Netflix invests extra effort customizing the encoding of each title, algorithmically. They take advantage of differences in compressibility of different content — cartoons vs. action movies is the oft-repeated dichotomy. The upshot is a little bit of bandwidth savings for them but mostly the customer gets better video quality for the same available bandwidth.
One cool detail I had not heard before is that they deliberately space the various bandwidth levels just tightly enough so that they can switch between them (in response to varying end-to-end internet conditions) without the customer noticing a jarring quality jump.
h/t OSNews.com and JT Smith