🧠 How psychology built (and might break) NETFLIX

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Hi there - Jen here :)

Netflix’s biggest competition isn’t Disney+. It’s not Hulu or (HBO)Max.

It’s sleep.

At least that’s what Executive Chairman Reed Hastings said in an earnings call:

“We’re competing with sleep…it’s a very large pool of time.”

The future of Netflix depends on getting folks to stream more, for longer.

And unsurprisingly, they’re using some psychology and behavioral science to do it.

There’s no doubt Netflix’s psychology-powered user experience wins them customers… but the brand is also playing a dangerous psychological game with its users.

Today you’ll learn:

• 3 ways psychology built Netflix into a streaming powerhouse

• Why Netflix is playing a dangerous psychological game with its customers that it can’t afford to lose

👉 But before we get started, I wanted to share that the new Choice Hacking Academy website and Pro Membership community have launched! The Pro Membership now features:

• Unlimited access to every course and workshop (a $2k+ value)

• Lifetime access to weekly live events where you get access to a marketing and behavioral science expert (me). The live events alone have a value of $10k+ per year.

• Generous discounts on coaching and consulting

If you’re looking to grow or start your business, find more buyers, and have an expert available to help when your marketing gets stuck, check out a tour of the membership here.

3 ways psychology built Netflix into a streaming powerhouse

There are lots of reasons why Netflix became the kings of streaming, but here are just three of the ways psychology helped them do it:

1. Personalization is Netflix’s Competitive Advantage

Netflix describes itself as “customer-obsessed” and aims to deliver a totally personalized experience.

Why is personalization so important to them?

It’s down to a psychological principle known as the Cocktail Party Effect.

This principle says that people focus on, remember, and act on personalized information.

Here’s how they use it:

1. Netflix’s Recommendation Engine

Netflix’s vast content catalog, about 50k titles, is part of their appeal. HBOMax (now called Max), for example, only has around 10k titles.

But a product with that amount of choice can be a double-edged sword.

The Choice Overload Effect says that lots of options will attract customers to browse, but fewer options get them to buy (or watch, in this case).

Netflix’s biggest challenge is landing the size of its content library but then quickly surfacing the most relevant titles for an individual.

To surface the right content at the right time to the right people, Netflix relies on its recommendation engine.

80%+ of the that customers watched in the last two years were suggested by the Netflix recommendation engine working behind the scenes to deliver content it knows that account holder loves.

2. “Because you watched…”

Netflix’s “Because you watched…” category is a prime example of their “customer obsession” in action.

This section, powered by its recommendation engine, suggests content related to titles you’ve already watched and enjoyed.

Content is delivered based on how much Netflix thinks you’d respond to a genre, topic, or even a specific actor that pops up a lot in your favorite films.

3. Thumbnail Design

Netflix was an early pioneer of thumbnail optimization in digital environments.

At the start, Netflix would use the general-purpose images provided by content studios. Most of these images were just resized billboards, print ads, or DVD covers.

Not images created for a digital experience.

You can see how hard it was to scan and browse early versions of the site below:

Early in its history, Netflix took matters into its own hands. They started creating and testing custom thumbnails to see if they could match the right audience to the right content.

(To read more about Netflix’s thumbnail-creation process, check out this issue of the newsletter from March.)

Why Netflix is playing a dangerous psychological game with its customers

While many folks still love Netflix, the brand has been testing its goodwill with customers a lot in the past few years.

In May of 2023, they began a crackdown on password sharing, taking away a benefit that many took for granted and that the brand itself even exploited for internet points:

And in 2022, Netflix announced an ad-supported plan that costs a few bucks less a month than the standard add-free subscription.

But by June of 2023, only about 9% of users had taken up the plan.

Netflix’s competitors were doing way better on their ad-support subscriber numbers:

• Peacock (NBC): 90% ad-supported

• Hulu: 57%

• Disney+: 23%

So why did Netflix lag behind?

Because downgrading to the ad-support tier wasn’t about saving money for most users, it was about losing time.

People got used to watching their favorite shows commercial-free.

And it feels like a loss to give up watch time to wait for commercials to finish.

Another loss - the “Standard with Ads” plan also takes away available content. You don’t get access to the full Netflix library.

Losing features, benefits, or time takes a big psychological toll on customers.

Loss Aversion says that the psychological pain of losing something is 2x that of gaining the same thing - and it’s a powerful driver of human psychology and behavior.

That’s why most people are happier to pay a few bucks more to avoid losing out on the time they get back, watching their shows ad-free.

But now let’s fast-forward to 2024:

Now, about 14% of Netflix’s 269.6 million subscribers are on the ad-supported plan.

“Jen,” you might be saying, “That’s a success! Clearly, you’re wrong about people not wanting to lose time to gain a bit of cash.”

Well, on the surface, that does seem to be an improvement.

But when we start considering why this number has grown, it becomes a more complicated picture.

Economic uncertainty might have something to do with it.

Netflix’s crackdown on password sharing might have something to do with it, too (those “freeloading” sharers now have to pay for their own accounts).

But interestingly, lots of (now) ad-supported users didn’t make the choice to move to a different plan.

For example, many mobile phone plans now include free Netflix or other services to sweeten the deal for new customers.

But some of the telecom companies providing this benefit thought to themselves, “We can save millions on free benefits if we pay for the ad-supported plan instead.”

So customers were involuntarily downgraded to the ad supported tier, whether they wanted to go, or not.

And they were not happy about it:

All because the psychological toll of losing something - like ad-free streaming - is much stronger than the benefits of getting something new.

I’ve explored this issue in many other case studies (like this one about the legendary failure of New Coke), but history has taught many businesses this tough lesson:

👉 When brands ignore the psychological side of loss, they put their entire business at risk.

Read, Watch, Listen

• The NFL’s Most Valuable Teams 2024, via Forbes. In honor of the football season starting (go Bears), check out this dive into the economics of the billion dollar franchises of the NFL. [Watch]

• Kamala Harris Campaign Experiments With Ads for an Audience With “Brain Rot”, via 404 Media [Read]

• Season 6 of the much-loved Choice Hacking podcast is now live! Listen as I deep dive into the psychology behind Spotify’s success → [Listen]

If there’s a psychology principle you want to hear more about or a brand you want me to break down and explain, just reply to this email and let me know :)

Until next time,
Jen