Wall Street waited with bated breath as Netflix released its recent quarterly earnings. Subscriber growth was all everyone cared about. When Netflix said they had 5.2 million new subscribers, Wall Street cheered and sent the stock up higher.
Most of us are similarly focused on key metrics that reveal the performance of the business. In fact, we often go very deep into sales metrics. But not enough emphasis is on the health of your business. The truth is you have to pay close attention to both the performance and the health of your business to be successful.
Yes, those are two different things. Let's dive into the statistics and see what we can learn.
Measure both consumer sales and engagement.
For Netflix, Wall Street rightly places high emphasis on subscriber growth as a clear indicator of demand and revenue growth. But hours viewed per subscriber is an equally important metric of consumer engagement. This is a metric of how sticky and compelling the Netflix value proposition is to its viewers. If you grow subscribers, but they are less engaged that is not a healthy business.
In 2011, on average Netflix viewers watched 310 hours of Netflix per year. That grew to 568 in 2015. While subscribers nearly tripled in that time, what is equally impressive is the 80 percent plus growth in hours per subscriber.
For 2017, the data is not yet fully available. Reed Hastings said subscribers are watching over a billion hours per week. With now over 100 million subscribers, all we know is that the hours per view number is at least 500 hours per viewer per year. It's not necessarily cause for concern, but it is something to watch for and consider what the high-water mark is.
Let's say Netflix viewers roughly watch 1.4 hours per day. Per Nielsen, the average American consumers 40 hours of video per week or 5.7 hours per day. Netflix has roughly 24 percent share of video hours across TV, Youtube and other sources.
Could that grow? I suspect yes.
Consider the impact of driverless cars in the future. Americans spend nearly 300 hours per year in cars. That would increase the video viewing ceiling about 1 hour per day. Given Netflix's recent upgrade to all you to download content to view without WiFi, Netflix's ability to grow the pie is significant.
Measure both inputs and outputs.
Most business metrics are focused on today's outputs like sales and customer acquisition. We should spend equal time and energy measuring inputs as well as outputs. Balancing inputs and outputs creates an important emotional steadiness to running your business, by focusing on what you can control (your inputs) and taking less credit and blame for what you cannot control (your outputs).
When I was a senior partner at a growth strategy consulting firm, I always measured my 2/4/8 metrics. Every productive partner should have at least two live projects at any given time, four live proposals in the market and eight active conversations with senior clients.
The most important metric was always the eight conversations. It focused the attention that your goal should be to have comfortable, compelling and continuous conversations with clients you liked and respected. This is actually quite easy and pleasant to do. If you did that, then the two live projects and four proposals would likely take care of themselves.
Measure pricing power.
Across two decades of driving growth, nothing tells you more about how healthy and strong your business is than your ability to raise your price. I'm not saying you should raise your price, but if your business would fall off a cliff if you raised your prices then you do not have a healthy business.
If you're growing because you're lowering prices, that's not a healthy business. It could mean your customers believe there are equally good or better values out there. It could mean that your value equation (value = benefits divided by price) is out of whack.
Remember Netflix in 2011 when it raised prices by 60% and everyone was up in arms? They had about 24 million subscribers then. Now they have double that in the US and quadruple that around the world. That's a pretty healthy business if you ask me.