Can Spotify keep their music throne?

Patrick Campbell Jan 14 2021

This week we are talking about music, juggernaut, Spotify, which revolutionized the music industry, breaking the chains of the labels, and basically making unlimited music for $9.99 or $15 a month or $15, if you are on the family plan. Spotify has been number one in this space and Amazon music, Apple music, etc., haven't been able to unseat their reign.

What's been really interesting is that Spotify is reaching a point where they have all the subscriptions—they're not going to reach the point where they have all the subscriptions—but they're going to continue to add subscriptions. And it's going to start reaching a diminishing return where they need to figure out a better way to monetize the platform and the users that they have created. And in that spirit, we're going to learn today what Spotify is doing well, and not so well, when it comes to their pricing strategy. So you can use this as a case study to help your business and monetization strategies.

 


Pricing field notes

Spotify

Music juggernaut, Spotify, revolutionized the music industry, breaking the chains of labels and making unlimited music, free. But how can Spotify use its position as the dominant force and innovator in the market to go beyond the ad and subscription model currently keeping them afloat?

Below are some valuable takeaways you can implement in your own business.

    • Add-ons
      • Know how to monetize better through better bundling analysis
      • Think about how you differentiate your features, whether you should bundle them within the product, or make them an add-on.

      • The proper feature add-ons can increase your expansion revenue.

    • Membership Models.

      • Membership models are a new stream of revenue.
      • Even if you're not an ad driven business, you should be considering memberships to build communities and monetize.
    • Partnerships
      • Find the right partnership and go all in, but ensure it's providing you with the right value.
      • Partnerships get people over first-click bias.
      • Partnerships are a really good way to grow.
        •  

Watch the full episode

 

Spotify

Music is one of those creations that make humans human. While music influences our mood and feelings, it’s also been linked to an early form of communication before language was invented, as well as the establishment of monogamy and early societies. We probably wouldn’t be here without music, or at the very least wouldn’t be as interesting. 

Over the years the music industry’s evolution has been linked to the ability to transfer and share music, from sheet music allowing different people to play different songs in different locations to physically storing music in LPs, CDs, MP3s, and now, the cloud. 

Spotify, founded in 2002 by Daniel Ek in Sweden, is the most contemporary juggernaut in the space. In response to the growing piracy problem with Napster, Limewire, Kazaa, and even Pirate Bay, Ek saw an opportunity to skip to the end and provide unlimited music to anyone with an account for free. 

The music industry wasn’t inherently on board with this proposition, so the secret became to develop a software solution that was better than piracy, as to eliminate the whole underbelly industry, but also find a way to compensate the music industry. 

Fortunately for Ek and his co-founder Martin Lorentzon the music industry was clearly behind the paid market innovation curve and was suffering for it. They were trying to hold on to the gatekeeper model of old, even though distribution of music had left the physical realm long ago. The suffering became too much and Spotify was rising at just the right time.  

Spotify convinced record labels to receive royalties based on streams. Labels obliged because they started seeing the writing on the wall. Sixty-million music tracks and 299 million users in 92 markets later, Spotify has morphed into the place to fulfill their mission of unlocking the potential of human creativity by giving a million creative artists the opportunity to live off their art. All while Spotify has grown to be valued to the tune of 27 billion dollars.


 

Not everything’s peachy with Spotify though. Many critics point to Spotify accelerating the commoditization of art with many smaller artists getting paid next to nothing for streams. On the other hand though, many of these artists wouldn’t have gained as much of an audience without Spotify, so in essence Spotify is building their fan base and helping them transition to a music revenue model that isn’t relying on track sales, but instead hinges on a fanbase attending shows, subscribing to Patreon, or buying merch. 

The real threat is is from later entrants into the music market. Spotify was the first company in, so they had to pay the most to train record labels in the new market. New entrants into the market like Apple and Amazon don’t have to pay as high of a price tag and can use their distribution leverage for better deals. Regardless of the unit economics, these two players seem to be making strides in the music wars with some of the fastest growing user acquisition numbers ever seen in the media space. 

