From DHM to Product Strategy

Gibson: You have ideas to delight customers, to build hard-to-copy advantage, and experiment with your business model. Now what? The next step is to tease out high-level hypotheses that combine delight, hard-to-copy advantage, and margin.

Achieving two or three of these objectives with a single strategy is at the heart of good product strategy.

Below, I outline a dozen of the high-level theories that Netflix explored over 15 years, along with a brief description of each. Half of these strategies failed, but many of the winners combined delight, hard-to-copy advantage, and margin enhancement.

The first, personalization. Today, Netflix personalization delights customers in hard-to-copy, margin enhancing ways. Over two decades, the percentage of recommendations that customers choose increased from 2% to 80%, making it easier for customers to find movies they'll love. Personalization also supports the business by enabling Netflix to predict the number of members who will watch original content, allowing Netflix to right-size their original content investment.

The second, easy. Netflix wasn't simple at launch but became simpler over time. Netflix learned to add features that customers value and remove those that do not. A surprising example in 2018, the decision to remove movie reviews. Now that members can quickly hit play or quit at any time, they no longer need reviews.

Social. Netflix experimented with “friends” for six years. The hypothesis was that “friends” would suggest great long-tail movies, creating both delight and margin, but also create a hard-to-copy, network effect. The effort engaged only 6% of members, however, so Netflix cut it in 2010.

Unique hard-to-copy tools. In 2005, the vision was that personalized previews would begin to play on each member's homepage, delivering both delight and margin. The personalized choices would be lower-cost, long-tail titles. The effort failed, however. Customers found the previews annoying, and the experiment did not move any of its proxy metrics.

Price and Plans. Given the need for ongoing business model experiments, there was constant price and plan testing.

Ads and used DVD sales. In 2006, Netflix explored two alternate business models, advertising and used DVD sales. Both businesses generated profit, but were killed in 2008 when Netflix began to deliver higher margin through its core DVD-by-mail rental business.

Next-day DVD delivery. A source of delight for members, DVDs arrived the next day in the mail. Netflix achieved this through a network of automated shipping hubs. It took Blockbuster years to replicate this capability.

Streaming. It's an obvious win today, but it was unclear when Netflix should launch its streaming service and how to acquire content. Today, there's a hard-to-copy advantage in the technology that Netflix employs to encrypt and deliver video, and customers love watching movies instantly, anytime, anywhere.

Entertainment. In 2005, the Netflix product team worried it was building an undifferentiated, automated vending machine. Ultimately, Netflix tested Max, an animated host on the PlayStation, but the experiment failed. The incremental increase in delight did not outweigh the cost of the effort, and an automated vending machine was on-brand for a service whose brand promise is movie enjoyment made easy.

Open APIs. In 2006, when Facebook, LinkedIn, and others opened their Application Programming Interfaces to enable partners to innovate on their platforms, Netflix followed suit. The intent was to let a 1,000 flowers bloom, but none did. Later, however, the APIs became the foundation for Netflix's device ecosystem.

Device ecosystem. Netflix launched streaming in January of 2007 on PC-based computers. The Mac followed shortly, but members wanted to stream movies to their TVs, which required partnerships with hardware manufacturers. In late 2008, Netflix launched on Xbox. Later, PlayStation, Wii, Roku, Samsung, and nearly all DVD and Blu-ray manufacturers followed. By 2012, Netflix had critical mass with hardware partners. They created a hard-to-copy network effect that also delights customers who enjoy watching anytime, anywhere.

Exclusive DVD content. During the DVD era, Netflix tested exclusive content via Red Envelope Studios, but without the economies of scale Netflix has today, the effort failed.

Original content. Netflix launched its first episodic TV series, Lilyhammer in 2012. By 2013, its $100 million investment in House of Cards delivered a hit.

Interactive stories. In 2019, after experimenting with children's Choose Your Own Adventure videos, Netflix launched an adult branching story movie, Black Mirror's Bandersnatch. It's early days for this experiment, so it's hard to evaluate its effectiveness. We do know, however, that an interactive version of The Unbreakable Kimmie Schmidt will launch soon.

High quality video and sound. One of the early lessons at Netflix was the importance of staying focused on making the core product better. Netflix's continued effort to improve both video and sound quality is a good example, and the technology required to do this is quite hard to copy. Today, Netflix generates higher margin through its higher-priced, Ultra HD plan.

