Why Did Netflix Switch to an Advertising Model?

One of Netflix’s biggest advantages used to be very simple:
“You pay — you don’t see ads.”
But in 2022, the company changed its long-standing approach and introduced a cheaper, ad-supported subscription plan.

Why?
1. Subscriber growth slowed down
In the first half of 2022, Netflix lost more than 1 million paid subscribers. The streaming market was becoming increasingly saturated, making it harder to attract new customers.

2. Competition intensified
Netflix was no longer almost alone in the market. As more streaming services emerged, consumers had more choices and increasingly had to decide which subscriptions were worth paying for.

3. Not everyone wants to pay for an expensive subscription
Netflix identified a new customer segment:
“I’m willing to watch ads if my subscription is cheaper”.
That’s why, in November 2022, Netflix launched its Basic with Ads plan for $6.99 in the US. At the time, the entry-level ad-free plan cost $9.99.

What did Netflix gain?
The company now had two sources of revenue from the same customer:
1. Subscription revenue — paid by the user.
2. Advertising revenue — paid by the advertiser.

Netflix later explained that its advertising strategy had two main goals: to offer consumers a more affordable price while creating an additional source of revenue and profit for the company.

Business lesson
A strong business model is not one that never changes.

When the market changes, you may need to rethink even the model that originally made you successful.

If you were the CEO of Netflix, would you have introduced an advertising model?