Over-the-top (OTT) companies are quickly becoming a major force in the entertainment industry, offering streaming video and audio content directly to consumers via the internet.
But with so much competition in the market, it's important for these companies to have a clear understanding of their revenue and cost structures in order to maximize profitability.
The revenue equation for an OTT company can be expressed as:
Revenue = (Number of Subscribers) x (Average Revenue per User) x (Subscription Duration) - (Customer Acquisition Cost + Content Cost + Payment Processing Fees)
where
1) Number of Subscribers: This is the total number of paying customers subscribed to the OTT service. The more subscribers an OTT company has, the higher the revenue generated.
2) Average Revenue per User: This is the amount of revenue generated per subscriber. It includes subscription fees, as well as any other revenue streams such as advertising or sponsorships. The equation for this is:
Average Revenue per User = Total Revenue / Number of Subscribers
By tracking this metric, OTT companies can identify opportunities to increase revenue by offering additional products or services to subscribers.
3) Subscription Duration: This is the length of time a subscriber remains a paying customer. The longer a subscriber stays subscribed, the more valuable they are to the OTT company. This is because it costs less to retain an existing customer than to acquire a new one.
4) Customer Acquisition Cost: This is the cost of acquiring a new paying customer. It includes marketing and advertising spend, as well as other costs associated with customer acquisition. The equation for this is:
Customer Acquisition Cost = Marketing and Advertising Spend / Number of New Subscribers
By tracking this metric, OTT companies can identify opportunities to reduce costs associated with customer acquisition, such as optimizing their marketing spend or improving their customer acquisition strategy.
5) Content Cost: This is the cost of producing and acquiring content for the OTT service. This includes the cost of producing original content as well as licensing fees for content from other providers. The equation for this is:
Content Cost per Hour = Total Amount Spent on Content / Total Number of Hours of Content Streamed
By tracking this metric, OTT companies can identify opportunities to reduce costs associated with content production and acquisition, such as negotiating better licensing deals or producing more cost-effective content.
6) Payment Processing Fees: This is the cost of processing payments for subscription fees. It includes transaction fees charged by payment processors. The equation for this is:
Total Payment Processing Fees = (Transaction Value x Percentage Fee) + (Transaction Count x Fixed Transaction Fee)
By tracking this metric, OTT companies can identify opportunities to reduce payment processing fees by negotiating better rates with payment processors or implementing more cost-effective payment processing systems.
As we've seen, an OTT company's revenue equation is made up of several components that work together to generate revenue. By understanding each of these components and optimizing them for growth, companies can increase their revenue and profitability.
However, it's important to keep in mind that this is not a one-time exercise but a continuous process of monitoring, analysis, and adaptation. With the rapid changes in technology and consumer behavior, companies must remain agile and adapt quickly to stay competitive and successful in the long term.