Here’s Why The Music Industry Needs To Dump Non-Discretionary Pricing

Spotify’s 2015 UK accounts painted a vibrant picture with both profits and above average Average Revenue Per User (ARPU). However, a little caution is required before assuming all the answers to the streaming market’s woes can be found here. Firstly, only a portion of Spotify’s costs are based in the UK. For example, much of the (more highly paid) exec team is in the US and much of the development team is based in Sweden. Such are the vagaries of financial reporting for multi-territory companies. More importantly though, is Spotify’s higher UK subscriber ARPU (€6.47 per month compared to €5.20 per month globally according to the ever insightful Music Business Worldwide). On the surface this is clear success (and indeed the UK may well have a higher paid-to-free ratio). However, the main reason for the ARPU difference is the music industry’s fixation with non-discretionary pricing. 9.99 is 9.99 in the US, the UK and the Euro zone, even though each of those currencies have very different values. Especially now post-Brexit referendum.

subscription pricing

At current exchange rates, the Euro Zone €9.99 is equivalent $10.86 and the UK £9.99 price point is equivalent to $12.18. Thus Euro Zone subscribers are paying 9% more than US subscribers while UK subscribers are paying 22% more. What makes matters even worse is that US per capita GDP (a measure of relative wealth of the population) is 55% higher in the US than in the EU and 27% higher than in the UK. So in effect that means a combined pricing ‘swing’ of 63% for the US compared to the Euro Zone and 49% compared to the UK.

In short, European subscribers are getting doubly hit by the music industry’s insistence on non-discretionary pricing for music subscriptions. While there are a host of commercial factors that can be cited in favour of the approach (e.g. it helps mitigate against currency fluctuations) there is zero customer value, unless of course you happen to be a US resident consumer.

Regular readers will know I am a long term advocate of a more sophisticated approach to subscription pricing (e.g. mid tier products and super-premium options) but before we get there, a first step should be to ensure that European music fans get a fair deal compared to their US peers. Or of course, we could try the alternative: increasing US subscriptions by 63% which would mean a $16.32 price point. Sounds crazy right? Exactly…

6 thoughts on “Here’s Why The Music Industry Needs To Dump Non-Discretionary Pricing

  1. Hi Mark you’d have to either add sales tax on top of $9.99 or take VAT off the €/£9.99 before comparing, wouldn’t you?
    €9.99 without 20% VAT is €8.33 ~ $9.10 i.e. lower than the US, For the UK, £9.99 becomes $10.12 ex-VAT (today’s spot rate) – and tumbling downwards,

    Then, re: GDP/cap, well, the repartition of GDP in the population is much worse in the US than in Europe (the 1%, etc.).

    So while I agree that pricing may be a bit rigid, I believe the main issue is that people are so used to 9.99 (started with Rhapsody in 2002!) that any (unilateral) move up is likely to provoke massive swings in subscribers (high price elasticity), which is not the case of many other goods like broadband, petrol or Marmite.

  2. The VAT issue is not a user issue., it is a business issue. Sales tax rates are local cost of business factors. There is a choice to either recalibrate local business operations or to penalise the user. All that European users feel in their wallet is that they have to pay a higher rate. So it is a choice between tweaking commercial models and serving the user, or not tweaking and penalising the user.

  3. Comparing the US with the EU in terms of Per Capita GDP is questionnable as the European countries are very different from one another. Eastern Europeans countries have lower Per Capita GDP… and lower prices for a month of streaming! => Deezer costs €6,99 a month in Romania, Estonia, Latvia, or Lithuania, and the equivalent of 4,62 in Poland or 4,84 in Hungary….

  4. JSA – thanks for your feedback, however you’ll note that the text in the blog specifically refers to Eurozone, not EU. The Eurozone consists of 19 EU markets, none of which are in your list of CEE countries. In the Eurozone subscription pricing is typically €9.99. The Eurozone’s per capita GDP is $38,341. I should have used this value but at the time of writing I didn’t have access to it. Using the Eurozone per capita GDP the same broad argument applies. The total pricing swing would be 47% instead of 63% and the revised US subscription price would be $14.69.

  5. I could never understand why they say $9.99 and not $10.00. Makes me suspicious. Like they’re looking down on me. That in itself is a clue that the whole thing is a ripoff.

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