Subscription Revenue Model (Netflix)

You’ll learn how to project subscription revenue for a Software as a Service (SaaS) or other subscription-based company in this tutorial, which is based on a case study of Netflix.
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Table of Contents:
1:16 Part 1: Key Drivers of a Subscription Revenue Business
5:09 Part 2: Where to Find the Required Information
10:08 Part 3: How to Put It Together in Excel + Add Scenarios
15:32 Recap and Summary
Part 1: Key Drivers of a Subscription Revenue Business
The key revenue drivers for subscription-based businesses include:
1) Existing Subscribers and the Renewal Rate - MOST revenue depends on the existing subscriber base unless the business is growing like a beast.
2) New Subscribers and Their Renewal Rates - As a % of existing subscribers, how many new ones is the company adding each year?
3) Monthly Fees and Pricing Increases - How much will these increase by over time? How much can the company can increase fees before driving away members?
The renewal rates often differ for existing vs. new subscribers because new customers tend to cancel more quickly; once someone has been around for a few years, he/she is more likely to stay subscribed.
You should also look at different scenarios - What happens with higher growth, renewal rates, and fee growth and with lower growth, renewal rates, and fee growth?
Part 2: Where to Find the Required Information
Some companies disclose these figures in their filings, but Netflix does not - they only give us the Net Additions, Revenue, and Average Monthly Fees in each business segment.
However, if you run the numbers yourself, you’ll see that the Churn Rate, or Cancellation Rate, can’t possibly be that high because Net Additions have been 17-25% of Subscribers historically.
So with a 30% cancellation rate, the company would have to replenish its subscriber base by 50% with new subscribers each year - not likely!
Also, industry sources like Parks Associates point to a fairly low cancellation rate of ~9% for the company.
So we choose to use a 94% renewal rate for existing subscribers and an 88% renewal rate for new subscribers (the 91% rate in the middle corresponds to the 9% cancellation rate).
We go 2% higher in the Upside Case, 2% lower in the Downside Case, and 2% lower than that in the “Extreme Downside” Case.
Subscriber Additions as a % of Base Subscribers will be higher than the historical numbers but decline over time. Monthly Fee increases will range between the average historical increases.
Part 3: How to Put It Together in Excel + Add Scenarios
Step 1: Set up the Renewal Rate Schedule for New vs. Existing
Step 2: Multiply the Existing Subscribers by the Renewal Rate each year
Step 3: Factor in New Additions each year as a % of Base Subscribers
Step 4: Apply the New or Existing Renewal Rate each year
Step 5: Sum the Total Subscribers and take the yearly average
Step 6: Grow the Monthly Fees and multiply to get Total Revenue
What’s Next?
After setting up the basic schedule, you could check and refine your numbers to make sure the scenarios and capitalized annual growth rates (CAGR) all make sense.
You could also consult other sources, like equity research, and see how your views compare with the consensus estimates for the company.
And then you could build the rest of the model by projecting expenses, Working Capital, CapEx, and other line items required for the full financial statement projections.
RESOURCES:
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[@EatDrinkWot]

when you deal with seed companies, you dont do much modelling like this. Excited to put this into practice. ps. i love your neat excel layout as always!

[@zsoltczagany9293]

Thank you very much you helped me through one of my toughtest seminars this year! All love

[@financialmodeling]

Thanks for watching!

[@TinaDerby01]

This was wonderful! Thank you!

[@financialmodeling]

Thanks for watching!

[@AhlquistMediaLab]

This was fantastic! Subscribed.

[@financialmodeling]

Thanks for watching!

[@bjliuyunli]

Thanks for the great video! I have two questions of excel here: At 12:05 how did you edit the formula of the cell with the G32 already been highlighted? And how to set up the selected scenarios menu?

[@user-hb9um8sj9d]

G32 was the reference to the formula which are highlighted everytime you edit associated formulas

[@financialmodeling]

For the scenarios, you can use OFFSET or INDEX/MATCH... covered elsewhere in this channel or in our free samples. For the part at 12:05 I'm not sure what you mean exactly, but any time you enter a formula the referenced cells are highlighted in Excel.

[@tueemsyhu4846]

Wonderful!!😁😀👌👍💵

[@financialmodeling]

Thanks for watching!

[@studio31oran]

thanks for the video! how do you recommend in increasing your confidence in using excel and be more efficient with it? thanks

[@financialmodeling]

Practice, practice, practice... and take our courses. :)

[@petrmartinek1941]

Love your videos! Pls how can I make a „Selected scenario“ drop down menu as you have (14:30 min.)? Is it data validation function, scenario manager or something else? Thanks.

