Can Spotify keep their music throne?

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We have an entire generation of human beings that never had to pay for music. And the Napster generation is the only way that Spotify could exist.

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Welcome to Pricing Page Teardown, where the ProfitWell Crew breaks down strategies and insights on how subscription companies from all corners of the market can win with monetization.

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Welcome to Pricing page, tear Down. I'm Patrick Campbell, and I'm Rob Literst, and 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 a month or $15 if you are on the family plan. That's correct. But because Spotify has been number one in this space and basically Amazon Music, apple Music title, et cetera, haven't been able to unseat their reign, I guess is the best way to put it. Yeah, yeah. What's been really interesting is that Spotify is reaching a point where they have all the subscriptions now. They're not gonna reach the point where they have all the subscriptions. They're gonna continue to add subscriptions, but it's gonna start reaching a diminishing return in the world 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 gonna learn today what Spotify is doing well and what they're doing not so well when it comes to their pricing strategy ultimately. So you can use this as a case study to help your business with their monetization strategy therein,

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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 and 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, Kaza, and even Pirate Bay, Exxon, an opportunity to skip to the end and provide unlimited music to anyone with an account for free.

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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. The music industry was clearly behind the paid market innovation curve and was suffering for it. They were trying to hold onto the gatekeeper model of old, even though distribution of music had left the physical realm long ago, the suffering though 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 and 60 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.

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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 fan base attending shows subscribing to Patreon or buying merch. The real threat is from later entrance 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 entrance 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.

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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 then becomes how can Spotify use its position as the dominant force and innovator in the market to go beyond the add-on subscription model currently keeping them afloat, will podcast and monetizing artists fan basis for them be what takes them to the next level? Spotify cannot become Napster, so we're gonna answer these questions by collecting data from current and prospective Spotify customers and we reveal it out coming up next.

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When did you stop paying for music? Ooh. Because notice how I put guilt already automatically within that question. Yeah. I definitely had years, and I hope the statute of limitations has run out. I dunno if years two people for hundreds of millions of dollars. Yeah. For like four downloads. I just remember, you know, you'd buy an album and you were like, oh, I only want these two songs. Yeah. And then you would rip it onto your computer in order to basically put together playlists 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. And I think that when the world of piracy was ahead of the innovation curve, oh yeah. I feel like the music industry lost the moral authority because they weren't going to a place where people actually like wanted to buy the way they wanted to buy.

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

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I don't think that's the play. I think what their approach right now is basically to approach this as an ad network. Mm-hmm. <affirmative>, you either are the unlimited subscription or ads, right? And I guess they could differentiate like 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, you know, how do we get more audio? How do we get you in the app longer? How do we get you away from really the other place that people are listening to audio, which is Apple podcast. Yeah. The number one. 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 gonna talk about in a bit.

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Let's do it. 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. Yeah. And the goal here is ultimately to see what they're doing right, what they're doing wrong and really what the opportunity is for Spotify. And with all those wins and those losses, putting those together into a case study so you can understand in your business, whether you're a B2B or a D two C brand, what you should be doing to optimize your monetization strategy.

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So differentiators are download music, no ads, play any song and unlimited skips. Yeah. Super, super simple. Interesting about that is like all of these are very cleared triggers within the free plan. Exactly. So as soon as I'm like losing wifi, I wanna download a playlist, like, oh, I can't do that unless they upgrade. Oh, there's another ad interrupting me. I would be really fascinating to see the conversion numbers because I think that if they get a target persona or target segment in there, they gotta be upgrading quickly. Oh yeah. This is almost like a faux free trial to me. Definitely. Where, you know, basically they know that this is annoying enough. That's 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 anyways. Definitely. Um, and if you don't care about these things, you're probably gonna be free forever and you're still monetizing them through ads, which is super interesting. Exactly. That's the coolest thing about their free plan is they monetize indirectly through advertising mm-hmm. <affirmative>, which interestingly competitively is something Apple would never do. So let's get into the takeaways.

