|Year||Premium Members Revenue||Ad-Supported Revenue|
In 2022, Spotify had 489 million users, 295 premium members and 205 million ad-supported members.
Spotify’s cost structure is quite interesting because the premium side of the business is run at wide margins (28% in 2022), and the ad-supported business while it works as a funnel for the company (most premium members were free users before); it’s self-sustaining.
In fact, in 2022, while the ad-supported segment generated only $30 million in revenue, it was still profitable!
This is critical to understand the economics of Spotify’s business model, where the ad-supported segment works as a funnel, which channels millions of free users (to turn into premium members) into the company.
And yet, once the free users have been turned into premium members, the funnel reinforces itself, as premium members have a very slow churn rate (premium members stay a long time).
Spotify is probably one of the most successful examples of the freemium business model.