How Review Analytics Can Help Spotify Become Profitable

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Spotify operates a freemium application wherein users stream music for free with some limitations – such as advertisements, limited skips, and non-specific song selection.  Users can upgrade to Spotify Premium to remove the limitations in exchange for a monthly subscription fee to Spotify.  Despite growing to impressive heights, Spotify is not profitable. 

The lifetime value (“LTV”) of a Premium user is the total amount of revenue Spotify expects to earn from the user over their lifetime.  Increasing LTV means more potential profit.  There are three ways Spotify can increase the total LTV:

  • Raise subscription rates
  • Retain users longer
  • Acquire more users
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Raising rates runs the risk of losing users to cheaper alternatives.   Spotify already does a great job at retaining users; their churn rate is three-times less than Apple Music’s churn rate. The LTV of a free user is worthless; Spotify generates 90% of its revenue from Premium users.  This revenue is not enough to offset streaming rights expenses. Spotify must convert more free users to Premium.

We used Stratifyd’s data connector with the Apple App Store to mine over 77,000 reviews for the first nine-months of 2017 and filtered out nearly 55,000 reviews that did not contain any text.  Stratifyd performed an unsupervised machine learning analysis of the review data.  Sentiment is very positive for Spotify and users rated the app 4.20 out of 5.00 stars on average.  The majority of the negative reviews are related to limitations placed on free user accounts, which suggests most negative sentiment towards the app comes from free users.  A custom taxonomy applied to the negative reviews classified the most common complaint themes as follows: 

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  • Advertisements: 1.91 out of 5.00 
  • Limited Skipping: 1.84 out of 5.00
  • Poor Song Suggestions: 1.83 out of 5.00

Spotify will need to abandon the freemium model in order to remove the limitations and generate a profit.  The company should consider requiring a subscription after an initial free trial while phasing out the freemium model.  Spotify currently offers a thirty-day free trial, but users are not required to subscribe after it ends.  Spotify’s competitor, Apple Music, requires a subscription after a three-month free trial. Spotify has tens of millions more users than Apple Music, but the current freemium model fails to adequately monetize them. 

Spotify can form a new marketing plan using Stratifyd’s insights into their user base.  The company may be better off servicing its Premium users exclusively given that free users add little to no value to Spotify.        
 

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Alexandra Ruga