In this blog I will evaluate how Spotify uses both second and third degree price discrimination.
Versioning is the provision of two different versions of a product to target different consumer segments. This is a form of second degree price discrimination where consumers self-select themselves into a product instead of the firm that segments consumers. A benefit of versioning is that firms don’t need to know consumers characteristics precisely. Spotify implements this type of price discrimination by offering a premium version next to a free version. Users can listen offline to music without having to listen to adds after every 30 minutes with a premium account. Shapiro & Varian (1998) argue that firms can best apply versioning by offering three types of their product as consumers are extremeness averse. This bias is ignored in the two-version strategy (ibid.), as it might cause people to not chose any of the two. As Shapiro & Varian (1998) argue that having three versions increases the likelihood of consumers buying the middle option, wouldn’t it be better for Spotify to implement this pricing strategy? Next to versioning, Spotify also applies third degree price discrimination. They have four different prices for its premium product, that is similar in each different abonnement. Spotify Premium is normally offered for €9.99 per month. Students, users that have to prove they are registered at a university, pay €4.99 to use Spotify Premium for one month. People living together are offered the opportunity to create an account for €12.99 per month (hence, they pay €6.45 per person). Lastly, Spotify offers a family abonnement that costs €14.99 per month. This family abonnement can be used by 6 people. Hence, the price per person is €2.50. The condition here is similar to the Duo abonnement: people have to live at the same address. As mentioned, the product is similar for each abonnement: having a Spotify Premium account. Students living together with at least 3 other people are better off when taking a family abonnement. Since many students meet this condition its family offer isn’t only targeting families and its student offer is actually only targeting students living with at most 2 others. Hence, should Spotify also revise its third degree price discrimination strategy as well? Next to this, as Spotify can’t accurately control whether people actually live at the same place, is this pricing strategy viable at all? Couldn’t they better differentiate the market in another way?
References:
Shapiro, C., & Varian, H. R. (1998). Versioning: the smart way to. Harvard business review, 107(6), 107.
