‘Freemium’ is the music to Spotify’s headphones

Welcome back explorers! I’m glad that you’ve decided to join us as we continue on our adventure across the digital ocean.

We’re currently docked at a port and the crew are looking for a tavern where they can enjoy a nice refreshing pint. The only problem is the the crew don’t have any music to drink to and little money either. We’ve had some crew sing, play the piano and dance but it just isn’t entertaining them. If only there were an application that would let us stream our music on our PiratePads?

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Who buys physical music these days anyway?

The best thing to come out of Sweden since flat-pack furniture and meatballs. After launching in 2008, Spotify has completely revolutionised the way we as consumers listen to music. Spotify is a digital streaming service that you can download on your phone, laptop and yes, even your PiratePad. It provides consumers with instant access to a library of over 30 million tracks. Spotify is available in 58 countries around the world and currently boasts more than 60 million users, 15 million of those are paid subscribers.

After watching Chris Anderson talk about “the price of free” in e-Business models and reading”How About Free? The Price Point That Is Turning Industries on Their Heads“ by Wharton, I found that the success behind this digital musical revolution is an innovative new business model termed “freemium”. The word is a combination of the two words “free” and “premium”. It describes a business model for internet based companies that offers a free core product to a large group of consumers and sells a premium product to a fraction of its user base at the expense of an extra subscription fee to the consumer.

Spotify found a gap in the market and have thrived using this business model, outperforming other streaming services such as Pandora and Apple Music. Spotify provide easily enticed consumers with access to their full catalogue of music with their free offering, however they are exposed to a stream of constant advertising in between tracks from brands and also have no access to Spotify offline. The premium offering where consumers pay a small monthly subscription cost of $11.99 for a better all round experience, will remove advertisements, enhance the quality of the audio and allow you to access content offline and on demand. Both user groups have access to the same user interface and accessibility on every platform.

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The “Freemium” model helps Spotify understand their customers

Through offering a free product, Spotify are benefitting through really being able to tap into their customers usage and activity behaviour. They are able to identify the different types of users and truly gauge who their market is and what they want from the product. As Spotify explore this they identify different customer usage patterns  (long term, short term, casual, heavy) and can identify those important features for consumers. This helps Spotify choose where to invest in for the premium version – they make premium features through looking at usage behaviour and understanding customers wants. They understand that time is more valuable than money – consumers have invested more in the product and don’t take into consideration the price. The loyalty of the consumers is self evident in their usage and Spotify reward them with new features and time.

Spotify are able to track consumers music preferences, social activity with friends and location to determine their usage patterns. Their Browse function allows consumers to create playlists, share music with friends, stay up to date on concerts, new releases and artist information and have access pre generated playlists based on their music preference, activity or day of the week. Spotify help consumers discover new music through ‘Discover Weekly’, a feature that tailors a music experience based on your music preferences, notable events or the hot hits on the radio. For example, on a Sunday morning consumers may be looking for a “lazy Sunday morning” kind of playlist or on a Friday night they be looking for something a bit more upbeat and “party like”. Only a recent innovation it has proved extremely popular with consumers being provided a personalised music listening experience. This idea of understanding their consumer helps Spotify tailor a product to their demands and converting those free user to premium users.

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Tackling the piracy epidemic 

Much like Uber and Airbnb, Spotify is disrupting the music industry with this business model. Spotify have a huge millennial following that have grown up never having to purchase music legally and therefore have always lived in a world where piracy is the norm and consumers aren’t prepared to pay for products that they can seek out for free. When consumers are presented with a legal alternative, they are less likely to pirate music illegally.

The idea behind Spotify using the “freemium” model is more about access instead of ownership and through providing a social model (sharing music with friends) consumers are attracted to this prospect. Spotify strives to restore lost value in the music industry by converting music fans from these illegal formats (e.g. illegal download services) to the paid streaming format, which produces far more value per customer. Hear what pop superstar Ed Sheeran has to say on being “the most pirated act” in England here.

Giving back to the music industry

Spotify pay 70% of the revenue they receive from advertising or subscription fees to royalties and supporting artists and companies who hold the right to content. To date, they have paid more than $3 billion back into the music industry. That’s a lot of gold treasure!

Spotify payout based on a “per stream” count to rights holders of between $0.006 and $0.0084. This model has come under much debate with major global artists such as Taylor Swift and AC/DC withdrawing some, or all of their music from the platform due to the  misconceptions around the value that Spotify returns.