[@financialmodeling]

Data Validation.

[@poli5111]

Can you continue and post a video on the rest of the case (debt vs. equity financing?) Thanks!

[@financialmodeling]

There is a Debt vs. Equity tutorial elsewhere in this channel. We only post snippets from the full case studies, so there won't be anything else for this one.

[@malt86]

Quick question on this: your best case scenarios for fee increases and for renewal rates seem like they should have an inverse relationship. I can appreciate that, barring correlation metrics we don’t have on hand, this is difficult data to find.. is there a good way to set up your model to not link the sets of scenarios? For example, 2 variables (best to worst case fee growth, best to worst case renewal rate). Thanks in advance!

[@financialmodeling]

You could set up models in different ways. This was just a simple example intended to illustrate some of the concepts. You pretty much always have to use scenarios or cases in a model that you use for credit/lending analysis. You could use other combinations of these assumptions or do something more complex, but in most cases, simplicity is a better approach.

[@numbahone7440]

Great video! Do you have relevant courses for e-commerce specific financial models?

[@financialmodeling]

We cover e-commerce and other technology companies in the Fundamentals and Advanced courses.

[@quangnoob]

Hi. Thanks for the tutorial. In the video, you said the Subscriber Addition rate will be lower than historical numbers. That number in FY14 was 26% (17% net addition plus 9% estimated chunk rate), the prior years' numbers were even bigger. So please correct me if I misunderstand somewhere but the 19% rate seems too low compared to the past numbers. Thanks

[@financialmodeling]

Yeah, maybe, but we usually get around this by building multiple scenarios into models so you can look at what happens in base/low/high cases. I don't recall what the exact data source for this one was.

[@leeserene7608]

This is fantastic. Thanks for this video. May I ask how do you do if this is done quarterly instead of annually?

[@financialmodeling]

kzbin.info/www/bejne/gXjcgayCqtStiqM

[@yashkaushik2007]

from where i can download the template for this financial model please help

[@financialmodeling]

Click "Show More". Scroll to the bottom. Click the links.

[@ThuyDuongT]

Thank you very much for the video. Where can we find the part that you advise the source of funding for Netflix?

[@financialmodeling]

This is a simplified/shorter part of a much longer case study. We normally only post excerpts and shorter versions in this channel.

[@jeeyolchung5772]

14:36 How can u set-up excel like this?

[@financialmodeling]

Alt, D, L for Data Validation, select "List" and then select the inputs you want. And check off "Dropdown"

[@brandonkim4044]

Thanks for the video! btw How did you come up with Subscriber Adds % Base in projected years? Row 60-64. Any assumptions please?

[@financialmodeling]

You have to look at industry growth rates, do outside research, look at peers, see what analysts are forecasting, etc. There's no one set method, so you usually look at different sources to form your own view. Keep in mind that Netflix was growing at a much faster rate at the time of this tutorial... subscriber growth is now much lower (single-digit percentages).

[@kylefinley9857]

Where can i get this spread sheet ?

[@financialmodeling]

Click "Show More". Scroll down to Resources. Click the links there.

[@koRioN555]

Is this video from courses you sell at BIWS?

[@financialmodeling]

As stated in the video, it is from an upcoming case study that will be added to the courses soon (next month).

[@jaredschepis9713]

What Happens if churn rate changes by month because of seasonality?

[@financialmodeling]

Then you need a monthly or quarterly model to reflect it. An annual model won't reflect seasonality.

[@marinom.hernandez3730]

Any course available?

[@financialmodeling]

The Netflix case study is in our Excel & Fundamentals course (breakingintowallstreet.com/biws/excel-financial-modeling-fundamentals/).

[@mag3351]

Could you share the excel template please?

[@financialmodeling]

Click "more" under the video and scroll down.

[@JonathanHadwen]

where can I find this Excel?

[@financialmodeling]

Click "More" or "Show More" and scroll to the links at the bottom.

[@quanronghu4900]

investment bank analyst*

[@quanronghu4900]

Is his what an investment analyst always do ?

[@financialmodeling]

This part of what an IB analyst might do. But 80-90% of the job consists of administrative duties, updating lists, writing documents, and doing other boring things.

[@quanronghu4900]

+Mergers & Inquisitions thank you. What's the most challenging part and most rewarding part of the job?

[@Mike-uz9hs]

+Mergers & Inquisitions i did not know this! Such a shame because modeling is so fun 😎