Spotify's Business Model & Two Fresh Ideas ⚡️

Kingi Gilbert -

This analysis was completed for an assignment as part of a Wharton Executive Education paper I am completing.

Freemium Business Model as seen through Spotify

Freemium is business model that provides a combination of “free” services/products and “premium” services/products.  Spotify offer a paid monthly premium plan that unlocks certain features.  A free user of Spotify is able to:

  • Explore the entire library and core offering on free
  • Explore the user interface on free
  • Receive annoying ads
  • Web browser
  • Faster than Apple Music (don't need to install iTunes)
  • Unable to play music offline on free
  • Unable to play a song immediately on mobile, have to wait for it's rotation in the shuffle play

Freemium Business Model Pros

  • Can easily communicate to and nurture free tier customers to the premium tier
  • Low Customer Acquisition Cost than having to acquire customers externally
  • Build data profiles on free tier customers
  • Potential to acquire free tier customers
  • Can use demand leverage to generate supply from suppliers

Freemium Business Model Cons

  • Cost to maintain service for free users
  • Free tier must be equal to or better than other competitor free tier offerings
  • Need to finely-tune your free tier and premium tier, otherwise  premium tier customers may feel they are unfairly subsidising free tier  customers.

Discussion 1: Ads offset the costs of the freemium service and lower CAC
Spotify  can monetize non-paying free users through advertising on it's  platform, which makes this a very potent marketing tool, it is a cheap  way to advertise and nurture new users.  While indefinite free access is  compelling, it is also a way to ward off competitors such as YouTube  music - shutting the door to the free service would make CAC soar.

Discussion 2: Tuning each tier
Has Spotify  well-tuned the free tier and subscription tier? If customers don’t  clearly grasp what they would gain by upgrading, Spotify will monetize  fewer of them than they could. However, the primary purpose of freemium  is to attract new users, so Spotify has to provide a free service that  is in-line or better than it's competitors YouTube Music, Apple Music.  A  freemium tier is thus highly competitive (and great choice for  customers).

Discussion 3: Generating traffic
The freemium  model should generate traffic and promote to new users, conversion rates  should be balanced with traffic growth. For example Spotify would be  better to convert 2% of 5 million monthly new users, than to convert 30%  of 200,000 visitors.

Perhaps the conversion rates in the freemium business model depend on  the size of the market? That is, if a company have a freemium offerring  for a small market then a higher conversion rate, but for a company  like Spotify with tens/hundreds of millions of users a 3-5% conversion.

Discussion 4: Maintaining conversion rate?
I  guess the question becomes - can Spotify maintain 3-5% conversion rate  over-time? Tough, especially when reaching saturation. How would Spotify  to convince price-sensitive late-adopters and over-the-hillers (on the  adoption curve)?  I would expect conversion rates to lower significantly  as the market reaches saturation.

In the case of market saturation then the freemium product tier would  have to change. The freemium tier would end-up costing the business and  ultimately affecting financial performance. Spotify would need to  optimise their operating costs to achieve improved business performance.

Discussion 5: Acquiring new users

I have some suggestions about how Spotify can convert free customers   into paying premium customers. The idea is a referral idea. While the  current freemium customer may not pay, maybe some of the freemiums  friends/family will convert into a premium customer.  

Idea 1: ⚡️ Referrals & Content Generation
Offer  a time-sensitive 'team-up' referral offer. Kind of like Dropbox but  with a bit of extra social power. Every friend you recommend that joins  Spotify, gives you 3 months free Spotify, so if 4 of your recommended  friends sign-up that's 12 months (1 year) free Spotify.

The free customer would organise four of their friends to sign-up at  the same time and in-turn organise another four. Viral network effect.  Spotify could assist users to reach their target by providing a unique  web-page for each user to see their referral success, perhaps some kind  of fuel-tank graphic or graphic. Advertising could also be placed into  the page.

I believe other supporting 'beta' content sharing features could be launched inside this referral page:

- share playlists with friends and get referral points for sharing playlists
- group playlists
- sale of playlists to restaurants, venues

Idea 2:  🎫  Link-up with live music gigs

How can you improve the music listening experience? The ultimate music  experience is to attend a live-show or a gig.  I think Spotify could do a deal with producers and promoters to purchase 20-500 exclusive tickets for a gig/show in each city. Only premium users get access to the tickets. A special web-page could be added to each users Spotify account for them to sign-up for the tickets.

Both these ideas keep Spotify users engaged on their platform and help generate advertising opportunities in Spotify.