# Spotify: can higher prices produce better profits?

Eight exercises, about 55 minutes with prepared historical data. The time estimate has not yet been calibrated with learners.

## Before you start

Use the Practice sheet for your formulas and Worked Model to review answers. Green cells are learner answers; blue cells are editable assumptions. Keep the supplied inputs and scenario 1 while checking your work. The downloadable workbook has one scenario selector at Worked Model!C5; the browser model uses Model!C5.

Historical figures are reported 2025 results. All 2026 forecasts, pricing changes and cost responses are hypothetical. Amounts are EUR millions, subscribers are millions, and monthly ARPU is EUR. Operating profit excludes interest and tax and is not cash flow.

## 1. The five-percent price challenge (10 minutes)

You use Spotify. Now decide whether a price change works for the business.

This experiment assumes **5% higher monthly average revenue per Premium subscriber (ARPU)** and **3% fewer average subscribers**, holding the period length constant. These are fictional practice assumptions, not Spotify guidance. A 3% decline in average subscribers is not a disclosed churn rate.

In the **Model** sheet, calculate the percentage change in Premium revenue in **C65** from C63 and C64. Price and volume multiply. Adding the two changes misses their interaction.

In **C66**, calculate the maximum subscriber loss that leaves revenue unchanged after the price increase. Show the loss as a positive percentage. Ask whether the assumed 3% loss falls below that threshold.

Keep scenario **C5 = 1** and the supplied blue inputs while checking answers. Future exercises unlock the operating forecast. Historical cells stay on the Historical sheet; later forecast inputs are hypothetical.

Revenue alone cannot settle the profit question. We will test costs in the final exercise.

### Hints and worked explanation

1. Think in multipliers: the new price is 1.05 times the old price, and the new average subscriber count is 0.97 times the old count.

2. Revenue change is the product of the price and volume multipliers, minus one. At break-even, the volume multiplier is the reciprocal of the price multiplier.

3. C65: =(1+C63)*(1+C64)-1. C66: =1-1/(1+C63). The revenue increase is 1.85%, and the revenue break-even loss is about 4.76%.

## 2. Read the reported numbers (5 minutes)

The **Historical** sheet holds reported 2025 data from Spotify's shareholder update published on 10 February 2026. Monetary figures are **EUR millions**, subscribers are **millions**, and ARPU is **EUR per subscriber per month**.

Reconstruct the annual totals rather than trusting a copied headline. In **Model!C76**, sum the four quarters of revenue in Historical!D13:G13. In **C77**, subtract the four quarters of cost of revenue and operating expenses from that annual revenue. In **C78**, calculate operating profit divided by revenue.

Compare C76 with Historical!H13 and C77 with Historical!H16. The expected totals are EUR17,186m of revenue and EUR2,198m of operating income. The latter is operating profit, not net income or cash flow.

Historical!D9:G9 contains period-end subscribers. These are balances: adding the four quarters does not produce annual subscribers. Blank ARPU cells are unavailable in this prepared dataset, not zero. Only Q4 ARPU is needed to start the forecast.

### Hints and worked explanation

1. Revenue and expenses accumulate over time. Subscriber counts do not.

2. Use SUM across D:G on the Historical sheet. Revenue less cost of revenue is gross profit; subtract operating expenses once more to reach operating profit.

3. C76: =SUM('Historical'!D13:G13). C77: =C76-SUM('Historical'!D14:G14)-SUM('Historical'!D15:G15). C78: =C77/C76.

## 3. Build subscribers and monthly ARPU (8 minutes)

Build **D40:G44** in Model. Columns D:G are Q1–Q4 2026. The active assumptions above the forecast already follow the selector in C5.

**D40:G40:** opening subscribers. Q1 starts with Historical!G9; every later quarter starts with the preceding quarter's closing balance.

**D41:G41:** link each quarter's net subscriber additions from row 9. These are already net of additions and losses; do not subtract churn a second time.

