Pricing Page Teardown - Can Spotify keep their music throne?

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Spotify

Music has been a fundamental part of human culture. It has been linked to communication before language was created, and to the formation of early societies. The evolution of the music industry has been closely related to the way music is shared, from sheet music to LPs, CDs, MP3s, and now the cloud.

Spotify is a music streaming service founded in Sweden in 2002. It was created in response to the growing piracy problem, offering unlimited music to anyone with an account for free. This was a challenge for the music industry, which was trying to hold on to the old gatekeeper model. Fortunately for Spotify, the industry was suffering and was behind the paid market innovation curve.

Spotify convinced record labels to receive royalties based on streams, which allowed them to eliminate the underbelly of the industry and compensate the music industry. Today, Spotify has 299 million users in 92 markets and is valued at 27 billion dollars. It has become 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.

Spotify has received criticism for devaluing art and paying smaller artists next to nothing for streams. However, Spotify has also helped many of these artists gain a larger audience. Spotify faces competition from newer entrants like Apple and Amazon who have a stronger distribution leverage. To remain dominant, Spotify must innovate beyond their current ad and subscription models. Will monetizing podcasts and artist fan bases be the solution? We will collect data from 10,542 current and potential Spotify customers to find out.

Spotify's pricing page

Differentiators

The free version of the app includes features such as downloading music, no ads, playing any song, and unlimited skips. However, these features are limited, and to access them, you have to upgrade or be interrupted by ads. The app targets a specific demographic, and it's likely that they upgrade within 14 to 21 days. Those who don't care about the limitations can still use the app for free while the company monetizes through ads. This indirect monetization strategy is something Apple would never do. Overall, the app's free plan serves as a pseudo-free trial and is interesting from a competitive standpoint.

Spotify uses a combination of forever free and free trials to attract consumers. Users can access every song in the world for free, with monetization through ads. The company also uses traps to keep users engaged. This strategy of freemium is becoming increasingly popular in the B2B and B2C markets. It's important to lower the activation energy for leads to become premium and to be nurtured by your brand. Freemium is now expected for many products, just like how the ebook was free for a decade in the HubSpot wave.

Better bundling analysis

As a business, it's important to monetize through strategic bundling analysis. This means distinguishing core features, add-ons, and other features, rather than throwing everything together. In today's world, music preference is strongly tied to personal identity. If a niche artist like Drake breaks traditional norms, people may support them by buying more merchandise or subscribing to a Patreon.

Spotify can benefit from this community as they have helped artists break free from the controlling nature of record labels. Rather than seeing artists as commodities, Spotify has worked as partners with them. Although some have criticized Spotify for not paying artists enough for a million plays, they can still monetize this community more effectively and provide them with features to help achieve their goals of building a strong fan base. Let's examine the data:

Data and analysis

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.

Differentiable features

This product has a clear feature set that includes fan communication, show and merchant management. These features have a high willingness to pay. However, music distribution and enhanced music distribution have a lower willingness to pay, possibly because artists feel like it is an expected service. The label puts a lot of money into their release, but independent artists are on their own.

Spotify could monetize artists and foster a community on its platform. This would increase fan engagement, merchandise sales, and event attendance. Spotify should prioritize keeping artists happy and on its platform instead of losing them to competitors like SoundCloud. It's important to connect with the community and build a strong relationship with the listener. Offering more than just music will help Spotify retain consumers.

Many band sites exist to help with audience building, but they are fragmented. Instead of going to multiple sites, why not have everything in one place on Spotify? This may not appeal to superstars who already have distribution power, but it could benefit indie artists with large followings that are still relatively small compared to Taylor Swift.

Bundling analysis is crucial

Consumers are willing to pay more for high-quality sound. This is evident in their purchase of expensive speaker systems like Sonos. They can discern when the sound quality is subpar. Streaming services like Tidal and Amazon have addressed this. However, focusing on bands and podcasters may still be the way to go.

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.

Several of us, including Peter, Facundo, Jenny, and myself, are on the same family plan with Spotify, paying $15. We’d pay $25 for it. The upper end of the price range is around $30. The key takeaway is that bundling is crucial, especially for B2B and two-sided marketplaces like Spotify. There is a lot of untapped potential on the artist and podcaster side that Spotify should take advantage of.

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

Membership models are becoming more important for revenue, especially in ad-driven businesses like Substack, Patreon, and The Passion Economy. People are willing to pay for access to artists and products they care about. This is also happening in media, where people support journalism even if they don't read the news. Recurring revenue is important for valuation and revenue protection.

This data shows willingness to pay by affinity, with scaling from low to strong. A strong affinity commands a significant premium. A loyal fan base of a thousand true fans, paying $5 to $10 per month, is all that is needed. The data suggests $10 per month is not an unreasonable expectation. This creates a world where artists can be hedged, monetizing through play revenue, merch, and other avenues, while also having room to create new art.

Creators on Twitter with a large following, up to around 100,000 people, monetize through newsletters or podcasts. Musicians and artists have a greater opportunity to monetize beyond just music, compared to the small followings of these creators.

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.

Partnerships get people over the first-click bias

Partnerships overcome the first-click bias. For example, Uber and Lyft - you can use whichever is closer. This bias is difficult to overcome for competitors in the market.

Spotify's purchase of Joe Rogan for a relatively small amount of money is intriguing. With 180-190 million downloads per month, even if they don't represent 190 million individual people, let's assume there are 50 million listeners. If I'm a Joe Rogan fan, I'll likely use Spotify to listen, along with my other podcasts and music. The goal is not just to make money, but to attract users. Apple has already cornered the market on most podcast listeners, so Spotify needs to offer something exclusive to break that habit and get people to switch platforms. For instance, when I couldn't find a Pivot episode on my usual podcast app, I turned to Spotify and discovered other podcasts there.

Mixer, a Microsoft product, shut down after making a move with Ninja. However, despite being the biggest streamer in the world, Ninja's following was not enough to take down Twitch. People still went back to Twitch because of the many other streamers they supported and watched. Use partnerships wisely and commit to those that work.

In conclusion, Spotify has revolutionized the music industry by offering a freemium model that has attracted millions of users. While the company has faced criticism for devaluing art and paying insufficient royalties to artists, it has also helped many independent artists gain a larger audience. To remain competitive, Spotify must continue to innovate beyond its current ad and subscription models, possibly by monetizing podcasts and artist fan bases. Additionally, bundling analysis is crucial, especially for a two-sided marketplace like Spotify. By fostering a community of artists and fans, Spotify can increase fan engagement, add partnerships, merchandise sales, and event attendance.

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