Spotify’s self-serving funnel shows how branding and distribution can merge.
This is what makes a tech business model powerful.
When you wreck off the walls between branding and distribution, there is no more trade-off between marketing and sales.
What do I mean?
In Q2, Spotify generated €2.86 billion in revenues.
Of which over €2.5 billion from premium subscriptions.
And only €360 million from the ad-supported version.
Not only that.
The ad-supported version only generated $4 million in gross profits!
While the premium subscriptions generated €700 million in gross profits.
But if the ad-supported version only generated €360 million (or 12.5% of the revenues for the quarter) and it only made €4 million of gross profits (less than 1% of gross profits for the quarter!!), why bother?
That’s the thing.
The ad-supported version generates revenues only as a side effect.
In short, the ad-supported version is not about making profits. If at all the fact that it covers the costs is great.
Instead, that is one of the most effective self-serving funnels (branding + distribution).
Let me explain.
The ad-supported version serves so far 252 million monthly active users.
Compared to the paid version, which serves 182 million monthly active users.
Not only the ad-supported version makes the platform accessible to way more people than the paid platform could ever serve (branding).
Most of the paid members have been free members first.
As Shopify explained in the past, more than 60% of the premium members were upgraded from the free, ad-supported plan.
Through prompts and additional features, Spotify knows that one in two free users will convert into premium members over time.
And showing ads is a great way to provide a linear value proposition to users (“you switch to paid and get no ads”).
That is what it means to build a funnel that amplifies your product (branding) while building your customer base (distribution/sales).
Building self-serving funnels are not easy.
But when you master them, as Spotify has, it’s a goldmine.
And if you can wreck off the walls between marketing and distribution, that is when you get the most effective business strategy: a barbell strategy.
With a single stroke, you grow the brand while growing the customer base!
Key highlights of Spotify’s self-serving funnel and business model:
- Spotify generated €2.86 billion in revenues in Q2, with over €2.5 billion from premium subscriptions and only €360 million from the ad-supported version.
- The ad-supported version only generated €4 million in gross profits, while the premium subscriptions generated €700 million in gross profits.
- The ad-supported version serves 252 million monthly active users, compared to the paid version serving 182 million monthly active users.
- The ad-supported version acts as a powerful self-serving funnel, serving as both branding and distribution.
- The ad-supported version makes the platform accessible to a larger audience and acts as a branding tool.
- Many paid members were initially free users, with over 60% of premium members upgrading from the free, ad-supported plan.
- Spotify uses prompts and additional features to encourage free users to convert into premium subscribers over time.
- Showing ads provides a linear value proposition to users, incentivizing them to switch to the paid version and enjoy an ad-free experience.
- Spotify’s self-serving funnel and business model have proven to be a successful barbell strategy, simultaneously growing the brand and customer base.