Where is Spotify's Annual Plan? Price Ratios & LTV

A common questions that I get from founders is "How how much should I discount my annual plan?"

Most choose 20%, because everyone else seems to choose 20%. Because of that, should you choose 20% ?

It kinda depends, but probably not.

Why Have an Annual Plan at All?

Not all products have annual plans. Why can't you buy one for your:

• Cellphone bill?
• Cable plan?
• Google Fiber?
• AWS servers?
• Car payments?
• Rent?
• Spotify?
• Netflix?

All of these products serve use cases that extend well beyond a year, so discounting a yearly plan would just end up costing those companies money.

There are a limited number of behaviors that humans will do basically forever and they are things like needing a house, transportation, the ability to communicate with others, entertainment, etc

Assuming that a company nails the product execution, those users end up sticking around for a long, long time and there is no reason for them to offer a discount.

What You Can Learn From Annual Plan Discounts %

If you look at the streaming marketing, you'll see a range of discounts on longer term plans.

• ​Netflix - No Annual Plan​
• ​Hulu Annual Plan - 16% Discount​
• ​Paramount Plus - 16% Discount​
• ​Peacock - 17% Discount​
• ​HBO Max - 20% Discount​

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Assuming that these companies are rational (which American media companies are some of the time), you can learn a lot from these choices.

Why are companies that are in the long term plans when they are solving a problem that user's never stop having?

My guess is that, with the exception of Netflix, the rest of these companies struggle with user retention and the average user lasts under a year.

For streaming services, content library size, quality and release cadence are doing to be the biggest leading indicators of user retention.

Based on the above order, this anecdotally matches what I would expect their retention to be based on how often they release quality content.

Netflix releases the highest volume of decent quality shows per year, so users probably stay around the longest.

HBO releases a select number of very high quality shows per, so users probably sign up to watch something, then cancel when it's over, then come back again later in the year. Everyone else is in the middle.

Guessing a Companies LTV based on Annual Plan Discounts

For experienced subscription companies, you can basically guess their user lifetime by looking at the ratio of their monthly plans prices to annual plan prices.

If you look at the Headspace's historical pricing via the WayBack Machine (which I love), you can see them figure out this tactic in roughly 2020.

Likely as they learn that their retention is 3-4 month long based on the use case of mediation. Users will either not like mediation or love it and realize you don't need an app to do it.

• 2014: Monthly: $12.95/mo, Annual $7.95/mo, ratio of 0.62
• 2023: Monthly: $12.95/mo, Annual $7.99/mo, ratio of 0.47

Because they can't really influence their LTV, they start pricing their monthly plan just above this to extend their LTV and capture just a bit more $$.

Also they are dropping their longer term plans as they presumably were not effective.

Also, they add a longer trial to the annual plan in 2023 because that probably works to drive another small % to annuals.

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So What Should You Do With This Information?

The vast majority of B2C companies are serving use cases that are under a year long. If you in one of these companies, I'd suggest doing the following.

1. Figure out how long your average user stays around
2. Price your annual plan so they is priced at the average monthly retention + 1 month.

If that works, congrats you just extended your LTV and can now either be more profitable and/or afford a higher CAC.

We did basically this at Codecademy and saw the following:

• Way more people choose the annual plan, which lowers your monthly churn
• You collect more cash up front, which is great for a scaling business
• You increase your average LTV, not by a ton, but this definitely helps, which in turn allows you to afford a higher CAC.
• These users psychologically commit to the product more and stay more active
• A good amount of these users will renew for year 2, further boosting LTV.

I'd suggest shipping this as an A/B test as there is some risk here. Reach out if you have questions.