Spotify Self-Serving Funnel Explained

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!

Read Next: Spotify Business Model

Spotify is a two-sided marketplace where artists and music fans engage. Spotify has a free ad-supported service and a paid membership. Founded in 2008 with the belief that music should be universally accessible, it generated €9.66 billion in 2021. Of these revenues, 87.5% or €8.46 billion came from premium memberships, while over 12.5% or €1.2 billion came from ad-supported members.
Spotify licensing deals affect its business model. The company runs on both a free service, which is ad-supported and a subscription premium service. They have different economics. The ad-supported business had a 10% gross margin in 2021, compared to 29% of the subscription-based business. That’s because the more the content gets streamed on the platform, the more that increases royalty costs for Spotify. That is also why the company invested in developing its content. Thus, in part transitioning from platform to brand.
The Spotify Model is an autonomous approach to scaling agile, focusing on culture communication, accountability, and quality. The Spotify model was first recognized in 2012 after Henrik Kniberg, and Anders Ivarsson released a white paper detailing how streaming company Spotify approached agility. Therefore, the Spotify model represents an evolution of agile.

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