Spotify Cost Structure

Cost of Revenue€5.99B€1B
FourWeekMBA Intelligence – Source data: Financial Statements

Spotify follows a premium and ad-supported model, where premium members get unlimited access to the platform without ads and premium content.

While ad-supported users can still access the platform for free, they have limited access, as content is interrupted by ads, and not all content is available.

Premium and ad-supported have different cost structures. The premium model has higher gross margins compared to the ad-supported model.

For instance, in 2021, the premium revenue model had a gross margin of over 28%, whereas the ad-supported version had a gross margin of 16%.

Thus, if we look at it from a gross margin standpoint, the ad-supported version seems less interesting.

However, it’s key to remember that the ad-supported version represents the company’s acquisition funnel.

Free, ad-supported users, in many cases, turn into premium members.

In addition, Spotify has strengthened its advertising network. Thus we might expect the ad-supported version to scale much more quickly both in terms of revenues and gross margins in the coming decade!

From that perspective, Spotify’s ad-supported revenue stream is both a funnel and a flywheel.

It’s a funnel because it enables Spotify to identify the various steps in the users’ journey to have them become subscribers.

In this way, at each step of the way Spotify can identify the key steps to take to make sure that the users convert into premium members.

interaction with a brand until they become a paid customer and beyond. Funnel marketing is modeled after the marketing funnel, a concept that tells the company how it should market to consumers based on their position in the funnel itself. The notion of a customer embarking on a journey when interacting with a brand was first proposed by Elias St. Elmo Lewis in 1898. Funnel marketing typically considers three stages of a non-linear marketing funnel. These are top of the funnel (TOFU), middle of the funnel (MOFU), and bottom of the funnel (BOFU). Particular marketing strategies at each stage are adapted to the level of familiarity the consumer has with a brand.

On the other hand, Spotify’s ad-supported business is also a flywheel, as more users who join the platform will share and invite others to join for free.

Thus, spinning Spotify’s flywheel.

Flywheel marketing was first introduced in 2001 by Good to Great author Jim Collins, who likened the strategy to a flywheel. For those unaware, a flywheel is a mechanical device designed to store rotational energy in an efficient way. It can be difficult to spin at first, but once momentum is built, the flywheel can perpetuate its own motion and spin by itself. Flywheel marketing has become a critical component of growth for platform business models.

Thus, with the combination of Spotify’s funnel and its flywheel, an incredible digital company was built!

The sales funnel is a model used in marketing to represent an ideal, potential journey that potential customers go through before becoming actual customers. As a representation, it is also often an approximation, that helps marketing and sales teams structure their processes at scale, thus building repeatable sales and marketing tactics to convert customers.

Read Next: Spotify Business Model.

Related Visual Stories

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. By 2022, Spotify had 195 million premium members and 273 million ad-supported users.

Spotify Ad-Supported Business

Spotify Audience Network is the underlying advertising infrastructure that supports its ad-supported user base. The Spotify Audience Network was born as the result of the acquisitions of Anchor and Megaphone. By 2022, Spotify had 273 million ad-supported users.
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.

Spotify Competitors

Spotify is the world’s largest music streaming platform with over 381 million users across 184 markets around the world. The company was founded by Martin Lorentzon and Daniel Ek in 2008 in response to the shutdown of peer-to-peer music service Napster. Spotify became a success because it was the first company to determine how to distribute music legally and compensate the music industry at the same time. The platform now offers various curated music discovery services, music stations, audio customization, and private listening. In recent times, it has also ventured into the streaming of audiobooks, podcasts, comedy, poetry, and short stories.

Spotify Model

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.

Who Owns Spotify?

The multi-billion music streaming company Spotify is primarily owned by its founders, Daniel Ek and Martin Lorentzon. As of 2021, Daniel Ek has 16.7% ownership of ordinary shares and 31.9% of the voting power. Where Martin Lorentzon has 10.9% of ordinary shares and 42.9% of the voting power. Another key shareholder is Baillie Gifford & Co, a Scottish-based money management firm, followed by Morgan Stanley, T. Rowe Price, and Tencent.

Read Next: Spotify Business Model, Spotify Advertising Business, Spotify Model.

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