Spotify may have just found a way to scale. On Tuesday, the Swedish music streaming startup cut the price of its premium service from $10 to $5 a month for college students, a demographic the company has been trying to reach because of its heavy reliance on mobile devices. Spotify will continue to offer a free version of its service with commercials.
While the music streaming landscape has been treacherous for startups--most of which charge $10 a month for subscriptions--Spotify's pricing strategy could be a key element in aiding its survival. As venture capitalist David Pakman wrote recently, most American consumers aren't willing to spend much more than $50 a year on music, and will spend even less when presented with an increasing number of options such as apps or television.
By that logic, Spotify may tap into what Pakman identifies as the "sweet spot" for paid subscriptions and gain valuable market share. Also importantly, the company will be in fighting shape just in time for its rumored initial public offering.
Spotify, which launched in the U.S. in 2011, faces a two-pronged challenge in its goal of long-term viability: its need to add more users and the high royalty costs it must pay whenever customers stream one of its 20 million songs. However, the startup does have some things going for it, including $250 million in venture capital, a valuation of $4 billion, and an increasingly strong presence abroad. About a year ago, Spotify was in only 17 countries. Today it's in 32.
In terms of pricing, Spotify will do well to make its service affordable to students. These millennials are social, media savvy, and eager to try what their friends recommend. If more of them subscribe to Spotify's now-cheaper service, the company should build tremendous momentum the old-fashioned way--by word of mouth.