If we look at major roll outs done by Spotify in last years, we can see a theme: Spotify Wrapped, Song Psychic, Discover Weekly, MySpotify, experiments with TikTok-style scrolling. Based on that list, we can assume that Spotify is really focused on increasing personalisation of their product. I would like to understand why, and I will share my conclusions.
Business model
Spotify operates their business in two segments: Premium and Ad-supported. Premium includes single paid accounts and Family and Duo plans. Ad-supported accounts include free, limited plan.
That business model represents some issues. In order to grow, Spotify needs to constantly add more Users at the top of the funnel but also retain as much Users as possible. That sounds very simple. The problem is that Spotify has limited space to manoeuvre as far as churn reduction goes. For the needs of this article, I will leave the accusation part out of the picture.
Churn
Most often listed ways of reducing churn are enhancing customer service, upsell and cross sell, high quality product and stickiness.
Customer service is very costly given the amount of Spotify’s Users and the fact that this is B2C service.
In healthy organisation upsell and cross-sell should make up an average of 20% of revenue. For Spotify that’s difficult to achieve because of limited subscription plans. Growth of share in revenue of Family and Duo plans is important, as indicated by including growth rates of these two plans on second slide of the most recent Shareholder Deck. However, absolute numbers of revenue are nowhere to be found. Spotify is also rolling out audiobooks, which comes with additional subscription plan for US Users, and that will present up-sell possibilities.
Given Spotify’s product maturity, further improvements in product quality are probably difficult to achieve.
So, we arrive to the stickiness. In order to increase ARPU, we can cut costs or increase income. As I said, I will leave cost side out of the picture in this article. With limited upsell abilities, Spotify can only increase revenue by increasing prices (which they recently did) or keep their acquired Users as long as possible on the platform.
User engagement
MAU (Monthly Active Users) is the metrics that Spotify uses in the Stakeholders Deck as a most important one. That is because increasing number of MAU is the best indicator that they are focused on retention with the highest priority.
Now, let’s get back to the list of new features from the beginning of the article. How will features like MySpotify or Discover Weekly influence user engagement? Now, when a link between happy investors, higher revenue, churn, and engagement is more clear, the words of Spotify’s Senior Director of Global Marketing, Matthew Luhks resonate a little bit stronger: “The more people that use personalised features, like Daylist, the less likely they are to leave the service.”.
Spotify has discovered that higher engagement can be achieved by enhancing the experience and personalisation. Keeping that insight in mind, Spotify Wrapped is a perfect example of addressing the business need of reduced churn by product solution. Every year User receives their own summary of music listened to during previous year, they can receive tailored message from the artist they have listened to the most, and on top of that Spotify Wrapped can be shared with friends which creates additional aquisition source.