Listening to 🎵 Fountains by Drake, Tems
In the last 2 weeks we have looked at Kanye West and BEP. Today we return to our series on Spotify.
This is the 3rd review of the 9-part series — Spotify: A Product Story.
In this series, you would learn about how to build a great product, transform an industry, and grow a business from scratch to 300m users. You would also learn about making strategic decisions, choosing the right business model, and partnerships.
INTRODUCTION
In the last article How do you steal from a pirate? We learnt about Spotify’s first product — the desktop app — and the 4 biggest strategic lessons learnt.
Today we’ll cover how Spotify embraced the introduction of the smartphone and transitioned from a free desktop app to a mobile app people happily paid for, despite the availability of pirated copies.
Customers used Spotify’s desktop app to find, share, and experience music. But still used Pirate Bay to download the same songs unto their iPods and listen offline.
This was the challenge for Spotify — “How do you charge for nothing!?”
Since customers already had Access, this was not what they were willing to pay for. They were willing to pay for Convenience. Based on user research, it turns out customers would pay $10/month.
This brings us to lesson 1.
Lesson #1: User research is great for understanding what people think they will do. Not what they will actually do.
To convince users to change an existing habit that already works for them, you need to offer an experience that is 10 times better — ‘especially if that existing habit is free, and you’re planning to charge $120 per year for it’.
For this (like in episode 1) Spotify would need another magic trick. What if Spotify’s mobile app could wirelessly, automatically sync your favorite music to your phone. Making it available for use whenever. Taking out the manual download, synching, and playlist creation. No Wires!!
But to make this work would require optimizing the code for the iPhone to ensure it ran efficiently. This involved considering the limited battery storage and mobile data.
Which brings us to lesson 2.
Lesson #2: You always optimize for something.
Optimization is all about balancing cost with performance across different variables.
Spotify achieved this by limiting the audio decoding that was done by the phone’s CPU, and by adopting the new standard iPhone codec (audio file standard) — AAC. Which provided a better audio quality with the same file size, than the mp3 format.
This brings us to our 3rd and final lesson.
Lesson #3: Really great product development almost always combines technological innovation with business model innovation.
Basically, when we think about being innovative, we tend to think about just the tech side. The greatest impact can be achieved through tech innovation, and business model innovation, working together.
Spotify did this through negotiations with the owners of the music rights. This slowed down the pace of innovation, but also made Spotify more strategically positioned with clarity on its cost efficiency, and future revenue performance.
THE RESULT
At the time, the benchmark for converting users from a free(freemium) model to a paid plan was Skype, which converted about 7% of their users. Spotify achieved this in a few months and just kept on going to 10%, 15%, and even 20%.
By transitioning from a desktop application to mobile, Spotify went from a company that was ‘growing users fast which relied on venture capital, to a company that was growing revenue fast through a sustainable business model (subscription)’.
Listening to 🎵 No Child Left Behind by Kanye West
SUMMARY
Lesson #1: User research is great for understanding what people think they will do. Not what they will actually do (Remember this when conducting market/user research).
Lesson #2: You always optimize for something.
Lesson #3: Really great product development almost always combines technological innovation with business model innovation.
I hope you found this informative and relevant.
You can catch up with past articles in this series: Part 0, Part 1, Part 2
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