Case #5: Spotify's Pricing Strategy

I think it is safe to say that most people in my generation have some experience using an online music player. Popular platforms include iTunes, Pandora, and Rhapsody, just to name a few. One of the most recent new online music players is Spotify. Spotify is a software program that users can download that allows them to stream a huge selection of music right to their computers at home. Before it was available in the U.S., it was taking Europe by storm. It essentially works by having a large collection of music, millions of tracks, that users can search for and play using the free Spotify software. The music is streamed to the users' computers, meaning they do not have to download it. Check out the video below to learn a little more about Spotify.

Click here to check out Spotify's website!

The obvious benefits of Spotify that separate it from its competitors are that the user can choose exactly what to listen to, make playlists, and then share their playlists and songs with friends. The social aspect of Spotify is huge, particularly with Facebook. Check out the video below to learn a little more about Spotify + Facebook:

 

Below is a screen shot of me preparing to share a song that I was listening to via Spotify as a Facebook status update.

Spotify has three different subscription options: Free, Unlimited, and Premium. Although most of its users have the Free subscription, those who do pay for the services more than make up for those who do not. That brings me to discuss Spotify's pricing strategy. According to Anderson's taxonomy, Spotify employs several different pricing strategies. The first of these strategies is "Freemium." This strategy is characterized by the offer of a free version of a product or service that the majority of its users subscribe to. There are also two paid subscriptions offered: Unlimited and Premium. The Unlimited plan costs $4.99 per month and removes the play time limits as well as the ads from thr free version. The Premium plan costs $9.99 per month and adds many more features. Check out the lists below to see exactly what each subscription includes.

The second pricing strategy that Spotify employs is Advertising. After every couple of songs that the user listens to, Spotify plays an advertisement. These ads are usually between 15 seconds and 1 minute in length and cannot be paused or skipped (trust me, I've tried). The companies that choose to advertise on Spotify have some information about the user, so that they can better reach their target audiences. The advertisements only exist in the Free subscription model, and disappear as soon as the user commits to a paid subscription, like Unlimited or Premium. Below is a screen shot I took while I was using Spotify. Although I was playing a song at the time, meaning an ad was not playing, there was still a banner ad at the bottom of the window.

The third pricing strategy that Spotify employs is Zero marginal cost. This strategy applies heavily to online music since there is not much opportunity to make money in that industry anymore. Spotify knows that people are not willing to pay to simply listen to music online because there are so many other places they can do it for free. However Spotify does recognize that people are willing to pay to listen to a huge selection of music without any advertisements, especially when they can take the music wherever they go.

The fourth pricing strategy that Spotify employs is Labor exchange. Spotify users can share their music collections, which is what allows Spotify to have such a huge music collection. Having users share their music collections is very beneficial to Spotify, as it makes their software more desirable to other users. Spotify's social features also benefit from its user's actions. For example, when a user logs into Spotify through Facebook, any song they listen to is automatically posted on their Facebook wall. This lets all their Facebook friends know that they use Spotify and is like free, personalized advertising for the company.

People label it as free, but it’s not – people pay with their time, listening to targeted ads and we’re seeing good results with those.

Daniel Ek

CEO of Spotify

Although I have only recently heard of and started using Spotify, I think that it is a very good product because it lets the user choose exactly what songs they want to play from a huge selection for free. I think that using a combination of pricing strategies makes the company even stronger. Spotify reported in January that it had over 10 million registered users. The company added that 3 million of those users are paid subscribers. That means that nearly one third of Spotify's users have a paid subscription. This proves that offering a free version of the product is a huge strength, rather than a weakness. The fact that there are 7 million users with free subscriptions means that there are 7 million users being exposed to Spotify ads. This provides a huge opportunity for the company to make lots of ad revenue.

Another form of proof that Spotify's pricing strategies are effective is the huge increase in its market share last year. In 2010, the company had a market share of 9.1%. One year later, the company had a market share of 18.7%. This means that Spotify doubled its market share in one year! This shows that the company is growing very quickly and is definitely doing something right.

Although I am fairly new to Spotify, I would highly recommend it! I was a little skeptical at first, as it seemed pointless to me since there are so many other free ways to listen to music. However I recently learned a few things that got me hooked:

• It is very easy to search and find tons of different music all in one spot (saves the trouble of searching YouTube for music again and again for each new song).
• It lets you choose exactly what song you want to listen to (unlike Pandora where you have to listen to whatever it thinks you'll like and limits how many songs you can skip with the free version).
• It lets you share what you are listening to or see what your friends are listening to. (I have used this feature a ton during my time interning for music promotion companies. It is one of the best ways to promote music online now!)

Thank you for reading my blog! I hope you learned something new. Feel free to check out the sources I used below!

Sources:
Wired Magazine
PC Pro
Technorati
Arctic Startup