Spotify needs to adjust business model to remain intact

As the macroeconomic crisis carries on, subscription business models are becoming increasingly popular throughout the private sector. Despite the proliferation of subscription services, not all companies are experiencing success with their existing methods and some may need to make adjustments to meet evolving customer demands.

Spotify is one these companies. A new report by PrivCo noted that while the popular streaming music service has garnered significant attention during the past several years, it is not making as much profit as it should.

The report revealed that Spotify's revenues in 2011 grew 151 percent from those in 2010. Unfortunately, nearly every dollar earned went toward royalty payments for musicians.

Adjusting business models to meet demand
"Spotify's 2011 results indicate that drastic changes must be made quickly to its business model in order to generate growth while actually improving operating margins so that break-even, let alone profitability, is somewhere, anywhere, on the horizon," said Sam Hamadeh, the founder and CEO of PrivCo.

The current business model means that with nearly every new member added, Spotify is losing profit, suggesting the company needs to reevaluate its subscription and/or royalty strategies. The report noted that there is a one-to-one ratio for every dollar that enters and exits the company's hands due to licensing and royalty fees.

"Either the online music royalty payment model to artists and music companies needs to change, which is highly unlikely in the near term given that digital royalties are record companies' only growing revenue stream, or Spotify needs to ASAP introduce a tiered subscription system, as opposed to its current flat monthly fee model, which is clearly a broken business model," Hamadeh said.

Tiered subscription models are an important consideration for any company competing in the ever-expanding subscription commerce industry, as they enable companies to retain customers more efficiently and provide a more consistent recurring revenue stream. As a result, firms can stay on pace with rival firms in the evolving industry, supporting long-term growth and development.

Decision-makers should also consider leveraging an innovative subscription management platform that provides executives with the ability to make business changes in real time. In doing so, executives can be sure their business meets customer demands, regardless of macroeconomic conditions.

About the Author

Editorial Team

The Forrester Wave: Subscription Billing Platforms, Q4 2015

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