The goal of any business is enduring, profitable growth. All three are critical. Profitable growth that is not enduring is short-term. There is no future. Enduring growth that is not profitable is a losing game. Again, this is a short-term situation. Growth that is neither profitable nor enduring is also a sign of short-sightedness and potential brand failure.
Based on its recent reporting, where is Spotify headed?
Does Spotify have a plan for enduring, profitable growth? The recent analyst review indicates that Spotify may face inherent problems in generating enduring, profitable growth.
The Wall Street Journal reported on Spotify’s recent and projected global price increases. The reporter wrote: “Higher prices come as Spotify struggles to post consistent profits despite its leading position in the audio-streaming business. The company in July said it added more subscribers in its second quarter but also showed that it swung to a loss.” Spotify has growth that is apparently neither enduring nor profitable. Spotify is the leader, but its leadership appears to be based, at least in part, on growth. Just growth. Growth without profit and endurance. Lack of consistent profits is a troubling signal.
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The business press cites data cruncher estimates that the value of the music streaming business in the US at $17.7 billion. Spotify owns about one-third of the business.
Enduring profitable growth is the fundamental goal of business. Becoming profitable by reducing costs and eliminating waste is important, but it is not a sustainable business growth strategy. It is a cliché, but it is true: you cannot cost-manage your way to future growth. Cost-cutting is not really a strategy for enduring prosperity. Cost-cutting is a strategy for managing inevitable decline profitably.
At the same time, price increases are not a sustainable strategy, either. Read the transcripts of earnings calls and notice the larger ticket prices but fewer sales. Many brands are experiencing this now: you cannot continue to raise prices and expect your customers to pay for shareholder gains. Even luxury brands are learning this lesson. Only the very elite of the luxury world can seemingly charge astronomical prices for goods. Many luxury brands raised prices and lost sales.
It is important to recognize that brands gain and lose customers. The goal is to both attract new customers and maintain current customers. Current customers who are brand-loyal are extremely valuable customers. With subscription services, churn and customer turnover are high. Chasing new customers to maintain growth is not a profitable or sustainable strategy. It costs more to attract a new customer than it does to retain an existing one. Spotify says that churn, loss of subscribers, has not been “out of the ordinary.”
How does Spotify plan to get the brand into the future? What is the plan for generating enduring, profitable growth? A strategic plan for generating enduring, profitable growth must balance short-term and long-term. That strategic plan must be brand-business driven. As a strategy, the brand-business plan must not be a series of unconnected tactics. It is unfortunate that when a brand is in trouble, the strategic plan deteriorates to tactical actions with no clear strategy.
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A brand strategy does not exist in a vacuum. A brand strategy takes place within the purpose and ambition of the corporation. The corporation’s purpose is the guiding force that provides the direction for all thought and action on behalf of a business. All corporations are in the business of building an enduring, profitable, growing, and preferred brand, whether it is the corporate brand or the corporation’s branded portfolio organization. This means that brand is at the center of every decision and action. Everyone from the CEO to the Board of Directors down throughout the enterprise must believe that how we manage our brands is how we manage our business. Brand strategies must align with and support the stated corporate priorities.
One of the problems with brand strategy is that many individuals who define it do so incorrectly. If you search on Nexis.com, for example, articles on brand strategy focus primarily on such things as media, especially digital platforms, image, logo, and other tactical approaches. Brand strategy is much more than this. It is about defining the direction of the brand and the plan of action to make progress in that direction.
Spotify CEO Daniel Ek told analysts that Spotify does not have a strategy problem but an executional problem. Sometimes this is true. An execution might not be delivering the strategy. On the other hand, perhaps the strategy is not viable. Spotify missed on “expanding ad revenue.” Mr. Ek said, “It’s taken longer than expected to see the improvements we initiated to take hold. It’s an execution challenge, not a problem with the strategy, and, while I’m unhappy with where we are today, I remain confident in the ambitions we laid out for this business.” Who are we to judge? Investors must choose to believe that there is a clear strategy for achieving and sustaining profitable growth, or not.
Spotify did state that its vision was for long-term gain. As part of this long-term gain, Spotify said that it would raise prices when deemed appropriate. Bloomberg wrote: “Chief Business Officer Alex Norström … said Spotify essentially raises prices all the time. In the last quarter, the company increased subscription costs in France, Belgium, the Netherlands, and Luxembourg.”
Strategically, Spotify’s reported goals appear to be “widen margins, generate profits via price increases and cost-cutting.” Having stated this, revenue, operating income, and quarterly guidance” were all lower than expected. Analysts had expected profitable growth, but learned that although subscriber growth was remarkable, the company incurred a net loss for the quarter.
Prices rose $1 or €1 a month. Data indicate that only a small percentage of users say they will cancel their subscriptions with a $1/€1 price increase. This is a good sign. A premium-level Spotify subscription in parts of the world now costs €143.88 ($166.68). Although the US increases are $1 a month, the total for a Family Plan, which rose $3 a month, will be $239.88 a year. For families cutting back on groceries, price hikes creating this magnitude of yearly expense may not be music to their ears.
What is more interesting is whether Spotify can generate results that satisfy Wall Street despite continuing price increases. Continuing price increases have not benefited packaged goods, fast-casual, casual dining, and fast food restaurants. Bloomberg reported that Wall Street and record labels cheered the price increases.
At some point, no matter how loyal customers are to the brand, the value equation takes a negative shift. Audio books and podcasts are part of the Spotify portfolio. Yet, all the great content and price hikes could not compensate for disappointing earnings. Depending on which press you read, the reasons for the poor results were either salaries, taxes, marketing, or slow execution of advertising monetization.
However, there is this from Bloomberg BusinessWeek: “Bloomberg Intelligence analyst Geetha Ranganathan wrote that the disappointing financial results are short-term noise that shouldn’t overshadow the tailwinds,’ citing strong premium subscriber and monthly active user growth.”
Perhaps. But what about having a strategy that does not focus on enduring, profitable growth? Continuous price hikes cannot be the cure-all for inconsistent profits. Neither can aggressive action, adding more people to the subscriber list.
We cannot have sustainable growth of the bottom line unless we create quality growth of the top line. To achieve quality revenue growth, brands must profitably acquire more customers, convince them to visit more frequently, and persuade them to become more brand loyal. The only way to enduring profitable growth is to achieve a sustainable brand advantage that profitably increases customer-perceived value.
Contributed to Branding Strategy Insider by: Joan Kiddon, Partner, The Blake Project, Author of The Paradox Planet: Creating Brand Experiences For The Age Of I
At The Blake Project, we help clients worldwide, in all stages of development, define and articulate what makes them competitive and valuable at pivotal moments of change. Please email us to learn how we can help you compete differently.
Branding Strategy Insider is a service of The Blake Project: A strategic brand consultancy specializing in Brand Research, Brand Strategy, Brand Growth, and Brand Education
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