The question becomes: How can Spotify use its position as the dominant force and innovator in the market to go beyond the ad and subscription model currently keeping them afloat? Will podcasts and monetizing artist fan bases for them be what takes them to the next level? Spotify can’t become Napster, so we’re going to answer these questions by collecting data from 10,542 current and prospective Spotify customers. 

 

Spotify's approach 

When did you stop paying for music? I just remember, you know, you'd buy an album and you were like, "Oh, I only want these two songs," and then you would rip it onto your computer in order to basically put together a playlist of the two songs from a bunch of albums. And then all of a sudden it was like, "Wait, I can just get those songs?" I think that when the world of piracy was ahead of the innovation curve, the music industry lost the moral authority because they weren't going to a place where people actually bought the way they wanted to buy.

I think it's one of those things where Spotify came along and realized that this thing that Steve Jobs put together was working. It was essentially a multi-billion dollar app store. Then other models started to pick up where you had these indie bands that weren't trying to sell these giant records, but they were trying to create really good music, and then find their thousand true fans. Then you had the birth of Patreon and these other things. And so I think that the big takeaway here is that markets move really quickly. It's interesting especially with these podcast acquisitions, there's an argument where they could commoditize and compliment with music and charge lower for just basic music access, and differentiate with some of these other things that they offer.

 

I think Spotify's approach right now is basically to approach this as an ad network. You're either on the unlimited subscription or ads. And I guess they could differentiate the podcast, but I think everything that they've shown, and I think it's the right play for the model that they're doing, is basically, how do they get more audio, how do they get you in the app longer, how do they get you away from the other places that people are listening to audio, which is Apple podcasts, right? And that's why I think they need to completely rethink how they monetize this product. Don't go away from the subscription. Don't go away from the ads, but just really look into different packaging areas, which we're going to talk about.

Let's take a look at their pricing page and then unpack some of the data that we collected on some of their current and prospective customers to see what they value. And the goal here is to see what they're doing right, what they're doing wrong, and really what the opportunity is for Spotify with all those wins and those losses. All so you can understand in your business, whether you're a B2B or a DTC brand, what you should be doing to optimize your monetization strategy.

 

Where does our data come from? 

Here at ProfitWell, our Price Intelligently software combines proprietary algorithms and methodologies with a team of pricing experts who think about this stuff more than anyone else to help companies optimize their monetization strategy. We do this by going out into the market and collecting data from current and prospective customers, having the ability to collect data from everyone, from a soccer mom or dad in the middle of Kansas, all the way to a fortune 500 CIO in South Africa. We then take that data and run it through our algorithms and analyze it in every direction to determine a company's ideal customer profiles, as well as which segments value, which features and which segments are willing to pay more, all in the spirit of determining how a company can use monetization for growth.

 

Spotify's pricing page

Differentiators

So the differentiators are download music, no ads, play any song, and unlimited skips. Super simple and the interesting about that is all of these are very clear triggers within the free plan. So as soon as I'm losing wifi and I want to download a playlist, I can't do that unless I upgrade or there's another ad interrupting me. I'd be fascinated to see the conversion numbers because I think that if they get a target persona or target segment in there, they have to be upgrading quickly. This is almost like a pseudo-free trial to me, where they know that this is annoying enough, probably not the nicest way to put it, but they know this is annoying enough that if you're in their target demographic, you're basically upgrading within 14 to 21 days. And if you don't care about these things, you're probably going to be free forever and you're still monetizing them through ads, which is super interesting.That's the coolest thing about their free plan—they monetize indirectly through advertising, which competitively is something Apple would never do. So let's get into the takeaway.

