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Lesson #1: “Don’t be afraid to change the model”

Article Overview: “I got the idea for Netflix after my company was acquired,” says Hastings. “I had a big late fee for ‘Apollo 13.’ It was six weeks late and I owed the video store $40. I had misplaced the cassette. It was all my fault.”

Lesson #1: “Don’t be afraid to change the model”

"I got the idea for Netflix after my company was acquired," says Hastings. "I had a big late fee for ‘Apollo 13.' It was six weeks late and I owed the video store $40. I had misplaced the cassette. It was all my fault."

The worst part about it? "I was embarrassed about it...I didn't want to tell my wife," he says. "And I said to myself, 'I'm going to compromise the integrity of my marriage over a late fee?'"

But it was what happened next that really got Hastings thinking. "On my way to the gym, I realized they had a much better business model," he recalls. "You could pay $30 or $40 a month and work out as little or as much as you wanted."

With that, Netflix was born. But, still, it took Hastings a few tries to get the model right.

"Early on, the first concept we launched was rental by mail, but it wasn't subscription based, so it worked more like Blockbuster," he says. "Some people liked it, but it wasn't very popular. I remember thinking, God, this whole thing could go down."

Then, Hastings decided to flip things on their head. "We said, ‘Let's try the more radical subscription idea.' We knew it wouldn't be terrible, but we didn't know if it would be great."

Uncertain as he was, Hastings decided he had nothing to lose. "We launched the service on September 23, 1999, and we could tell within a month that we had a renewal rate," he says. "It was a free trial, but only 20 percent didn't go from the free trial to the paid. We're up to 90 percent renewal now."

Looking back, Hastings wonders why he did not begin with this model from the start, especially after having learned from his experience at the gym.

"Having unlimited due dates and no late fees has worked in a powerful way and now seems obvious," he says, "but at that time we had no idea if consumers would even build and use an online queue...The subscription model was one of a few ideas we had - so there was no Aha! moment."

Hastings dared to change his company's business model not knowing what the results would be. Once he realized he had hit the nail on its head, however, Hastings shifted all his attention to promoting this new model. He knew there could be no going back and forth. If he was going to make the subscriptions work, it had to be the only service he offered.

And that, says Hastings, is something he learned while working for Audrey MacLean, CEO of Adaptive Corporation (now a professor at Stanford), in 1990. "From her, I learned the value of focus. I learned it is better to do one product well than two products in a mediocre way."

Hastings was not afraid to change the business model, and he was able to reap the rewards as a result.

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Article Tags: hastings, lesson 1, netflix



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