All of the efforts above are motivated by the desire to improve customers' experience in ways that build a hard-to-copy, margin enhancing experience. I'll give you a quick summary of what worked and what didn't. Personalization worked. It delighted, it was hard to copy, and it improved margin. Creating a simple, easy experience, that worked. It both delighted and helped build margin.

Social was a failure against all three attributes. Movie finding tools, again failure on all three attributes. Price and plan testing, positive on delight and positive on margin. Not hard to copy. Ads and used DVDs added to the margin, but didn't create enough delight and it wasn't hard to copy.

Next day DVDs arrive in the mail. That was a positive on all three attributes. Streaming, positive on all three attributes. Entertainment, failure on all three attributes. Open APIs, failure on all three attributes. Device ecosystem, delights and it's hard to copy. Exclusive DVDs failed on all three.

Original content succeeds in the modern era on all three attributes. Interactive stories, too early to tell. Video and sound quality improvements helps delight, it's hard to copy, it improves margin.

Netflix did not test all of the ideas above in parallel. Each year, Netflix took on about four to six product strategies. Here were the significant efforts in 2005: personalization, keeping things easy and simple, social, margin enhancement, unique movie finding tools, and next-day DVD delivery. Each of these efforts had a dedicated pod made up of engineers, designers, product, and data leaders.

Here's the next set of product strategy exercises. This is exercise number four. Given your product's potential delighters, hard-to-copy advantages, and business model explorations, what are four to six hypotheses you'd like to test in the next year or two? That's the question.

In the following essay, I'll demonstrate how we fleshed out the six high-level hypotheses from 2005 to form a cohesive product strategy.

Suzanne: This word strategy is so scary, and dangerous. People either love to be called a strategist, or they're loathe to use the term because it can mean so many different things. What strikes me about your essay is that strategy, or strategies, are short lived it seems and almost code for experiments really, which takes a lot of the oomph out of the word and makes it like, "Here's a bunch of things we're guessing about over the next three months," or over the next six months. Is that what you're basically calling product strategy?

Gibson: That's a great interpretation. If the job is to delight customers in hard-to-copy, margin enhancing ways, the question is what are the things... What's the body of wo rk you're going to do to try to do that? You can say, what are my high level hypotheses and theories about how to do that, or you could say, what are my product strategies? It's all the same for me.

For me a product strategy is a bit of a theme. In the case of personalization at Netflix that lasted, that theme, forever right? It worked. A strategy that had a much shorter life because it was a failed theory, a failed hypothesis, was the experimentation around the social strategy, this idea that you could connect with your friends within Netflix. You'd share great movie ideas with your friends and you wouldn't want to leave because of that. You had sort of a network effect.

That was a failed hypothesis. Over time you kind of keep the winners. Over time Netflix is all about keeping things simple and easy, about creating this personalized experience, about instant delivery, next day delivery of DVD or streaming. It was about creating this huge device ecosystem where you could watch anytime, anywhere. Then eventually it was about original content.

But you're right. I think the word strategy, it shouldn't be scary. Think of it as, what's my theory or hypothesis about how I will delight customers in these hard-to-copy, margin enhancing ways? That's the right way to think about it.

Suzanne: If I were to scaffold this in and take new co., baby new co., that hasn't laid a single stick in the ground so to speak. It sounds like what you're really saying is, there is only one strategy for every product business which is DHM. Then you start with your first handful of guesses. Then those guesses which prove out success can become persistent corners of your unique strategy. If we use personalization and the example of Netflix we say, "All we wanted to do was delight customers in hard-to-copy, margin enhancing ways. Then we came up with these four to six, four persistent... personalization is the Netflix product strategy."

Gibson: Yeah. It's one of them. Correct. You're right. It's true that I'm trying to demystify this concept of product strategy. In large part what I noticed in the product world in the last five years there was so much focus on how you build stuff around agile, et cetera. I've just been nicely trying to bring the conversation back to what should we be building? What's the important stuff to build?

Strategy, or these high level theories and hypothesis is trying to answer the question. And trying to answer the question, how the heck do I delight customers in hard-to-copy, margin enhancing ways? I'm trying to vastly simplify that. By the way it's hard.

Suzanne: I love that. This was DHM model two strategy, essay number two.