However, for many others it provides a way to reach new audiences through recommendations and playlists and gain royalties from listeners who they would previously have not received any revenue from.The platform also generates awareness for artists which can lead to purchases of concert tickets, merchandise or CD’s away from the online platform. Take a look at how little known DJ Major Lazer’s track “Lean On” became the #1 most streamed track on Spotify and heralded him into artist royalty.

Monetising the “freemium” model 

Spotify has developed a range of innovative advertising formats to build its revenue, mainly from its free subscribers. Spotify have guaranteed revenue through its paid subscribers and also entice free subscribers with special introductory offers (3 months for $0.99) or enticing advertisements at the right time. The majority, those being the free subscribers are exposed to a number of advertising models from both Spotify and brands alike in these formats:

• Audio Ad – A cross-platform, unavoidable format comprised of an audio spot, cover art, and clickable campaign name.
• Display – Leaderboard ads in the Spotify player are served when the user is interacting with Spotify.
• Homepage Takeover – Block out a full day for your brand on our Homepage.
• Branded Playlist – Custom user-generated playlists with brand logo, custom text, and optional link to your campaign.
• Sponsored Session – Users choose to watch a video to receive a 30-minute, ad-free session.
• Video Takeover – Sponsor the ad break experience with video and display.
• Advertiser Page – A microsite seamlessly integrated into the Spotify player. The Advertiser Page can contain practically any content you’d find on a webpage, including videos, clickable images, blogs, news, links, and comments.

(Spotify Case Study by David Chaffey, 2015) 

Source: Advertisement, Premium & Happy, McCafe

Brands want to cash in 

Spotify has never launched a TVC, print or radio advertisement and have relied solely on PR, WOM, events, social media engagement and collaboration with brands. Spotify has developed other features to add to the value of their central music service which has also given opportunities to spread awareness of the site through co-marketing and events such as #SpotifyHouse. Brands and artists want to work with Spotify due to their incredibly large consumer base and the influential nature that their product has over the millennial market with the average user spending 148 minutes on Spotify across each platform daily. Online retailer ‘The Iconic’ did simply that:

Spotify campaign for The Iconic

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One example of a campaign run on Spotify was for the ‘The Iconic’ and more specifically wanting to create buzz and reach their target demographic through the platform. Spotify decided to display The Iconic’s “Spring Racing Fashion” ad campaign ran across desktop, web and mobile utilising audio and companion banner ad units to reach female Spotify users under the age of 39. The impact:

• 58% of users said they were likely or very likely to visit The Iconic website after seeing the campaign—26% above the Spotify benchmark.
• 48% said the campaign increased their interest in The Iconic, which is 118% above the industry average.
• 44% said the campaign positively influenced their perception of the brand, which is 46% above the industry average. *The overall number of survey respondents who believe The Iconic and Spotify go very well together increased by nearly 20% after the campaign.

(Interquest, 2015)

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The Future of Spotify and the “freemium” battleship

While embracing the “freemium” business model for Spotify has been a huge success thus far, it is evident that it is vital to adapt your digital business models with advancements in technology and innovation. In the future it will be exciting to see how Spotify use this model to continue to revolutionise the music industry…perhaps streaming music videos and concerts could be next??

There is no doubt that new competitors will enter the market on the back of Spotify’s success and existing competitors will get stronger so I feel like the biggest challenge for Spotify in the future is continuing to innovate its product and provide enticing features that will convert free subscribers into premium users. I also believe that artists will begin to realise the enormity of Spotify and its influence on the industry and begin to demand more royalties and in tern will provide exclusive content (e.g. Spotify Sessions, exclusivity to play that artist one one platform) to all streaming services as a new source of revenue for  both the artists and Spotify.

As physical CD sales continue to decline and a digitalised world of streaming and downloading grow where consumers are granted free access to content that they otherwise would of paid for, will undoubtably call for restrictions on streaming in the future. Content offered to free users may be stripped back and royalties paid to artists will most probably be regulated.

Do you think that restrictions on streaming in the future could potentially disrupt the success of the Spotify platform?

Below is an interesting Q&A with Spotify Managing Director (Australia) Kate Vale on Spotify and how it’s making waves in the digital ocean.

Until we set off for our next adventure across the digital ocean,

Benjamin Deville