Spotify just raised its prices for the second time in a year. Customers, including myself, groaned, but will they unsubscribe? Stockholders don’t think so. On Monday, the day the price increase was announced, its stock price rose 5.7%.
Spotify enjoys the highest customer retention of any audio or video streaming service. Just 1.5% of customers canceled in April 2024, according to Bloomberg. Spotify has decided to increase profits by raising prices and reaping the rewards of their extremely high customer retention rate.
How Spotify Built a Loyal Customer Base
1. Comprehensive Music Library
Spotify has almost every song ever. There’s no need for customers to pay for multiple audio streaming services as they do for video. While no one video streaming service offers every show or movie, Spotify offers nearly every podcast, song, and album.
2. Audio-Only Focus
Spotify is dedicated to audio only. All of their efforts are focused on making the best product for listening to audio. Their competitors, Apple and Amazon, primarily make their money through other products and services, treating audio as just a feature in their ecosystem. This allows Spotify to innovate on user experience features.
Some of my favorite innovations include the ever-evolving playlist feature ‘Daylist,’ (seen on the right), the personal DJ powered by AI, and blend playlists with friends.
3. High Switching Costs
Users meticulously curate playlists of their favorite songs over months and years. Personally, I’ve been making playlists since high school, providing me a time capsule where I can see my taste evolve over time. Losing these playlists would be devastating. Once a new user creates a few meaningful playlists, they won’t want to cancel and lose the memories associated with them.
4. Spotify Wrapped
Every year, Wrapped becomes a viral sensation. It’s the greatest organic marketing campaign of all time. This feature provides users with a personalized summary of their listening habits over the past year, including top songs, artists, and genres.
The most effective marketing communication for any business is personalized. However, personal marketing is inefficient on a large scale with low margins due to the time it takes to create catered messages for every customer. Spotify figured out a way to do it, though.
Spotify lets users’ listening habits tell the story of their year. They simply generate a cute summary for users to post on Instagram, resulting in perfect individually targeted, meaningful messaging for every user and free promotion.
Other non-music subscription businesses can’t copy the Wrapped strategy. Imagine Netflix releasing an end-of-year summary, “Yay, you wasted all of your Sundays this year binging hours of nonsense and rotting on the couch!” Or Amazon releasing a Prime recap, “You spent $3,216 on stuff you didn’t need!”
Conclusion
Spotify keeps raising prices, but the company’s customer retention rate and strategic innovations suggest that most will remain loyal. By offering a comprehensive music library, focusing exclusively on audio, and creating high switching costs with personalized features like Daylist and Wrapped, Spotify has built a sticky user base. Only time will tell if Spotify’s recent price increases will cause users to consider other options or only lead to increased profits.
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