Digital Music News recently ran an article about an analyst’s report that suggests that if music subscription services want more users, they should lower their prices. While I agree whole-heartedly – lower prices would certainly mean more subscribers, offsetting the price drop – what I noticed was how illogical subscription service pricing is. I’ve known this for a long time, living in Europe, and recently found it surprising that, when I moved to the UK, prices for services like Spotify were 20% higher.
The reason is that Spotify – and some other services – aren’t using any kind of real pricing model that takes into account the value of the service they provide. They are using a psychological pricing model, putting prices where they think people won’t complain.
It seems that the number 10 has strong psychological value in prices. So Spotify wants to make sure they don’t breach this number. In the US, they charge $9.99 a month. In the EU, they charge €9.99. And in the UK, they charge £9.99. In Scandinavia, they can’t use the number 10, so they use 100. In Sweden, Denmark and Norway, a month’s music on Spotify costs 99 kroner.
If you compare those prices using today’s exchange rates, you get the following:
Kroner: $15.30 – $18.49
The Danes – theirs is the $18.49 – pay nearly twice as much as people in the US for the same service.
It’s important to note that these numbers include VAT, which is not paid in the US; this ranges from 20-25%. So the price in Euros, for a country with 20% VAT, is actually about $11.40; in the UK, the ex VAT price is $13.83. Nevertheless, what the user pays out of pocket is the number that counts.
According to the report cited by Digital Music News, these prices are keeping subscription rates low in countries outside the US. “Spotify [...] is now subsidizing unlimited free accounts worldwide [...] but may be doing little to secure a long-term, sustainable financial future.”
(Graphic: Digital Music News)
Whether or not this is true – whether free accounts are hindering a sustainable future – it’s clear that price matters. I’m not willing to pay £10 a month for Spotify. $10 is the cost of a standard album on the iTunes Store; in the UK, that price is £8. (Though many albums are now costing more.) At £8, I’d be more likely to ante up, and at £5 I’d probably do it right away.
Netflix gets it right. While their service costs $8 in the US, it’s only £6 (or about $10; includes 20% VAT) here. At £8, I’d think twice about using the service.
Pricing is never about any fixed value, but always takes into account psychological elements, as well as supply and demand. But Spotify seems to be stifling their own potential market by pricing themselves much higher outside the US.