The first big takeaway, and we kind of alluded to this already, is that Spotify is utilizing what's called forever free. It's kind of like a forever free and a free trial depending on how you look at it from a consumer. I think this is super smart, and the reason is because you get a ton of value without having to pay for anything. You get access to every song in the world. You can use this product free forever, and you're technically monetizing through the ads, right? And ultimately you have these traps and if these traps don't annoy you within those 14 to 21 days, you're just going to keep going. So the big thing to take away here is that you should really be considering freemium. You got to think about freemium as a premium ebook.

You're living in a world where you want to lower the activation energy for that lead to become kind of a premium lead and to be nurtured by, not only your product, but also washed over from your brand. So, I think it's really important thing to consider freemium. There's so many free B2B and B2C products. It's just kind of expected at some level, just like that ebook was expected to be free for a good 10 years in the HubSpot wave.

 

Better bundling analysis
The second big point here is that you, as a business, need to know how to monetize through better bundling analysis. What we commonly see, not only for consumer brands of a Spotify level, but also B2B brands, especially ones that have so many different features, is that it becomes a hodgepodge of throwing everything into the basket and not really considering what should be a differentiable feature, what should be an add-on and what should be a core feature, and anything kind of in between.

You're living in a world right now where bands, or the preferences that you have, strongly become a part of your identity. So, you know, you got Diddy as your Twitter background, you run a newsletter that's Drake thoughts, every single day. This is part of your identity, right? There's a world where, especially if Drake was more of a niche artist and didn't follow the traditional norms of the music industry, there's a world where you would support him through buying more merch, OVO, or maybe by getting a Patreon subscription, etc.

Spotify is in a position to take advantage of this community because they've been in the position of breaking the hold that labels have had on these folks, and being more of a partner to bands and things like that, rather than just treating them like a commodity. They've gotten some pushback because you know, a million plays makes you like no money on Spotify, which is really fascinating. So what they can do is they can not only monetize these bases a little bit better, but they can also live in a world where they can give these folks features to help them better their mission to build their own community with their own thousand or 10,000 true fans. Let's look at the actual data:

 

The value matrix

You're about to see something called a value matrix. Here, we collected data from the group comparing feature preferences and plotted those on the horizontal axis. More valued features on the right ,less valued on the left. We then collected willingness to pay for the overall product and plotted that based on their number-one feature preference on the y-axis. Analyzing data in this manner allows us to determine which features are differentiable ad-ons, core, or commoditized for each segment.

 

Data and analysis

Differentiable features

What's fascinating here is that you have this really stark feature set. Things like fan communication, show event management, merchant management, that all have, not only a fairly strong preference, but also a fairly high willingness to pay. And when you look at some of these other pieces like music distribution and enhanced music distribution, those have some preference, but the willingness to pay isn't there because I think a lot of artists just think they expect it is what it is at this point. And if I'm with a label, they're going to put a bunch of money around my release. And if not, I'm kinda on my own and I'm going to be doing what I need to do.

Value Matrix of Feature Preference and Willingness to Pay (0;00;06;24) (1)

But all of these things kind of in between, I think, are really strong things that Spotify could be doing. Not only monetizing these artists, but also building the community on the Spotify platform that not only brings in the fans more consistently, and to buy more things like merch, which they can take a cut of, or events, which they can also take a cut of, but ultimately, make sure that those bands, most precious asset, are really, really happy with Spotify and not encouraging them to go to their own SoundClouds or those types of things, but encouraging them to stay on the Spotify network. Make it more than just getting listeners, make it connecting to your actual community and your tribe. They own that consumer relationship. So it's like, what else can you bundle around actually giving them the music.

Some folks have tried this. There's so many sites for bands to help with their audience and things, but they're so fragmented. I'm already going to Spotify to listen, right? Why not go to Spotify to check out my Jay Z message board or these types of things? I think the superstars are probably not the ones who are going to use this. They would be smart to, but they already have the distribution power. I think it's the next tier down, you know, the folks who are more indie, the folks who are building a large following, but small relative to the Taylor Swift.

