Prioritizing growth, engagement, and monetization to keep organizations aligned.
As companies grow, product strategy helps teams maintain focus. But misalignment, especially across product, marketing, sales, and finance, happens often. One of the biggest causes is differing opinions on how to prioritize growth, engagement, and monetization. The GEM model forces cross-functional teams to prioritize these factors and helps build a metrics-focused organization.
When I joined Netflix in 2005, the company had nearly two million members, was growing 30% year-over-year, and monthly cancellation, the proxy for product quality and engagement, was about 4.5%. The key challenge at the time, however, was our ability to demonstrate to Wall Street that we could build a profitable business. Barry McCarthy, our CFO, felt we would have a higher valuation — and attract more investment — if we could generate higher profits.
Here’s the resulting forced-rank prioritization of growth, engagement, and monetization, along with the metrics we used to evaluate each factor:
- Monetization: As measured by Lifetime Value (LTV) and gross margin.
- Engagement: As measured by monthly retention. (Think of this as a proxy for product quality.)
- Growth: As measured by the year-over-year member growth rate. (30% in 2005.)
Based on the forced-rank prioritization above, we put some new projects at the top of our prioritized list. In 2005, we started testing advertising, we experimented with selling previously viewed DVDs to members, and we initiated lots of price and plan testing. Our priority was monetization to answer the question, “How can Netflix deliver a higher-margin business?”
Eventually, we figured out how to deliver a more profitable DVD rental service through the introduction of lower-priced plans, which substantially improved retention. We maintained our $22/month, three disks at a time plan, but added $15 and $9 monthly plans for two and one DVD at a time. Both of these lower-priced plans generated a substantially higher lifetime value.
By 2008, we were confident that we could deliver a profitable business, and we flipped the priority as we set a goal to achieve 20 million subscribers by 2010. We wanted to convince investors we would have a big, profitable business in the long-term. Here was the revised forced rank in 2008:
By this point, we had reasonable confidence that we could deliver higher margins, and the priority shifted to growth. At different times in a company’s life, the priorities change. It’s an excellent habit to reassess the priority of these three factors every six months or so.
Product Strategy Exercise (#11)
Thinking about the overall needs of your company, how do you prioritize growth, engagement, and monetization? Which metric will you use to measure each? Now compare notes with your CEO and leaders in other functions of the company to see how they prioritize the three factors. If the answer is different, find ways to debate the prioritization and reach an agreement. Doing this every six months will dramatically improve cross-functional alignment.
I hope you enjoy the next essay. It outlines how to bring strategic thinking “front and center” in your product organization:
PS. Here’s an index of all the articles in this series: