Netflix, the streaming giant that has been cautiously entering the realm of advertising, is going through some growing pains in its second year of ad sales. While Netflix’s foray into ads had a few stumbles, ad executives who have engaged with the company feel there’s hope that its future plans will make its ad-supported tier more appealing.
Challenges in the Debut Year
Netflix’s debut in the ad market was not as smooth as expected, with its top ad sales executive exiting abruptly, uninspiring upfront presentations, and relatively high ad prices. This presented some hurdles, but it’s all part of Netflix’s grand plan to develop a robust advertising business.
Plans to Expand Audience Reach
Netflix is actively looking to expand the audience for its ad-supported tier. They are in discussions with TV manufacturers and satellite TV providers to strike carriage deals for the ad-supported tier. This could boost the reach of ads in the U.S. and the U.K., where the basic subscription tier is being replaced by the ad-focused one.
Attracting New Subscribers to the Ad-Supported Tier
Netflix’s primary aim is to attract new subscribers to its ad-supported tier, rather than converting existing ad-free subscribers. Netflix executives are open to subscribers switching from pricier ad-free tiers, as the ad-supported tier generates more average revenue per user, even in a soft ad market.
Retention and Attrition
Some subscribers are migrating away from ad-free subscriptions due to price increases and Netflix’s efforts to curb password sharing. The streaming service is planning to implement a price hike on ad-free tiers, hoping to redirect customers toward the more affordable, ad-interrupted experience.
Audience Growth in the U.K.
The ad-supported tier has shown promise, especially in the U.K. where it has been growing at a rate of approximately 100,000 subscribers per month. A third of new subscribers in Q3 opted for the ad-supported plan in countries where it’s available, indicating that Netflix is appealing to a segment of users seeking a budget-friendly option.
Global Growth Potential
Netflix’s real growth potential in the ad-supported tier may come from newer markets where cost sensitivity to ad-free subscriptions is more significant. The challenge lies in enticing customers to trade down from ad-free tiers, especially in mature markets.
Netflix as a Test Environment for Marketers
For now, Netflix is seen as a testing ground for marketers to learn how ad budgets work in its unique ecosystem. It’s a relatively new business, and there is some conservatism toward this uncharted territory.
Attracting Advertisers
Netflix has been extending budget-friendly rates to all agencies to attract more advertisers. However, with a relatively limited audience size, Netflix faces challenges in getting advertisers to pay a premium for advertising.
Netflix’s Ongoing Collaborations
Netflix is actively seeking experienced ad sales executives with a background in selling TV and digital ads to expand its advertising team. The company has maintained its collaboration with Microsoft Advertising, which handles programmatic ad sales.
Netflix’s Evolution as an Advertising Platform
Netflix’s journey into the advertising world is still evolving, and it is fine-tuning its approach. The data from its ad-supported tier will be instrumental in making informed business strategy decisions on how to scale the ad-supported and ad-free tiers together, contributing to the company’s growth as a whole.
Netflix’s venture into advertising is akin to a pilot episode of a new show—still a work in progress with room for improvement. As it navigates the complex world of advertising, Netflix aims to find the right balance to foster a successful advertising business.
