‘A lot better to keep the customer around’

Spotify’s (SPOT) dismal quarterly earnings report has raised questions over whether the company should raise prices at a faster pace than it has previously to boost its margins.

On the company’s second quarter earnings call Tuesday, executives responded to an analyst question on why the company wasn’t raising prices as quickly as competitors. CEO Daniel Ek defended Spotify’s measured approach to price increases, saying the strategy reflects a long-term focus on customer retention rather than short-term financial gain.

“It’s a lot better to keep the customer around for a longer time than to lose the customer and then try to re-acquire the customer back at a later point,” Ek said. “At scale, the subscription business is really around retention, not new customer acquisition.”

The stock fell more than 10% following the quarterly report, retreating from a record rally after the company posted a Q2 loss, missed revenue estimates, and offered weaker guidance for the current quarter.

Ek’s comments come as Spotify continues to test new pricing structures globally, following multiple rounds of increases in recent years. In mid-2023, the company rolled out broad price hikes across roughly 70% of its revenue base. That was followed by another round in June 2024 targeting US subscription plans.

As part of the latest changes, Spotify raised the monthly price of its individual Premium tier by $1 to $11.99 and also introduced a $10.99 “Basic” music-only tier in the US. The company also launched an audiobook-only plan and continues to experiment with bundled audio offerings in international markets.

Investors have largely applauded the changes, which helped drive a 500-basis-point improvement in gross margins over the past year and a stock rally of roughly 120% heading into Tuesday’s report.

But after the mixed second quarter report and softer Q3 outlook, some analysts are asking whether Spotify could move more aggressively, especially as rivals like Apple (AAPL) and YouTube (GOOGL) raise subscription prices at a faster pace.

On the company’s earnings call, LightShed Partners’ analyst Rich Greenfield questioned why Spotify isn’t raising prices more aggressively in developed markets, noting that NBCUniversal’s (CMCSA) Peacock recently hiked prices by nearly 40% despite limited user engagement.

Ek pushed back, emphasizing that Spotify’s pricing strategy is more nuanced, focused on segmentation and product expansion to balance monetization with long-term user retention.

Still, Spotify’s gross margins dipped to 31.5% in Q2, down slightly from 31.6% in Q1 and below the record 32.2% hit in Q4 2024. The company now expects margins in the current quarter to fall to 31.1%, due in part to regulatory costs and renewed licensing deals with major music labels.