{"id":20835,"date":"2019-09-18T19:32:31","date_gmt":"2019-09-19T00:32:31","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/biws\/?post_type=biws_kb&#038;p=20835"},"modified":"2024-08-01T19:09:43","modified_gmt":"2024-08-02T00:09:43","slug":"subscription-revenue-model-netflix","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/3-statement-models\/subscription-revenue-model-netflix\/","title":{"rendered":"Subscription Revenue Model (Netflix) (17:37)"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Subscription Revenue Model (Netflix)<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/3-statement-models\/subscription-revenue-model-netflix\/#Subscription_Revenue_Model_Netflix\">Subscription Revenue Model (Netflix)<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/3-statement-models\/subscription-revenue-model-netflix\/#Part_1_Key_Drivers_of_a_Subscription_Revenue_Business\">Part 1: Key Drivers of a Subscription Revenue Business<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/breakingintowallstreet.com\/kb\/3-statement-models\/subscription-revenue-model-netflix\/#Part_2_Where_to_Find_the_Required_Information\">Part 2: Where to Find the Required Information<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/breakingintowallstreet.com\/kb\/3-statement-models\/subscription-revenue-model-netflix\/#Part_3_How_to_Put_It_Together_in_Excel_Add_Scenarios\">Part 3: How to Put It Together in Excel + Add Scenarios<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/breakingintowallstreet.com\/kb\/3-statement-models\/subscription-revenue-model-netflix\/#Whats_Next\">What\u2019s Next?<\/a><\/li><\/ul><\/nav><\/div>\n\n<h2><span class=\"ez-toc-section\" id=\"Subscription_Revenue_Model_Netflix\"><\/span>Subscription Revenue Model (Netflix)<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><strong>Table of Contents<\/strong><br \/>\n1:16 &#8211; Part 1: Key Drivers of a Subscription Revenue Business<\/p>\n<p>5:09 &#8211; Part 2: Where to Find the Required Information<\/p>\n<p>10:08 &#8211; Part 3: How to Put It Together in Excel + Add Scenarios<\/p>\n<p>15:32 &#8211; Recap and Summary<\/p>\n<div class='code-block code-block-2' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/24164120\/adv-fm-tile.png\" alt=\"PowerPoint Pro\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Master Financial Modeling for Investment Banking With <strong>BIWS Core Financial Modeling<\/strong><\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Become a financial modeling pro<\/h4>\n              <p>158 videos, detailed written guides, Excel files, quizzes, and more<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 10+ detailed global case studies<\/h4>\n            <p>These include both the theory and the practical applications<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Prepare for your internship or full-time job<\/h4>\n            <p>Gain the skills you need to \u201chit the ground running\u201d on Day 1\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/core-financial-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Core-Financial-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div><\/div>\n\n<h2><span class=\"ez-toc-section\" id=\"Part_1_Key_Drivers_of_a_Subscription_Revenue_Business\"><\/span>Part 1: Key Drivers of a Subscription Revenue Business<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>The key revenue drivers for subscription-based businesses include:<\/p>\n<p>1) Existing Subscribers and the Renewal Rate \u2013 MOST revenue depends on the existing subscriber base unless the business is growing like a beast.<\/p>\n<p>2) New Subscribers and Their Renewal Rates \u2013 As a % of existing subscribers, how many new ones is the company adding each year?<\/p>\n<p>3) Monthly Fees and Pricing Increases \u2013 How much will these increase by over time? How much *can* the company can increase fees before driving away members?<\/p>\n<p>The renewal rates often differ for existing vs. new subscribers because new customers tend to cancel more quickly; once someone has been around for a few years, he\/she is more likely to stay subscribed.<\/p>\n<p>You should also look at different scenarios \u2013 What happens with higher growth, renewal rates, and fee growth and with lower growth, renewal rates, and fee growth?<\/p>\n<style>.enteremail__large--inline{margin:60px auto!important}<\/style>\n<h2><span class=\"ez-toc-section\" id=\"Part_2_Where_to_Find_the_Required_Information\"><\/span>Part 2: Where to Find the Required Information<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Some companies disclose these figures in their filings, but Netflix does not \u2013 they only give us the Net Additions, Revenue, and Average Monthly Fees in each business segment.<\/p>\n<p>However, if you run the numbers yourself, you\u2019ll see that the Churn Rate, or Cancellation Rate, can\u2019t possibly be that high because Net Additions have been 17-25% of Subscribers historically.<\/p>\n<p>So with a 30% cancellation rate, the company would have to replenish its subscriber base by 50% with new subscribers each year \u2013 not likely!<\/p>\n<p>Also, industry sources like Parks Associates point to a fairly low cancellation rate of ~9% for the company.<\/p>\n<p>So we choose to use a 94% renewal rate for existing subscribers and an 88% renewal rate for new subscribers (the 91% rate in the middle corresponds to the 9% cancellation rate).<\/p>\n<p>We go 2% higher in the Upside Case, 2% lower in the Downside Case, and 2% lower than that in the \u201cExtreme Downside\u201d Case.<\/p>\n<p>Subscriber Additions as a % of Base Subscribers will be higher than the historical numbers but decline over time. Monthly Fee increases will range between the average historical increases.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Part_3_How_to_Put_It_Together_in_Excel_Add_Scenarios\"><\/span>Part 3: How to Put It Together in Excel + Add Scenarios<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<ol>\n<li>Set up the Renewal Rate Schedule for New vs. Existing<\/li>\n<li>Multiply the Existing Subscribers by the Renewal Rate each year<\/li>\n<li>Factor in New Additions each year as a % of Base Subscribers<\/li>\n<li>Apply the New or Existing Renewal Rate each year<\/li>\n<li>Sum the Total Subscribers and take the yearly average<\/li>\n<li>Grow the Monthly Fees and multiply to get Total Revenue<\/li>\n<\/ol>\n<h2><span class=\"ez-toc-section\" id=\"Whats_Next\"><\/span>What\u2019s Next?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>After setting up the basic schedule, you could check and refine your numbers to make sure the scenarios and capitalized annual growth rates (CAGR) all make sense.<\/p>\n<p>You could also consult other sources, like equity research, and see how your views compare with the consensus estimates for the company.<\/p>\n<p>And then you could build the rest of the model by projecting expenses, Working Capital, CapEx, and other line items required for the full financial statement projections.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>You\u2019ll learn how to project subscription revenue for a Software as a Service (SaaS) or other subscription-based company in this tutorial, which is based on a case study of Netflix.<\/p>\n","protected":false},"featured_media":21924,"template":"","class_list":["post-20835","biws_kb","type-biws_kb","status-publish","has-post-thumbnail","hentry","kb_category-3-statement-models"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/20835","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media\/21924"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=20835"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}