In the fourth quarter of last year, Spotify (NYSE: SPOT) began raising rates in a few countries. It followed up on those early price hikes in February with raises in 25 more countries, and it did so again earlier this week with changes in major markets such as the United States, the United Kingdom, and Brazil.
Raising rates, particularly for multi-user services, is a major point of control for the streaming service, which has seen its average revenue per user drop significantly in recent years.
Increasing sales per user stability
Here’s how average revenue per customer, or ARPU, has declined over the last four years, adjusted for fluctuations in foreign exchange rates.
Historically, management has cited “product mix” as the cause of ARPU declines. In other terms, an increasing number of listeners are opting for a package that allows for several listener profiles, such as Duo (two users) or Family (four users) (up to six users).
On the other hand, the stabilizing ARPU might not be a result of certain plans’ price rises. Rather, the commodity mix is being stabilized. Remember that most of the price increases didn’t take place before the last month of the first quarter. Similarly, price increases reported only before the earnings report would have no impact on the second-quarter performance.
With the product balance stabilizing, it’s unlikely that the multi-user discount is causing a surge of new premium customers.
Users are willing to spend more, but Spotify can proceed with caution when it considers raising rates. Unlike in the video streaming room, where each rival has its material, every subscription music streaming service has the same core product: On-demand access to millions of tracks. E.g., Apple Music (NASDAQ: AAPL) has the same 60 million songs as Spotify.
Spotify strives to set itself apart from the market in many ways: Personalization, features, and a podcast archive of original and unique content are included. These are the places where it concentrates its efforts to draw potential customers and turn them into paying members. In other terms, Spotify is demonstrating that it has developed a platform and a customer base that enables it to charge a higher price than rivals.
Rising ARPU to increase gross profit
Spotify could have the potential to increase its profit by raising rates. Certain prices, such as payment processing and content distribution, are constant and are unaffected by Spotify’s pricing. More specifically according to NYSE OXY WS at https://www.webull.com/quote/nyse-oxy-ws, Spotify’s contracts with record labels can have some control.
Apple revealed in April that it just pays music labels 52 percent of sales from Apple Music. Spotify’s premium operating profit was 27.9% in the first year, by contrast. If Spotify can keep the total sales per customer moving in the right direction, it means there’s a lot of space for growth in the percentage of revenue it pays to music owners. There are many other stocks like nyse bac at https://www.webull.com/quote/nyse-bac.