Spotify Subscriptions: The Three-Tier Price Discrimination Model

Here in Australia, I'm on a student plan and pay only 6 AUD a month for Spotify, which is less expensive than a cup of coffee. My friends who have already graduated, however, are spending close to 12 AUD. Additionally, you can further reduce the cost if you're prepared to commit to a yearly subscription. Different price tags for the same service. Economists refer to this as third-degree price discrimination.

Spotify groups its users neatly. Given that students are both extremely price conscious and avid listeners, it makes sense to entice us in with a low rate because we will remain and stream indefinitely. The ability to cancel at any time is more important to working professionals, who make more money and don't care as much about paying a few extra dollars. And the real fans of music? They are the ones who commit to the platform over the long term by going for the annual plan.

The subtle changes Spotify makes to these plans are even more fascinating. I recall that you used to save a lot more money with an annual subscription, but the discount gradually decreased. It's a smart move—not so drastic as to turn off casual users, but just enough to extract a little more money from the most devoted ones.