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Spotify Is About to Test Pricier Plans

By Evan Niu, CFA – Aug 15, 2019 at 3:03PM

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The music-streaming specialist is looking to boost profitability.

Last month, investors mostly shrugged when Spotify (SPOT 3.78%) reported second-quarter earnings results that showed operating losses narrowing as the Swedish music-streaming company grew its premium subscriber base to 108 million. The company noted that gross margin ticked up sequentially to 26%, even as Spotify continues to invest aggressively in podcasts.

In an effort to boost profitability, Spotify now reportedly wants to gauge its pricing power.

Spotify reception desk at headquarters

Image source: Spotify.

Testing pricing power

Bloomberg reports that Spotify is preparing to test a pricier version of its popular family plan in Scandinavia, which includes its home country of Sweden. Spotify may feel confident to run the test in that region due to its incredible brand strength in the region: The company has long been a source of Swedish national pride. The price increase is expected to be approximately 13%, according to the report, and is considered a test that may or may not lead to a permanent bump.

For reference, the current cost of a Spotify family plan in Sweden is 149 Swedish krona per month, or about $15.44. That's about the same price as in the U.S. ($15 per month); the company charges different prices around the world based on a number of factors. The news comes after Spotify had raised prices for all three of its paid tiers in Norway in early 2018.

Average revenue per user (ARPU) has been steadily trending lower over the years, due to ongoing uptake of family and student plans that cost less per user; a family plan can be shared with up to six users within the same household that live at the same address. Family plans enjoy stronger retention and reduce churn, and Spotify has long argued that the ARPU trade-off is worth it as it continues to prioritize user growth.

Chart showing ARPU over time

Data source: Spotify. Chart by author.

However, declining ARPU across the industry has been rankling record labels for years. They worry that trend will hurt artists' ability to be fairly compensated for their work. "Spotify is subscription streaming's market leader, and by driving down ARPU they're starting to do the same thing to artists that Amazon is accused of doing to authors," an anonymous record label source told Rolling Stone in January. That concern is despite the fact that paid streaming is driving the industry's revenue higher.

"Downward pressure on ARPU continues to moderate, and we continue to expect that ARPU declines through the remainder of the year will be in the low single digits," Spotify wrote in its second-quarter shareholder letter. "As we mentioned last quarter, the declines in ARPU are a result of shifts in both product and geographic mix."

CEO Daniel Ek made it clear last month that Spotify is still very much focused on growth, and its pricing strategy reflects that. Ek believes that the streaming audio market is still in the early innings, and pricing is one key growth lever.

"Pricing obviously ends up being a function where we said for a long time that we believe in the current pricing strategy that we have in order to drive future growth," Ek said. "But we're actively investing a lot in both improving our product capabilities and the content mix on the service."

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Evan Niu, CFA owns shares of AMZN and Spotify Technology. The Motley Fool owns shares of and recommends AMZN and Spotify Technology. The Motley Fool has a disclosure policy.

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