Discuss the digital growth strategy of Spotify
In this post, we will discuss the digital growth strategy of Spotify which has helped the company achieve superior growth, build a distinct audio streaming brand, achieve a solid competitive advantage and maintain its market leadership.
Spotify is the world’s largest music streaming network with a strong global presence. The company is based in Luxembourg, Sweden and offers its services across 184 countries and territories. Compared to several of its smaller competitors, the company has a strong presence and enjoys stronger brand awareness in most corners of the world. Apart from its leading competitors including Apple Music, Amazon Music and YouTube, most other rivals are lagging in terms of brand awareness, user base and market penetration.
Spotify did not remain limited to the Americas and Europe but expanded globally in the other corners including Asia and Middle East. It is also a reason that it found more growth compared to its smaller rivals. While its market share has declined in the recent years with the rise of several new brands, its user base has grown at an impressive rate. The company has also experienced solid improvement in its financial performance in 2021 compared to 2020.
However, Spotify is operating in a challenging and highly competitive industry environment. It is operating against players like Apple, Amazon and Google which are considerably larger firms in terms of resources and capabilities. To maintain its competitiveness, spotify spends a major sum each year on research and development. It has also established a company culture that fosters innovation. There are still several challenges related to growth before Spotify including challenges that are technological or legal in nature. Operating and achieving success in an intensely competitive environment requires Spotify to maintain a strong focus on innovation.
One of the key reasons that Spotify was able to achieve superior growth compared to the other industry players is its large collection of songs. The company has supplemented its collection of songs with a vast collection of podcasts (around 3.6 million). It also made several acquisitions to augment its competitive strengths and offer a superior listening and podcasting experience to its customers.
Instead of using a premium subscription model, like Netflix, Spotify has adopted a Freemium business model. A freemium model is a mix of Free and premium in which users can access the services offered by the company for free (limited compared to premium subscribers) and gain increased access to the same services or complementary services with a subscription. It offers ad-based services to the free users which means the free users watch ads for using the platform. The company also offers premium services for which the users pay a monthly subscription fee to gain access. Most of its premium subscribers are the free users having converted to premium users. The company invests in advertising to convert free users into premium users. Its premium users are the larger source of revenue for the company compared to the free users. Currently, its user base includes more than 400 million MAUs (Monthly Active Users) of which around 220 million users were free users (as of end 2021). Its user base has improved substantially over the last two to three years. Over a 6 years period, the company has grown its user base from 100 million to more than 400 million.
Spotify is an ambitious company and aspires to grow its user base to more than one billion and it could possibly achieve the target given its large collection of songs which only Apple Music can match and the free services. However, it is not only the large collection of songs driving all the growth for the company, but it has also formulated a digital growth strategy to support its growth over the coming years. It is true that Spotify has the largest user base of all the audio streaming networks and its market share is more than double what Apple Music or Amazon Music currently hold individually. However, that does not reduce the growth and competition related pressure on the Luxembourg based audio streaming brand. Spotify has not just managed to survive, it has created an outstanding business model that is unique as well as powerful and can be a lesson for millions of digital startups globally.
Here are the main components of Spotify’s digital growth strategy which have enabled the company to achieve superior growth over the past several years.
- Multiple revenue streams for maximum market reach:
- Innovation to improve user experience:
- Acquisitions for business expansion
Multiple revenue streams for maximum market reach
Spotify generates its revenue from two sources mainly. The larger source of revenue for the company are the paid subscriptions. However, it also generates revenue from advertising from its free accounts. The company pays higher attention to engagement metrics since the more the users return the higher are the retention rates.
The Freemium model Spotify has adopted offers a dual benefit. The free subscriptions are like entry channels for users. They are populated with advertisements and on the other hand, the premium subscriptions bring recurring revenue. According to the Chief Financial Officer of Spotify, Paul Vogel, around 60% of its subscribers have come through the free channel which means they signed up first for the free accounts and then converted to premium subscribers. Spotify has continued to invest in its advertising business. Initially, the free accounts were there mainly to supplement the income from the premium accounts. However, now it is like a standalone business that it still growing. So, while the company generates advertising revenue from the free accounts, it is also its largest source of premium subscribers.
