April 8, 2013
Giving consumers access to virtually any song they’d like to hear — at any time and for free — may not sound like a business model tech startups would be quick to emulate. But the truth is that Spotify’s model is focused on more than free streaming. Startups across the board can learn from the company’s strategic product launch.
When Spotify opened for limited public use in 2008 in Europe, it was a blip on the radar. Listeners could only enjoy the tool with a paid subscription, and it was only available in certain markets. After years of setbacks with record labels, funding, and music ownership rights, Spotify finally launched its U.S. service for listeners in 2011. The success of the music streaming service was hard-won, but in a market of ever-changing variables, Spotify’s hold is shaky at best. Still, there are a few key lessons that can be taken from the music disruptor’s success.
Find the Gap in the Market: Your startup doesn’t have to be the first to market; it just needs to find the sweet spot between what is currently available and what users actually want. By leveraging market and industry research, Spotify broke through marketplace barriers by understanding what did and didn’t work. The company was entering a space that was full of tough competitors. Pandora, a leader in the category, provided a certain number of free hours of listening per month (with advertising), but it didn’t allow users to pick a particular song to listen to. Rhapsody costs $10 per month to begin listening, but users could play specific songs and create playlists. This initial cost seriously limited its user base, making it the choice for only serious music aficionados.
So, what did users want? They wanted a social, cloud-based music service that allowed them to listen to any artist or song for free. Spotify worked hard to find a competitive edge by creating a solution that gave both casual and dedicated listeners options, creating a large user base.
Create a Buzz-worthy Launch: Press releases, media stunts, and interviews can help push a product launch, but if you want to be successful, you need to get early adopters and influencers to buy into your product and promote it to their friends.
Using invite-only access to drive momentum, Spotify created a powerful viral trial audience before it launched to the rest of the world. Users had to receive an invite from a current Spotify user. Twitter, Facebook, and other social media platforms buzzed with people looking for invitations to the service. Spotify let its audience help market and create demand for the service organically.
You can emulate this model by searching out those who are in your perfect target market and asking for feedback and suggestions. If early users feel like they are part of the development process, they will be more likely to spread the word.
Use Freebies to Drive Paid Subscriptions: When you offer a great product or service, users will multiply overnight. If even a fraction of those turn into subscription-paying customers, you may have a sustainable freemium model. Spotify has garnered strong revenue generation, despite the fact that not every visitor pays for its content. Its dual-tier model is, in fact, the main driver for its rapid growth. The business model banks on the assumption that more and more users will subscribe over time, motivated by the allure of eliminating ads and getting other perks. Eventually, users will start paying roughly $5 to $15 per month.
Some users may never convert to a paid subscription plan, preferring to tolerate the ads. However, even these users can act indirectly as a key revenue source. They give Spotify the opportunity to mine data, gather info on an opt-in basis, and monetize this information with advertisers, content owners, and other interested parties.
To stay relevant in the future, Spotify will have to continue to launch new models and approaches that resonate with customers. Just recently, there has been chatter that the music-focused service will break into the video streaming industry, competing with companies like Netflix by creating original content for subscribers. Finding new revenue sources and ways to attract a unique audience that is looking to bundle media streaming services — video and music — may be the next step for this constantly evolving music giant. Either way, Spotify will need to continually bring fresh content to its library and provide opportunities for artists to capitalize on additional revenue streams.
Spotify isn’t in the business of free music; it’s in the business of using free music to drive subscriptions, upsell, harvest valuable data, and ultimately, make money. Any startup can learn from these strategic principles to drive the bottom line.
Guest author Kelli Richards is the CEO of The All Access Group and a highly sought-after consultant, mentor, speaker, producer, coach, and author. She and her team facilitate strategic business opportunities in digital distribution between technology companies, established artists and celebrities, film studios, record labels, and consumer brand companies in order to foster new revenue streams and deliver compelling consumer experiences. Kelli is also the author of the bestselling eBook, “The Magic & Moxie of Apple — An Insider’s View.”
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