 

Bundling analysis is crucial

On the consumer side, we're finding that they're also missing the mark on a couple of key areas where they could be driving more monetization. One of which is high fidelity sound. So think about those huge audio files. They have Sonos, they have these awesome speakers, probably more expensive systems. They just have these creme de la creme speaker systems. So they have those expensive speakers—they're willing to pay more for it. They they're willing to pay more for higher crisper quality music. They can also tell when the sound quality isn't as good. And that's what's so fascinating is like, I think Title has done this, Amazon has done this as well. I still would probably put more eggs in the bands and podcaster basket that we're talking about.

Price Sensitivity by features -v2 (0;00;05;15) (1)

The other piece that we saw is that they're underpriced on their family plan. They allow up to five users on their family plan. This is something that is huge. I think they're currently priced at $15, and we saw an additional premium of four more dollars that people are willing to pay.

I think that's one of those things that's really interesting—and don't come at me Spotify—so, Peter, Facundo, myself, and I think Jenny and one other person, all use the same family plan paying $15. We'd pay about $25 for it, which is the upper end of this particular range. I think the range actually goes up over $30 here. So, I think the big takeaway for any business out there is bundling analysis is so crucial, especially in B2B, but also in two-sided marketplaces, which is kind of what Spotify has. It's not a traditional marketplace where you're charging one or the other, or charging both, but it is one of those things where they have two sides of this funnel. And I think that there's so much more opportunity on the artist or podcaster side that they have to take advantage of.

 

Membership models are a new stream of revenue in ad-driven businesses

Next up membership models are a new stream of revenue, especially in ad-driven businesses. They're offsetting ad-driven businesses, which I think is so great. You see Substack, Patreon, The Passion Economy that everybody talks about, and  people are willing to pay a lot for access and a direct line to the artists and the products that they have the highest affinity to.

I think you're also seeing this in the media. When Trump got elected, so many people were signing up and it was really funny because a huge group of those people just don't even read the news. They're just supporting journalism. People are realizing that the recurring revenue bundle is ultimately one of the biggest things that you should be focused on to not only improve your valuation, but hedge yourself against revenue, which I think is super important.

WTP - Willingness to Pay Based on Affinity for Artist or Band (0;00;07;00) (1)

The data that we're looking at now is showing the willingness to pay by affinity. So you can see that scaling on the willingness to pay by low to moderate, to strong. You can see the significant premium with people that have a strong affinity for a particular brand. People identify with artists—it becomes part of who they are. You don't need millions and millions of followers. You need like a thousand true fans at $5 to $10 per month. And this data suggests that $10 a month, isn't unreasonable. All of a sudden we're looking at a world where these artists can be hedged, not only in terms of their play revenue and their merch, and all these other things, bu they also get room to breathe and create more art. 

You see these kinds of creators on Twitter. And the kind of passion and creator economy that have these big Twitter followings that are up to like a hundred thousand people, and they might monetize through a newsletter or podcast, or something like that. You see that compared to the following for musicians and artists, and it's complete pocket change. Artists have a huge opportunity to monetize way deeper than just music.

When we look at the value matrix for what people are expecting out of a membership, it's not that different than what these folks are already providing. What you're seeing here, and this is a value matrix basically based on what preferences are inside a membership. You have things like discounts and live feeds that aren't something that are highly valued. You can still provide those things, but things like early access and swag, and it's not that you have to give the swag away for free, it's just access to swag. Drew, what he could do with his Substack is basically provide a Facebook group that you can access. I know Hustle has done that with trends—I think they're also called Trends now.

PPT-S01-E05-Spotify-Edit-v1.00_18_13_15.Still001 (1)

It reminds me of Phish and The Grateful Dead—they probably have the biggest opportunity to have a subscription of some sort, because that's just how loyal these folks are. You should have memberships. You should have groups. You should have communities that you're curating. You have to get really good at this. And it's hard. It's so hard. It can't just be some random Slack group that doesn't get curated.