Technological innovation to improve user experience:
Spotify is known for its curated playlists which are on of the leading factors driving higher user engagement and retention. It is also one of the primary attractions of the brand and Spotify is among the earliest to use technology to create such curated lists apart from Netflix. It uses three types of recommendation models including Collaborative filtering models, Natural Language Processing Models, and Audio models. However, its recommendation model or the curated playlists are not just drivers of higher user engagement, retention and popularity, but its smart algorithms are also its main source of competitive advantage for the brand.
The three leading rivals of Spotify including Apple, Amazon and Google. To perform in the market against such tough rivals, a brand would not need to create just something better but something that is substantially better. In 2021, the company made in app lyrics available to all its users globally. The feature had previously been available to users only in select markets. However, the reason that the company did not instantly launch the feature worldwide was that it needed to test the feature for factors like user engagement. Since, muser preferences differ by geographical region, something that is preferred in the UK might not find as popularity in the East. Once the company was sure that the feature could drive higher user engagement across all the markets, it released the feature to all the users across the globe.
Spotify invests heavily in research and development. This expenditure has continued to grow at an impressive rate as the company’s financial performance has improved. This is an essential expenditure given Spotify is going up against the top three like Apple, Amazon and Google. Maintaining its leadership position and retaining the competitive advantage require the company to maintain a heavy focus on R&D.
Opening new lines of growth through acquisitions:
The company has also made several acquisitions in its history and while they have augmented its competitive strengths, these acquisitions also enabled it to expand into new lines of business. Initially, its acquisition of Gimlet and Anchor which it made in 2019 was considered risky. However, with time the investment has started paying off. The world of podcasting has seen little innovation and that’s why these acquisitions marked a remarkable change.
The podcasting world had remained stagnant for around twenty years – a simple RSS feed. However, just like its music business where the company uses the smart algorithms to improve user experience and providing recommendations, the company has been able to improve the podcasting experience and drive user engagement high. Now, it offers more than 3.6 million podcasts on its platform.
Apart from Gimlet and Anchor, the company made more acquisitions recently related to podcasting which include Parcast, Megaphone and Podz.
However, the company has also made more acquisitions including Findaway an audiobook distributor. Reportedly, it paid $119 million in cash for this acquisition. Another key acquisition by Spotify was Greenroom, a Clubhouse rival. Spotify Greenroom has been renamed Spotify live.
A few last words:
There are several reasons that Spotify has seen higher success compared to its rivals including its focus on innovation, user loyalty, and among other factors an excellent digital growth strategy. Spotify’s global success is also a result of its freemium business model which has helped it penetrate markets globally. The freemium business model offers a dual benefit. It generates advertising revenues for the company and also serves as a gateway to bring premium subscribers onboard.
Spotify is pitted against industry leading players like Apple, Amazon, and Google. Despite the intense competition in the industry, the company has seen excellent growth and its user base has increased to above 400 million from 100 million within a span of 6 years. It is the era of digital technology and companies are making heavy investments in innovation to build growth momentum and improve user experience. Among other things, the company is also investing in building new channels of growth and it has successfully been able to grow its attractiveness as a music streaming and podcasting network. Spotify made several acquisitions in its history that helped it augment its competitive strengths and achieve a superior competitive advantage.
Spotify’s smart algorithms and its recommendation model among the most critical factors that are driving higher conversion, increased user retention and loyalty as well as a superior brand image. The company was also among one of the earliest players to adopt such an innovative recommendation model. Technology is driving the brand’s growth worldwide and while several of its smaller competitors are limited to just a few markets, the company has successfully achieved global growth by combining several benefits that drive higher popularity and attract more users. Spotify aspires to build a global user base of more than one billion. Based on its past performance, the company might make it possible. However, it is operating in an intensely competitive environment and its sustained focus on innovation is the most crucial key to robust growth. Instead of imitating the business models adopted by the other brands, Spotify created a model that could help it achieve higher success in the longer term. The company has been able to improve its profit margins by adding podcasts to its existing collection of music labels. Another important thing is that competition has increased with technological advancement and therefore old models of growth do not work any more. Innovation has become critical but user experience is also of paramount importance for brands expecting to achieve the same growth as Spotify.