a gift for Netflix by allowing it to reach a wider audience, has now become a curse since the restrictions of password-sharing remain unclear.

  • As a result of the fierce rivalry, several new OTT platforms have developed that offer streaming services at a lower cost with a greater variety of content such as sports and news.

What is the result?

  • Employee morale at Netflix has suffered as more people are trying to quit the firm than in the past. They have also advocated for greater flexibility in stock-based compensation.

  • As a cost-cutting measure, Netflix canceled some of its in-production programming and let go of the head of its animation department, among others.

What is Netflix’s customer retention strategy?

  • Netflix has hinted at a lower-priced ad-supported model comparable to HBO Max and Disney+.

  • Netflix has begun charging a little supplementary cost from users who want to share their service with others outside their household in a few South American nations, and it may soon apply in North America as well.

**Conclusion **

Netflix is constantly innovating and refining its algorithms in order to reduce churn and retain members by providing the greatest customer experience possible. It has the lowest churn rate, implying improved customer retention. Understanding the underlying intent of customers' activities and improving individualized recommendations with a sophisticated recommendation system is the key to customer retention.

Read our latest blog on "Data Science vs COVID-19: The Fight against the Pandemic".

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Narender Ravulakollu
Technical Content Writer at AlmaBetter

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