Another Case of Free Reference Price

Spotify is an online streaming music service that allows users to listen to free music with Ads inserted into the stream every 20 minutes. They also offer a premium version that has no Ads. In the terminology used by Mr. Chris Anderson, this is freemium. Whatever the name is, it is a case of tried and trusted pricing scheme, multi-version pricing. Points critical  to multi-version pricing are correctly designing the versions to match the different segments and defining version boundaries so that customers self select themselves to the right version targeted at them.

In case of Spotify, its versioning is neither done based on segmentation and targeting nor are the version boundaries defined correctly. The Wall Street Journal says,

Chief among the concerns: Similar services have tried and failed to crack the market for streamed online music, unable to generate either sufficient advertisers to support free content or enough consumers willing to pay a monthly fee.

The free version serves the needs of almost all segments. Despite the interruptions, the customers see net positive value in using it over the paid version. Even if there is value in using the premium version, the $0 price for the Ad supported version has set a bad reference price that is difficult to escape.  The attraction of building subscriber base, even those free users, is always attractive because of the potential to monetize them.The WSJ story adds,

To make it in the U.S., Spotify must not only find advertisers for its free service, it must migrate between 5% and 10% of its users to the premium service, said Mark Mulligan, vice president of Forrester Research Inc.

“A lot of consumers out there don’t see this as anything other than a way to get free music,” said Russ Crupnick, vice president of research firm NPD Group.

But the problem is customers can stay happy with free version longer than the business can stay solvent (hat tip to Keynes).