What Spotify’s December Growth Tells Us About Pricing

Spotify just announced the addition of 2.5 million paying since mid November to reach 15 million total subscribers. This is unprecedented growth not just for Spotify but for the subscription market as a whole. It also comes at a time when Spotify needs the best possible numbers to keep labels on board during its crucial renegotiations. But what is most interesting is what the growth tells us about pricing.

spotify 15 million

Long term readers will know that I firmly believe there is a watertight case for reducing the price of subscriptions. Only about 10% of music buyers spend $10 or more a month on music (across all recorded music formats) and most of those have already been converted to subscriptions. While there is absolutely a case that some consumers can be ‘educated’ to spend more on music, in just the same way cell phones educated them to spend more on telephony, many simply will not because there are such compelling free alternatives.

Spotify Made 9.99 Feel Close To Free 

There are two short term and two long term drivers of Spotify’s December growth:

  • Long Term 1: Student plans – effective discount: 50%
  • Long Term 2: Family plans- effective discount: 50%
  • Short Term 3: Holiday gifting – effective discount: 100%
  • Short Term 4: Holiday 0.99 promotion – effective discount: 90%

Of all of those the 0.99 for 3 months holiday promotion had the biggest impact. There is an argument that customers acquired this way are effectively monetized trialists and it is highly likely a large share, perhaps even the majority, will not continue to pay after the promotion is ended. But that almost misses the point. What the surge in adoption at lower price points shows us is a purer measure of the demand curve for on demand subscriptions, without the distortion of the 9.99 price point. Of course 0.99 is not a feasible long term price point but 4.99 is, or perhaps more realistically for now, 7.99 is.

Some of those trialists will unsubscribe after 3 months, some will forget to unsubscribe and some will decide that 9.99 is actually pretty good value. The net effect for Spotify will be more subscribers than it would have had without the campaign.

Taylor Swift, Labels and Investors

The stellar growth is also intended to catch the eyes of various other vested interests. For investors ahead of a potential IPO these numbers help show that Spotify may have its best days ahead of it. For labels this, ‘conveniently’, creates the best possible numbers for them to consider during contract negotiations. And for Taylor Swift it shows that for all her windowing antics Spotify grew faster than ever. In fact, the wall-to-wall media coverage of the ‘Swiftify’ debacle actually boosted Spotify’s profile and may even have modestly helped the numbers.

2015 will be a huge year for Spotify with the super heavyweights Apple and Google both playing their subscription hands and with growing label concerns about the freemium model. It would be naïve to suggest Spotify will not feel the pressure of those factors alongside the continued growth of competitors such as Rhpasody, Rdio and Deezer. But starting the year with 2.5 million new holiday season subscribers is about as good a start as Spotify could possibly have hoped for.

15 thoughts on “What Spotify’s December Growth Tells Us About Pricing

  1. Your captioning is incorrect. The area you have circled shows the increase in total users, not paying users. According to news reports, http://www.theguardian.com/technology/2015/jan/12/spotify-60m-users-15m-subscribers total users rose by 10 million, while paying users rose by 2.5 million. So the proportion of paying users (roughly a quarter) did not increase at all, despite the massive promotional price cut. Far from showing the price-elasticity of demand, it strongly suggests the very opposite.

  2. The graphic is now corrected (thanks for the catch) but I disagree with your analysis. The growth dynamics of free need to be considered separately from paid. With the exception of the subscription prospects, which are a subset, most of those users simply want free stuff. They are the same as Soundcloud, YouTube users etc. No meaningful change was made to the free acquisition strategy, so that growth in itself requires some unpicking. but paid growth did have some very specific different levers pulled. And we can see clearly that they had very direct impacts on adoption. Subscriber growth hit record levels when pricing was dropped. That points to pricing elasticity.

  3. Paid and unpaid users rose at the same rate. The null hypothesis (to be pretentious about it) is that the same factors were responsible for both rises. I hazard a guess that the Taylor Swift controversy and resulting publicity was an important contributor.

  4. David – if you want to drop me a line at mark AT midiaresearch DOT COM I’ll be happy to share some further insight

  5. Mark, first time poster here, and I thoroughly enjoy your insights in each new blog entry.

    Having said that, David’s point seems logical to me. Spotify is still very much a growing company that is unknown to large segments of the population. Consequently, I can see how proportional growth in the free and paid customer bases could be attributed simply to greater exposure (thanks, T Swift). If it is not the case that similar proportions of willing subscribers to freeloaders exist in the ranks of the still uninitiated, how do those on the free end of the spectrum need to be studied differently? Would such an approach be necessary for folks in other sectors of the music industry who want to monetize hardcore customers (i.e. subscribers) and passive fans (i.e. freeloaders) alike? Any clarification on either point would be appreciated. Thanks for your time!

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  7. You were among the first to note the connection between Spotify’s big numbers and Spotify’s big discounts. You’re right. David is also right to note that paid and unpaid users rose at the same rate.

    You and David are both right because something bigger is going on. Spotify has offered discounts, even 3 months for 99¢, before. Discounts are working so much better now because a basic trend is behind them.

    As I pointed out in my blog post yesterday (with a link to yours, of course), consumers streamed about 24 billion MORE songs in the second half of 2014 than they did in the first half. Streaming music, as you have been predicting, is going mainstream. And, right now, Spotify is the #1 place to find it.

    Spotify is riding the wave. Spotify might be wise to drop its subscription price as a pre-emptive move against Apple and Google. But even a current prices, most of Spotify’s new paying subscribers are likely to stay.

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