Spotify is one of the famous music streaming subscription service platforms all over the world with 433 million users of which 188 million are premium users across 183 countries, they have enjoyed the luxury of a customer base increasing 15% every year.
They not only offer a free music service that has 70 Million songs with 60,000 new songs added daily to the already vast collection but also podcast content with almost 3 Million of them which is one of the most engaging content nowadays.
In the year 2021, they generated a revenue of € 9.66 Billion with a 22% increase in the last year. With innovations and marketing, they have tripled their revenue in the last 5 years.
Yet with all this revenue, they are to record an annual profit for a financial year. In the last 5 years, 2021 was the year where they came closest to breaking even with an annual loss of $ 39 million.
Spotify’s Business Model
A Free Streaming Platform
Nothing attracts people more than something which is for free. Spotify changed the music industry from downloading to a streaming by giving users free access to millions of songs and podcasts. This model generates revenue from advertisements that are played in between the songs.
Convert Users to Premium Ones
Who likes ads while listening to songs? Spotify with its incentives offers, and extensive advertisements have been successful in converting free users into premium ones with a conversion rate of around 45%. These premium users make up 90% of the total revenue.
Customer Retention and Churn
A loyal user is what every platform wants as it increases the lifetime value (LTV) and the amount generated by a particular customer. Spotify has made music personalized for one and all with its Friends mix and blends so that it can retain most of its customers.
Balancing the Books
Spotify is entitled to pay royalty charges to artists which it balances by the premium charges it receives. It pays around 52% of the generated revenue which is broken down as € 3.5 Billion from premium users and € 0.5 Billion from free users like most of us.
The most hated thing about the platform arguably is a key aspect of its business model. Paid advertisements generate a proper chunk of the revenue to balance off for the free users.
Benefits of the Spotify Premium model
You can listen to your favorite songs even on a plane or on the outskirts as the premium offers offline music listening also. You can also download up to 10,000 songs.
Better Audio Quality
Free users listen to songs at 96 kbps or kilobytes per hour whereas premium users get 320 kbps.
Say Bye To Shuffle Mode
The premium version allows users to listen to songs outside shuffle mode while streaming albums or daily mixes.
Spotify is on a mission to make the world its stage. With its unique business model and creativity, they have a long way to go and has years of profit to follow.