How Spotify Works
It is 2009 and piracy is at an all time high (about 95% of the music that was downloaded in 2008 was being downloaded illegally). In such conditions, where Youtube is blowing up (providing audio+video for free) and “streaming” music is unheard of, how does one launch and sustain a music streaming platform profitably? The answer is twofold: through advertising and product differentiation.
One of the things that got me through 2020 would be Spotify, the Swedish audio streaming and media services provider. Be it the playlists that are literally ‘made for you’, brilliant podcast suggestions or (my personal favourite) the end of the year Spotify Wrapped, the freemium platform is significantly better than its competitors. Which is why I wasn’t surprised to see that when I googled which music streaming app was the best, Spotify came up as pretty much the number one suggestion on all the sites I visited.
So, what is a freemium model? It is a model that’s a potential win-win for both the consumers as well as the producers. The consumer gets to experience some of the product’s features for free and their experience in turn becomes free authentic marketing for the producer. Over the past few years many companies have switched to this model since it is much more effective compared to the ‘one month free’ model. What Spotify has managed to do right however is that it strikes a balance between generating new traffic and maintaining a profitable conversion rate. Which means that the right amount of features are freely available to the users.
Or to put it another way, Spotify has identified what features the user would want to pay (to get rid of). For those that are not the biggest fans of Spotify, I bet the ads on the app could be a reason why. What’s especially annoying about said ads is that they are more often than not about what a source of annoyance ads are. Now, this tells us that it is obviously more important to Spotify that more people use the premium version than promoting other products/services (which also does happen, don’t get me wrong, but just not as much). This, however still doesn’t completely explain why the ads are, well so self-critical instead of just simply talking about the benefits of the premium version.
An alternative to explain this could be the power of problem solution advertising. These are the ads that first acquaint you with a problem and then tell you that their brand can help you solve it. This way, product differentiation becomes apparent and the consumers can clearly understand what they are paying for. The famous Tide commercial where you can never get your clothes clean enough without (of course) Tide or the Reynold’s pen which is better than other pens because it solves the problem of water falling on your page by using waterproof ink demonstrates just this. Spotify does the same thing except, well, they create their own problem.
Now, advertising coupled with strategic collaborations with music labels like universal and warner and a greater reach (which is created when users share their songs and playlists on social media) are some reasons why Spotify is able to retain its status. Considering that Spotify makes most of its total revenue from its premium services and it is now a 5-billion dollar business, it is safe to assume that the ads aren’t going to stop anytime soon.