A Ratio in the Eye of the Beholder

The Economist reports that Spotify has 6m users of its free, ad-supported service but only a "puny" 40,000 subscribers to its paid, ad-free service.

How puny is this? It's a ratio of 150 non-payers to every paying customer.

Now, if you regard the 150 side of the house as freeloaders who ought to be contributing revenues, then this looks like a poor deal for Spotify. But those 150 ad-listeners are more like folks browsing in a shop than people indulging in shoplifting. In many businesses, a ratio of 150 tyre kickers to every one buyer would look attractive. And those kinds of businesses are big ticket businesses.

So, here's the thing: is Spotify a big ticket business or a small potatoes affair? We're so used to thinking of music in pocket money terms that it's easy to classify Spotify as a small stakes player - one that can't pay for a legion of onlookers and enquirers with the revenues of its customers.

But Spotify is actually in the lifetime value game. Sign someone up for a monthly subscription, and you have a relationship with them. You're their music service, not their record store.