At the start of this week, Spotify revealed their latest set of highly impressive numbers, demonstrating that their user base had grown to 60 million active monthly users, with 15 million of those paying users.
This was a 50% increase since May 2014, where paying subscribers were at 10 million, and a 20% increase in the last three months alone when they revealed 12.5 million paying subscribers in November 2014.
The impressive growth of Spotify’s user numbers.
As well as being just as impressed by everyone else by Spotify’s latest figures, there was also a number which I kept thinking about when I looked at the numbers, one which wasn’t heading in the same direction as all of the others, in fact it hadn’t changed at all since March 2013.
The Conversion Rate
Despite the number of paying (and free) users continuing to increase, the conversion rate has remained flat for coming up to two years, and the words below from their CEO in May of last year no longer ring true.
“This shows that our conversion rate is working, We’re proving the more people play, the more they’ll pay.” Daniel Ek, CEO of Spotify. (May 2014)
Spotify have had no trouble adding paying users, but they are no longer proving that the more people that use the platform the more they’ll pay, as their conversion rate has remained completely static as they have gained free and paid users in equal measure.
Now, when you are adding 2.5 million paying users in just three months, then things can only look rosy.
However, the conversion rate is key to Spotify becoming profitable, which they are still yet to achieve.
No matter whether a user is free or paying, every user comes with an acquisition cost, especially in the music industry, and the fact is, even if they keep growing in paid users, the quicker they increase their conversion rate the quicker they will reach the magic milestone of profitability as they earn more money from playing the same amount of music.
Another important reason for them to increase their conversion rate is to appease their stakeholders, and in particular the record labels. Recent speculation has been that the Record Labels who own equity in Spotify want them to drop their free service, but Spotify have argued that this is key to attracting paid users. An increase in conversion rate is absolutely vital in order for Spotify to justify continuing with a model which continues to be controversial in the music industry.
A major concern for Spotify in regards to the conversion rate remaining flat at 25% in their latest numbers (which don’t get me wrong, is an incredible rate) would be that the recent offers which were designed to acquire/convert paying users don’t seem to have had an impact as of yet. Despite offering a ‘Holiday Offer’ of $0.99 for three months, and a ‘Family Discount’ allowing you to add up to four accounts at half price, these offers have had little to no impact on the numbers as of yet.
There is no doubt that overall Spotify’s numbers are heading in the right direction ahead of a likely IPO this year, however, what will be really interesting is the next set of numbers Spotify release, after the churn from the recent offers kicks in, to get a real sense of where they are heading in terms of the road to profitability, and I certainly know what number I will be looking at first.
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