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So where does our data come from here at ProfitWell, our Price Intelligently products combines proprietary algorithms and methodologies with a team of pricing experts with 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 O 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.

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I think the first big takeaway, and we kind of alluded to this already, is that Spotify is utilizing what's called forever free mm-hmm. <affirmative>. Um, and it's kind of like a forever free and a faux free trial depending on how you like look at it from a consumer. And I think this is super, super smart and the reason is 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 monetized through the ads. Right. And ultimately, like you have these traps and if these traps don't annoy you within those 14 to 21 days, you're just gonna keep going. Yeah. So the big thing takeaway here for, you know, different folks listening right now is that you should really be considering freemium. You gotta think about freemium as a premium ebook.

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You're living in a world where you wanna 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. And so I think it's a really, really important thing to consider freemium. There's so many free B2B and B2C products, it's like, it's just kind of expected at some level, right? Just like that ebook was expected to be free for a good 10 years on the HubSpot wave. 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 that just have so many different features, is that it becomes kind of a, a hodgepodge of throwing everything into the basket and not really considering what should be a differential feature, what should be an add-on, um, and and what should be a core feature.

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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. Oh yeah. Right. So you know, you got Diddy Uhhuh as your Twitter background. Yep. You run a newsletter that's Drake thoughts every single day. And so like this is part of your identity. Right? Right. Yeah. There's a world where especially if Drake was more of a niche, you know, artist and didn't follow necessarily the traditional norms of the music industry, there's a world where you would support him. Mm-hmm. <affirmative>, right? Yeah. And would support him through buying more merch, um, ovo, all those types of things. Oh yeah. You would support him maybe by giving a Patreon subscription, Spotify's in a position to take advantage of this community because they've been in the position of kind of breaking the, you know, 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. Right Now they've gotten some pushback because you know, a million plays makes you like no money on Spotify, which is really kind of fascinating. And 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 on their mission to build their own community with their own thousand or 10,000 true fans. Totally. And if we look at the actual data here, you're looking at what's called a value matrix

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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 base on their number one feature preference on the y axis. Analyzing data in this manner allows us to determine which features are differential add-ons, core or commoditized for each segment.

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And what was really kind of fascinating here is that you have this really, really kind of historic feature set things like fan communication, show event management, merch management, that all not only have a fairly strong preference but also have 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 that much there. Right. Because I think a lot of artists just kind of think they expect it. It is what it is at this point. Yeah. And if I'm with a label, they're gonna put a bunch of money around my release and if not, like I'm kind of on my own and I'm gonna be doing what I need to do. But all these things kind of in between I think are really, really strong things that Spotify could be doing.

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Not only monetizing these artists, but also building the community on the Spotify platform. Totally. 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 like their most precious asset are really, really happy with Spotify. Yeah. And not encouraging them to go to their own SoundClouds or those types of things, but encouraging 'em to stay on the Spotify network. Right. Make it more than just getting listeners make it connecting to your actual community and your tribe. Hundred percent tribe. Right. They own that consumer relationship. So it's like what else can you bundle around actually giving them the music? But some folks have tried this, there's so many sites for bands to help with their audience and things, but they're so fragmented.

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I'm already going to Spotify to listen. Right. Why not go to Spotify to check out my, you know, Jay-Z message board or these types of things. Right. I think the superstars are probably not the ones who are gonna use this. They would be smart too. But they already have the distribution power. I think it's like the next tier down and stuff like that. Like, you know, the folks who are more indie, the folks who like are building like a very large following, but small relative to the Taylor Swifts of the world. Totally. Yeah. So on the consumer side, we're finding that they're also missing the mark on a couple 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. They have probably more expensive stuff than Sonos.

