Everyone knows the platform Spotify. Spotify is a platform where users can browse through various parameters in order to find the right song/artist/album that they want to listen to. Spotify offers songs that they acquire from the license holders of those songs. Spotify pays license holders approximately 70% of their total revenue, based on the number of streams of the song in proportion to all song being streamed on Spotify.
Spotify offers their service in two ways. Either for free or for a monthly subscription, which is called ‘Spotify Premium’. Dividing their services into those two products is a form of differential pricing, which is regarded as ‘versioning’.
On one hand, Spotify offers the free version, which sounds great already. However, the free version lacks some key features in comparison to the premium version. The premium version eliminates advertisements, as those are of great annoyance for most customers. Besides that, it includes higher streaming quality, offline listening and it makes you able to listen Spotify with multiple devices, such as your mobile phone or tablets.
As said previously, Spotify divided their service in two ways. However, I believe that they should adapt an extra product/option by taking the following argument into consideration.
A cognitive bias which is encountered when consumers make purchase decisions is that consumers tend to have extremeness aversion. This occurs when consumers have to make a decision between two products. Due to this bias, people tend to go for the cheap version. An experiment has shown that once you introduce a third version of the product, people tend to go for the middle one.
I think that Spotify’s revenue could grow if they would implement this third option. They could find a middle way where they add some extra features (e.g. no advertisements), but not all the features that their premium option consists of. This way the consumers who tend to have an aversion against extremeness might choose the middle option, and therefore pay a (lower) subscription to Spotify instead of choosing the free version.
Sources:
Shapiro, C., and Varian, H. Pricing Information. In Information Rules: A Strategic Guide to the Network Economy. Cambridge, MA: Harvard Business School Press.
Spotify. (2018). Muziek voor iedereen. Retrieved October 7, 2018, from https://www.spotify.com/nl/premium/?checkout=false
Wikipedia contributors. (2018, October 7). Spotify. Retrieved October 7, 2018, from https://en.wikipedia.org/wiki/Spotify
Hi Jeppe,
First of all, I think it’s an interesting subject and you have applied the material from the lectures well.
Spotify would indeed have a good opportunity in adding a third option to turn the extremeness aversion into an advantage. However, according to Sawers, 2017 Spotify already has nearly 40% paid subscribers. I think that implementing a third and middle option would cause a shift from premium subscribers toward this middle option. Therefore, the overall revenue could be reduced instead of increased.
In my opinion, Spotify would have a better opportunity when they expend the possibility of aggresively bundling their premium subscription with other products. This is might even be necessary because Spotify is already facing rough competition from companies like Amazon and Apple (Hu, 2018). The market share of Spotify would be taken by these firms, because they are already bundling their music content with an enormous amount of other products and services. The big advantage of bundling is that it reduces price dispersion. This would result in a higher total profit of the bundled products of services.
So, I would advise Spotify to start aggressive bundling instead of adding a third option because this extra option would not increase revenue and doesn’t increase Spotify’s market share in the same manner as bundling would do. The company faces hard competition from other big companies and has to come up with an effective strategy. Bundling their product might be a good solution.
Jaron Rijven
414353
https://venturebeat.com/2017/06/15/spotify-announces-140-million-users-as-its-paying-subscription-base-approaches-40/
https://www.billboard.com/articles/business/8464867/spotify-content-bundling-competing-apple-amazon-music
Hi Jeppe,
I remember in one of our lectures, the lecturer was asking how many people use Spotify Premium. With around 90% saying yes, the vast majority of students pays each month to listen to music with good quality, etc. Have you ever heard of Spotify for Family in which multiple people, who live in the same place, can come together to pay much less, only 2,50 Euros per month? I do feel like Spotify gives an array of options to choose from with price-insensitive customers researching on these cheaper options. What do you think?