Madflix.com

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Information that can be shared with the interviewee on his/her inquiry:

• Subscription models:
  • S1: 1 movie at a time / $9.99/month
  • S2: 2 movies at a time / $14.99/month
  • S3: 3 movies at a time / $19.99/month
• Key revenue drivers:
  • Price
  • Subscription mix
  • # of customers
• Subscription model 1 was introduced 2 years ago.
• Growing number of customers and revenues
• Unchanged prices

Acquire information on the following points:

• Subscription models
• Key revenue drivers
• Development of number of customers and revenues
• Development of prices

Information that can be shared if inquired: 

• Key cost drivers: Fixed costs (administrative) Variable costs
• Components of variable cost:
  • Distribution: Primarily mailing costs
  • Content amortization: Usable life of movies is 30 rentals.
  • Allowances: allowance for movies to be lost in the mail
  • Other: DVD cases repair, etc.
  • Insignificant fixed costs
  • DVD amortization is variable
  • Distribution cost on a per-unit basis

Main conclusion:

• Revenues are growing for all subscription models.
• Variable costs depend on the number of movies rented per month (not subscription volume). Distribution costs and amortization make up the biggest share of the variable costs.
• 2 key gross profit drivers are:
  • Subscription mix
  • Average rentals per month

Information that can be shared if inquired: 

• Possible key issues:
  • New competitors
  • More rivalry
  • Studios sell fewer movies
• No other competitor in Madflix’s niche.
• Margins for competitors are not decreasing.
• Studios are expected to sell the same amount of movies.

Acquire information on the competition that will be necessary for your final recommendation

Information that can be shared if inquired: 

• There were no changes in demand from the target audience.
• There were no changes in customer preferences.

Average rentals per month

= 8 (Table 3)

Costs per rental

= $1.75 (Diagram 2)

Average rentals per month

= 6 (Table 3)

Costs per rental

= $1.75 (Diagram 2)

Average rentals per month

= 7.5 (Table 3)

Main Conclusion

The main conclusions here should be:

• S3 is more profitable than the other models.
• S2 is still profitable, but S1 is a loss.
• Madflix is subsidizing its own growth (sells at a loss).

The final recommendation should include:

• Madflix increased its revenues by adding customers in S1 and S2. It has subsidized S1 with S2 and S3 as S1 is generating negative margins.
• Madflix needs to restructure S1 to make it profitable.
• Possible ways to increase profitability:
  • Adjusting the price
  • Rationalize costs (focus on distribution cost and amortization)
  • Enter other market niches (women, children, etc.)
  • Targeted advertising to increase customer base
• Possible risks:
  • Adjusting prices could lead to switching of customers (from S3 to S2 and from S2 to new restructured S1)
  • Madflix needs to identify premium offering of S2 and S3
  • Madflix needs to be cautious not to lose customers while restructuring S3
• Next tasks:
  • Analyze the price elasticity of the customers to find a suitable price for each subscription
  • Renegotiate contracts

Possible answers:

• Renegotiate volume discounts to decrease distribution costs.
• Encourage S2 & S3 customers to order more than one movie together.
• Promote (with discounts, etc.) rentals of older movies that have lower amortization costs.
• Renegotiations with film studios in order to reduce DVD costs.