Understanding the Spotify Business Model

The Spotify business model is a hybrid of the subscription services business model. Listeners can download Spotify software or their app and listen to free music, but with interruptions for advertising. They can also choose to subscribe to a premium account for a fixed monthly fee to remove the ads and have offline availability to specific music they like to hear on their playlists.

For Spotify to be able to offer this service, they must pay for licensing fees to distribute the music to customers. In return, artists with music on Spotify are receiving a royalty for every stream that is heard. Although the overall amount is not very large, it is an improvement over the torrent streams that were producing no revenue for artists.

The subscription model for digital music is exploding in growth, seeing double digit increases when the music industry as a whole is struggling to maintain its current level of revenues. That’s why these lessons learned from the Spotify business model are so important. They are increasing revenues when everyone around them is decreasing their prices in a desperate attempt to maintain. Here’s how they are making that happen.

1. Mass Marketing Can Still Work.

If you’re big enough to play on the world stage, then you’ve got the chance to find massive success. Each region requires a separate licensing agreement to allow Spotify to broadcast music to customers in that area. This means the company is paying multiple fees for access to the content that they are then distributing to others for a higher fee. They profit off of the markup or from their advertising sales and the customers of Spotify feel like they’re getting a good deal, so they stick around for more.

Not every business model benefits from mass marketing, but with the right product at the right price point, it will work. You can’t beat the value in giving people legal music for free.

2. It Encourages Exploration and Growth.

Maybe the most exciting thing about the Spotify business model is that it encourages people to explore new artists and songs. Because there is no limit to the subscriptions that are offered, customers of Spotify can listen to whatever music they want at any time they want. This is true even on the free accounts. With unlimited access to millions of songs, artist discovery becomes a big part of the Spotify existence.

This discovery method benefits the music industry in three key ways.

1. It allows for artists to develop a wider fan base because their music can be tried before a purchase is made.
2. It gives the independent artists without representation equal footing in the music world because their EPs or LPs are right alongside those of major recording artists.
3. It provides a fairly risk-free way of testing out new music theories or concepts on customer segments without the risk of producing and distributing a full album.

The added discovery provides more artists with opportunities to create music, which gives Spotify the opportunity to stream more music. It’s a virtuous cycle that has a lot of strength to it.

3. Spotify Helps Businesses Be Able to do More Business.

Playing the right music in the background of any shopping experience will help people stay 35% longer at a business. This includes service-based industry experiences, such as restaurants as well. Playing the wrong music will cause people to leave 44% quicker. This is why Spotify is an essential component for every business. By streaming the right mood and tempo, a business can increase the likelihood of a sale because they’re extending the shopping time.

The Spotify business model includes a specific business service within certain regions where the premium subscription has a few extra perks. Businesses can schedule out a full week of music in just a few minutes and schedule in the streams so owners don’t have to worry about what an uncontrolled radio station might play.

4. People Love Instant Gratification.

The music industry has been on the decline since Napster came around in 1999. Album sales have been cut in half over the course of the last 10 years. For some, the all-you-want business model of Spotify is the last dying breath of the music industry before it is forced to transform itself into something new. For others, however, Spotify is considered a savior of the industry because it is bringing in revenues from over 50 million subscribers in nearly 60 countries.

There is no denying this truth: people love being instantly gratified and the Spotify business model does this very well. If a subscriber wants to access an album or a song from a preferred artist, all they’ve got to do is find it on the service and click “play.” This even works on the free tier. Spotify took scarcity out of the music industry and created abundance. In that abundance they are able to find a lot of profit.

5. Being Interactive Helps to Create More Streams.

One of the most unique components of the Spotify business model is the fact that the entire platform is interactive. In some ways it’s a music-based social network. Friends can follow other friends and even see what they’re listening to at any given moment. People can follow artists if they want and be notified of when new music drops.

Yet even though it is its own social network in many ways, it is fully integrated to other social networks as well. People can link their Facebook account to Spotify and instantly share in a status update what they’re listening to at that very moment. The link will allow all of their friends to listen to that song as well, even though who don’t have a Spotify account, and this allows even more streams to play because people really can share music for free.

6. Custom Recommendations Build Loyalty.

When Spotify first came to the American internet in 2011, the recommendation system that it had would be considered poor at best. If you listened to Boston, you might get a recommendation to listen to Slayer next. Sometimes the recommendations were bad enough that they drove listeners off of the platform for good. If you’re listening to Christian praise music from Chris Tomlin on Spotify radio and the next song is Nelly singing about taking clothes off because it’s hot in here… let’s just say that the needs of the customer segments weren’t being met.

That all changed in 2014 when Spotify invested into an artificial intelligence system produced by a company named Echo Nest. Now listeners get a consistent experience if they’re listening to Spotify radio that is automatic and much more customized. This creates a level of customer loyalty within the subscribers because it shows that the agency is willing to work on creating relationships with their customers.

7. It Is Important to Focus on the Small Things.

Within the Spotify business model is a saying: “We’re not in the music space. We’re in the moment space.” The goal of Spotify is to create a system that is responsive to moods, activities, and experiences. If you’ve just finalized a divorce, do you really want to listen to the song that was played at your wedding? Or if you’re working out, do you want to listen to slow ballads while finishing up the last mile on the treadmill?

By focusing on the small things within the Spotify experience, the company is able to create a large following that feels connected to the service. People are allowed to pursue their own interests on the platform and this allows them to have a custom music experience that is personally nuanced. This is what causes customers to subscribe.

8. You’ve Got to be Better Than the Rest.

When the Spotify business model was being formed in 2005-2006, there was still active piracy on the internet. Apple had brought iTunes to the market and allowed people the cherry pick the songs they loved off of an album so that the entire thing wouldn’t need to be purchased. In order for Spotify to succeed, they’d have to take an extra step beyond these services to provide a better experience.

The lesson learned here is simple: if a product or experience is not better than the competition, then the competition is going to win most of the time. With Spotify, it feels like an iTunes platform and that the music is already owned, even when using Spotify Free. Yet downloaded music is also accessible through Spotify, so there isn’t a loss in terms of the older downloads someone may have.

9. It’s Everywhere.

The average life cycle of tablets, smartphones, and PCs today is 2-4 years. In the past, people would need to sync their downloaded content to the new computer in order to keep it or pay for cloud services. With Spotify, none of that is necessary. Users just download the software on their new device and login. It’s also available on all of these devices, which means Spotify can go anywhere that someone may need to go.

The Spotify business model proves that subscription services in the music industry are highly profitable. These lessons prove that any business can benefit from the lessons that Spotify has sometimes learned the hard way.