Customer Lifetime Value : Spotify

Spotify is a digital music, podcast, and video streaming service that monetizes service through both subscription and advertising from the monthly active user (non-premium membership). Here is my analysis of the total value of customer prediction to the company during the term of the business relationship. It can help to measure the future profit over the customer’s lifetime purchase (Customer Lifetime Value). According to Spotify business model, I placed the concern to several accounts to capture developing formulation to calculate customer lifetime value in Spotify business data, especially on Premium Membership Segment (I use Spotify Annual Report 2019, several data on the internet, and assumption based on data) :

Read : Customer Experience and Privacy

Revenue. Due to the Spotify revenue stream came from premium subscription and advertising from the active monthly user, I try to analyze based on that classification. Due to Premium Subscription comprised 90% of revenue, so I choose to capture formulation from Premium Subscription data only. It is also more clear to calculate CLV because Premium Subscription segment has strong engagement with the customer.
Premium Average Revenue per User (ARPU). The data provided in the Spotify Annual Report 2019 by calculating monthly premium revenue in the quarter indicated divided by the average daily premium subscribers in such a quarter then divided by three months. Annual
ARPU is calculated by averaging premium ARPU for the four quarters in such fiscal year.
To calculate Customer Average Lifespan (how long the average customer has been with the company), I use churn rate from statista.com and make a 1% assumption for the churn decrease rate in 2019 (based on Spotify statement on their annual report 2019 and churn rate data history 2017).
Retention Rate is the percentage of the members who made a repeat purchase over to a particular period compared to the previous period. The data information provided by measurable.ai (use retention rate Q3 2018 to Q3 2019). [6]
Discounted rate is 7.5% stated in the financial report (Spotify Consolidated Financial Statement 2019).

Spotify Data 2019

Customer Lifetime Value

So here my calculation Spotify Customer Lifetime Value :

Customer Lifetime Value = Gross Margin per Lifespan ()

Step 1 : Gross Margin per Lifespan (GML)

= Gross Margin (%) x Average Revenue per User x Customer Average Lifespans

= 27% x 4.65 x 5.5

= € 6.8

Step 2 : Calculate CLV

Spotify’s Customer Lifetime Value = € 6.8 ()

= €13.8

Step 3 : Customer Acquition Cost

=Sales and Marketing Expense / Number of Net Additional Premium Membership

=€ 826.000.000/28.000.000

= € 29.5/customer

CLV-CAC = €13.8-€29.5= -€15.7

CLV/CAC = €13.8/€29.5= 0.47

Analysis :

The Spotify customers value during the term of the business relationship is €13.8 per customer. The amount refers to premium membership value customers which core segment on the Spotify business model. Furthermore, I calculated the amount of Spotify spent to acquire a new customer and the result is Spotify spent more cost for €29.5 per customer than the value acquired from the customer which only just €13.8. The revenue from the premium segment increase by 30% YoY. But the Revenue growth is still below the Spotify spending amount on business operation. The higher cost of revenue was driven by the increase in new premium subscribers due to royalty, license cost for the content and streaming delivery cost and higher selling and marketing expenses that increase 30% than the previous year (which only 7%, 2017 to 2018) related to the marketing campaign and free-trials cost.

The Spotify business growth is having a great prospect, according to the enthusiasm of digital music providers nowadays. The flexible utilization of Spotify application and sharing membership Spotify business model can attract new customers due to the mobile lifestyle demands on digital music content. The complexity of the royalty payment scheme and structure problem should be solved immediately by Spotify to reduce acquisition cost per customer and increase customer lifetime value in the long run.