Netflix has teamed up with Microsoft to offer a cheaper subscription plan to customers that will show adverts.
The streaming giant says the service will be an "addition" to its existing plans, which do not include adverts.
The company has not yet revealed how much it plans to charge subscribers for the new service.
Netflix announced the move after it reported its first subscriber loss in more than a decade and cut hundreds of jobs earlier this year.
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It lost 200,000 subscribers between January and March, compared to the 2.5 million analysts had been expecting the firm to add in the period. Netflix also now expects to lose a further two million subscribers between April and June.
The company said it had selected Microsoft as its global advertising technology and sales partner to introduce a "lower priced ad-supported subscription plan".
"It's very early days and we have much to work through," Netflix's chief operating officer Greg Peters said in a statement.
"But our long-term goal is clear. More choice for consumers and a premium, better-than-linear TV brand experience for advertisers."
Netflix never wanted ads. Its entire business model was built around monthly subscriptions.
Yet Netflix executives have had to rip up their own rules.
It comes after terrible figures showed that the company was losing subscribers.
And the cost of living crisis has meant that households, tightening their belts, have looked at their Netflix subscription as a potential saving. Investors have been spooked.
Netflix also has huge competition from the likes of Amazon Prime, HBO Max, Apple TV and Disney+.
There are too many options and not enough paying subscribers to go around.
To adapt, Netflix is creating a cheaper service - with adverts - that it says will be rolled out later this year.
Spotify has a similar model, where music is free if you're happy to sit through commercials.
The hope is that Netflix, by embracing ads, will attract new audiences.
But the move also shows adverts, that were seen by high-end streaming companies as so passé just a few years ago, are very much still alive and kicking. Netflix is trying to renegotiate the deals it has with major entertainment firms so that it can show adverts as part of its service, the Wall Street Journal reported on Tuesday.
The firm has reportedly held discussions with Warner Bros., Universal and Sony Pictures Television.
Warner Bros declined to comment. Universal and Sony did not immediately respond to a BBC request for comment.
In April, Netflix saw $50bn wiped off its market value after the company disclosed the surprise fall in subscribers - the first drop since October 2011.
The company, which had gained millions of subscribers during Covid lockdowns, said it had lost 700,000 subscribers from closing its service in Russia. It also blamed competition from rivals as well as people sharing their Netflix password with others.
Last month, the firm announced 300 job cuts as it grappled with the drop in customer numbers.
Also last month, Netflix co-chief executive Ted Sarandos said it was in talks with several companies to find ways to appeal to price-sensitive audiences.
"We're not adding ads to Netflix as you know it today. We're adding an ad tier for folks who say 'Hey, I want a lower price and I'll watch ads'," Mr Sarandos told an audience at a conference in Cannes.
