Final answer:
Netflix's unique business model was based on a subscription service that provided unlimited rentals without traditional fees, which contrasted with competitors that relied on per-title rental fees. However, they misjudged the customer preferences and elasticity of demand, not anticipating the competitive market with close substitutes like Redbox, Amazon Prime, and Hulu, and underestimating the impact of competitors on customer retention.
Step-by-step explanation:
The business model of Netflix was distinct from its competitors in several ways. Initially, Netflix operated on a subscription-based model that provided unlimited rentals without due dates, late fees, or per-title rental fees, which differed from the traditional video rental stores. This model was later expanded to include online streaming, allowing customers to watch an unlimited amount of content for a flat monthly fee. Meanwhile, competitors at the time, such as Blockbuster, were primarily focused on physical DVD rentals with per-title fees and late charges.
However, Netflix's estimate of customers leaving was far off due to an increase in close, but not perfect substitutes. In a more competitive market with options like Vudu, Amazon Prime, Hulu, and Redbox, along with traditional retail stores, consumers found more convenience in these services. For example, the presence of Redbox kiosks within a five-minute drive of 68% of Americans highlighted a significant preference for physical DVD disks over the convenience of online streaming in 2012. The elasticity of demand and the consumer preference for physical media were misjudgments on Netflix's part, leading to a miscalculation of customer retention.
Netflix also seemed to have underestimated the impact of other venues and consumer response to price changes. The growing number of competitors, which expanded from a few to nearly 200, posed a challenge, impacting Netflix based on the concept of elasticity, which measures the change in quantity with respect to a change in price.