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Yeah. Sonos is bad. They just have these like creme de la creme speaker systems. Sonos has moved into table stakes for audio files and days. Yeah. But um, yeah, so they have those expensive speakers, they're willing to pay more for it. They, they're willing to pay more for higher CRISPR quality music. It's funny cuz they can also tell Right. They can also tell when the sound quality isn't as good. Totally. And that's what's so fascinating is like I think title has done this. Um, Amazon you mentioned has done this as well already. Yeah. I still would probably put more eggs in the, you know, bands and podcaster basket that we're definitely talking about. And the other piece that we saw, they're underpriced on their family plan course. So their family plan, they allow up to five users. This is something that comes up huge. We've been premium Spotify subscribers forever.

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And now I end up seeing Lee's music and it's all like musicals and the Greatest Showman and stuff like that coming through in my stream. And um, definitely kind of weird juxtaposition with gangster app. But uh, there you go. Yeah. I think that they're currently priced to 15. We saw, uh, an additional premium of four more dollars that people are willing to pay there. Yeah. And I think that's one of those things that's really interesting cuz like, and don't, don't come at me Spotify. So Peter Fado, myself and I think Jenny and one other person. Oh, that's amazing. All use the same family plan paying 15, we pay about 25 for it. Right. Which is the, like the upper end of this particular range. I think the range actually goes up over 30 here. Wow. I think the big takeaway for any business out there is bundling analysis is so crucial, so much in b2b but also in like two-sided marketplaces, which is kind of what Spotify has.

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It's not a traditional marketplace where you're charging one or the other. 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. Yeah. They gotta take advantage. Next up, membership models are a new stream of revenue, especially in ad driven businesses. Yeah. They're offsetting ad driven businesses, which I think is so good. Exactly. I mean you see CK Patreon, the passion economy that everybody talks about. People are willing to pay a lot for access and a direct line to the artists, the products that they're most, that they have the highest affinity for. Well I think you're also seeing this in media when Trump got elected, so many people were signing up and what's really funny is like a huge group of those people just don't even read the news.

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Yeah. They're just like 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 like hedge yourself against revenue. Right. Which I think is super, super important. The data that we're looking at now is, is showing kind of willingness to pay by affinity. Mm-hmm. <affirmative>. So you can see that scaling on the willingness to pay by low to moderate to strong, you can see this significant premium with people that have a strong affinity for a particular brand. Yeah. Right. 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. Right. And you know, at five to $10 per month and, and you know, this data suggests that $10 a month isn't unreasonable.

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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, but just like they get room to kind of breathe and create more art. Oh yeah. Which I think is so good. So you see these kind of creators on Twitter, right. In the kind of passion and creator economy that have these big Twitter followings that are, you know, up to like a hundred thousand, a hundred thousand people they might monetize through a newsletter or podcast, something like that. You see that compared to the following for musicians and artists and it's like complete pocket change. Like artists have a huge opportunity to mosi monetize way deeper than just music. When we look at the value matrix for what people are expecting out of a membership, it's, it's not that different than what these folks are already providing.

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Right. Um, and what you're seeing here, and this is a value major, it's basically based on what preferences are inside a membership. You have things like, you know, discounts and live feeds. Those aren't something that are highly, highly valued. You can still provide those things, but things like early access swag, it's not that you have to give the swag away for free, it's just access to swag. Like Drew, what he could do with his CK is basically just like, Hey, here's a Facebook group that you get access to. I know Hustle has done that. Um, with trends. Trends. Yeah. I think they're also called trends now that I realize that Yeah, you're right. It reminds me of like Phish, you know? Right. Like the Grateful Dead, right. Yeah. People just travel around, travel around Grateful Dead and Phish probably have the biggest opportunity to have a subscription of some story.

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Yeah. Because they're just how loyal these folks are. Definitely. And literally just asking, you know, Trey or some of the other folks in these groups like, oh, like why did you do this? Why this set list? Right. Like little things that they're probably gonna answer their fans with anyways. Oh, a hundred percent I think is a really, really big thing to think about. 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. This brings us to our last point. Mm-hmm. <affirmative>, the Joe Rogan point, oof. Joe Rogan. And this is a big one, I don't think we have any data on this, but partnerships get people over. The first click bias, the better metaphor I think is Uber and Lyft, right?