 

Partnerships get people over the first-click bias

Our last point, the Joe Rogan point. And this is a big one: Partnerships get people over the first-click bias. The better metaphor I think is Uber and Lyft. So I don't know about you, but I'm pretty agnostic. I would use Lyft until Lyft was way too far, and then I would go to Uber, and then I would go back to Lyft, and back and forth. This is like the first-click bias—my first click, that habit of going to Lyft constantly or Uber in the beginning, and then switching to Lyft and then going back and forth. That was something that was super tough to get over if you were the competitor or the challenger within this market.

What's fascinating is that Spotify bought Joe Rogan for such a small amount of money, if you really think about it. He has 180, 190 million downloads per month. I'm sure that's not 190 individual people, but let's say it's 50 million people. If I listen to Joe Rogan, I'm going to have to go and set a Spotify, and if I'm already there, I might as well listen to my other podcasts. I might as well listen to my music there as well. It's not about the money, it's about the users. Apple has already acquired the majority of podcasts users. Now, I need an exclusive thing to break my habit, break that first click, and go to another place. And it's already kind of happened for me because I was like, "Oh, I can't find that Pivot episode, the searching on this podcast sucks." Then I went to Spotify and I was like, "Oh, I guess I could find my other podcasts in here."

I think what's kind of funny is what what Mixer did, which is a Microsoft product that just shut down. They made this kind of move, but with Ninja. I don't think Ninja's following was big enough. He's the biggest streamer in the world. That's not enough to take down a behemoth of a social network. There wasn't necessarily a connection to that first-click bias. People were still going back to Twitch because there are so many other streamers that they were supporting and watching. Use partnerships in the right way, and when you find those partnerships that are going to work, go all in.

 


Pricing recap

 

  • Know who to monetize better through bundling analysis.The big thing here is making sure you understand which features should be differentiable and which features should be add-ons. These types of things are the biggest missed opportunities in most businesses. It's just really terrible packaging.

  • Membership models are a new stream of revenue, especially in ad-driven businesses. Even if you're not an ad-driven business, you should be considering memberships, community, and identity. Even with B2B SaaS products, the amount of people who, for example, use Drift, wear the Drift swag and all these different things. You can't tell me these B2B products don't become a little bit of your identity, and you want to make sure that you're part of that community.
  • Partnerships get people over first-click bias. When you find the right partnership, go all in
     and make sure that it's getting you the right type of usage of your product, or the right value to your product. I think integrations are some of the easiest things to look at for most B2B businesses. If you're in some sort of DTC environment, influencers and things like that are the ones to really help you, but you might want to go beyond sponsored posts and things like that. Ultimately partnerships are a really, really good way to grow, whether it's from a UX perspective or from a straight cash perspective.

 


Who's up next?


Next week we have a darling of the B2B space. In the past five to 10 years, they’ve raised an egregious amount of money. And I don't actually know how to describe their space perfectly. They're kind of in the help desk, inbox management type space. They also do social management. It's a company called Front, and we’re actually happy customers here at ProfitWell. And I think they have really good examples of push pricing of how it can go right and how it can go wrong. There's some really good lessons to learn from on what Front is doing well and not so well, so you can make sure that you get your own monetization strategy back on the right track.

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If you want help with this type of pricing research for your company, feel free to email me  at patrick@profitwell.com or rob@profitwell.com, and we'll make sure you get hooked up with the right people to make sure you're focused getting your monetization right. 


 

This is a ProfitWell Recur production—the first media network dedicated entirely to the SaaS and subscription space.


 
By Patrick Campbell

Founder & CEO of ProfitWell, the software for helping subscription companies with their monetization and retention strategies, as well as providing free turnkey subscription financial metrics for over 20,000 companies. Prior to ProfitWell Patrick led Strategic Initiatives for Boston-based Gemvara and was an Economist at Google and the US Intelligence community.

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