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So I don't know about you, but I'm pretty agnostic. I would use Lyft until like Lyft was way too far. And then I would go to Uber. Right. You know, and then I would go back to Lyft and so back, back and forth and this is like the first click bias, like 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, super tough to get over if you were the the competitor or the challenger within this market. Oh yeah. What's fascinating about it is that basically they bought Joe Rogan for such a small amount of money. If you really think about it, he has 180, 190 million downloads per month. Right. And I'm sure because of the number, like that's not 190 individual people, but let's say it's 50 million people, right?

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Mm-hmm. <affirmative>, if I listen to Joe Rogan, I'm gonna have to go listen Spotify and if I'm already there, I might as well listen to my other podcast and I might as well listen to my music there as well. Right? Right. It's not about the money, it's about the users. Apple has already acquired the majority of podcast 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. Oh totally. Because I was like, oh, I can't find that pivot episode. The searching Apple podcast sucks. I went to Spotify and now I was like, oh, I guess I could find my other podcasts in here as well. Yeah. Like you've got Simmons, you've got Joe Rogan. These are guys that actually move the needle in podcasts. But I think what's kind of funny about it is like basically what Mixer did, which is a Microsoft product that they just shut down. We're gonna do 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 just behemoth of essentially a social network. Right. And there wasn't necessarily a connection to, you know, that first click bias. Like people were still going back to Twitch because there are so many other streamers that they were supporting and watching. Right. Use partnerships in the right way. And when you find those partnerships that are gonna work, go all in.

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Let's wrap up. Let's do it. First up, know how to monetize better through better bundling analysis. Hmm. A hundred percent. The big thing here is like making sure you understand which features should be differential, which features should be add-ons, these types of things. Biggest missed opportunities and most businesses is just really terrible packaging. Next up, 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, like the amount of people who are like, I use Drift, I'm wearing the Drift swag. All these different things. You can't tell me that. Like these B2B products don't become a little bit of your identity and you wanna make sure that you're a part of that community. And lastly, partnerships get people over first click bias.

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When you find the right partnership, go all in on it, all in and make sure that it's getting you the right type of usage of your product. Exactly. Um, or the right value to your product. I think integrations are some of the easiest things to look at for most B2B businesses. Mm-hmm. <affirmative>, if you're in some sort of D to C environment, influencers and things like that are the ones to, to really help you. But you might want to go beyond just like sponsored posts and things like that. Um, we know launched out LA has done this totally really, really well. Yeah. Ultimately partnerships are really, really good way to grow, whether it's from a UX perspective or from a straight cash perspective. Totally.

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Well that's all for this week's episode of Pricing Page. Teardown. If you got value from this, enjoy the episode. Make sure you share it on the social media channel of your choice. We want to get this in into the hand as many people as humanly possible. Cause you wanna spread the evangelism of pricing knowledge. And make sure you're subscribed to pricing page teardown.com and if your business is looking for help with their pricing, looking for some of the data or data like this for your own business and your own customer base, feel free to email me@patrickprofitwell.com or email rob profitwell.com and we'll make sure we'll get you the help you need and make sure you get your pricing on the right track. Who do we have next week? Pc next week we have a darling of the B2B space. Ooh. Uh, darling, actually in the past, you know, kind of five to 10 years raised an egregious amount of money.

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Wow. Um, and they're in, I don't actually know how to describe their space perfectly. They're kind of in the help desk inbox type space. Okay. But they also do social management. It's a company called Front Awesome. And Front is one of these products we use. We're happy customers here at ProfitWell. I think they have really good examples of push pricing, but how push pricing can go right. And also how push pricing can go wrong. And so there's gonna be some really, really good lessons from what front is doing well, what they're not doing so well. So you can make sure that you get your own monetization strategy back on the right track. We'll see you next week. See you next week.