**D42:G42:** opening subscribers plus net additions. **D43:G43:** average opening and closing subscribers. This assumes subscriber changes occur evenly during the quarter. It is an approximation, not a reconstruction of Spotify's daily subscriber denominator.

**D44:G44:** monthly ARPU. Q1 grows Historical!G10 by the Q1 growth assumption in D14. Later quarters grow the previous quarter's ARPU by their own row-14 assumption. A quarterly growth assumption changes monthly ARPU once per quarter; it is not a monthly compounding rate.

The higher-price scenario introduces a 5% ARPU increase in Q1 only, then smaller quarterly changes. Keep Base selected until the graded build is complete.

### Hints and worked explanation

1. Opening plus net additions gives closing. Revenue will need average subscribers, not just closing subscribers.

2. Q1 has two cross-sheet starting points. From Q2 onwards, opening subscribers and ARPU refer to the preceding quarter in this same model.

3. D40: ='Historical'!G9; D41: =D9; D42: =SUM(D40:D41); D43: =AVERAGE(D40,D42); D44: ='Historical'!G10*(1+D14). E40: =D42 and E44: =D44*(1+E14); copy the applicable patterns right.

## 4. Forecast Premium and advertising revenue (7 minutes)

Complete **D46:G48** in Model.

**D46:G46:** multiply average Premium subscribers (row 43), monthly ARPU (row 44), and months in the quarter (row 8). Millions of subscribers multiplied by euros produces EUR millions. Do not multiply by another million, and do not use 12 months in a quarterly column.

**D47:G47:** grow each matching 2025 quarter's advertising revenue from Historical!D12:G12 by its year-on-year assumption in row 24. This preserves the historical quarterly pattern. Annualising the latest quarter would erase seasonality.

**D48:G48:** sum Premium and advertising revenue. Annual monetary totals in H are supplied as sums of the forecast quarters and will update as you fill the model.

Treat ARPU as realised revenue per subscriber, including mix and currency effects. It is not a single country's advertised subscription price. The forecast keeps those effects inside its hypothetical ARPU assumptions.

### Hints and worked explanation

1. Premium revenue uses three factors. Advertising uses the same quarter a year earlier.

2. Use row 43 rather than row 42 for billable subscribers, row 44 for monthly ARPU, and row 8 for the period length. Advertising growth is year on year, not quarter on quarter.

3. D46: =D43*D44*D8. D47: ='Historical'!D12*(1+D24). D48: =SUM(D46:D47). Copy each pattern across to G.

## 5. Model segment costs and gross profit (6 minutes)

Complete **D50:G54** in Model.

**D50:G50:** Premium revenue times the active Premium cost ratio in row 19. **D51:G51:** advertising revenue times the active advertising cost ratio in row 29. **D52:G52:** sum these two costs.

**D53:G53:** subtract total cost of revenue from total revenue. **D54:G54:** divide gross profit by revenue to calculate gross margin.

The cost ratios are **hypothetical modelling assumptions**, not disclosures of royalty rates. Premium content includes different rights and services. A single cost percentage simplifies their behaviour; it does not describe individual contracts.

Why separate the segments? If Premium and advertising earn different margins, a change in their revenue mix changes the group's margin even without a change in either segment's cost ratio.

### Hints and worked explanation

1. Apply each cost ratio only to its own revenue. Expenses are shown as positive amounts and subtracted in the profit calculation.

2. Premium revenue is on row 46, advertising revenue on 47. Combine costs on row 52 before subtracting them from total revenue on 48.

3. D50: =D46*D19; D51: =D47*D29; D52: =SUM(D50:D51); D53: =D48-D52; D54: =D53/D48. Copy right.

## 6. Find the operating-profit effect (6 minutes)

Complete **D56:G58** in Model.

**D56:G56:** grow the matching 2025 quarter's operating expenses in Historical!D15:G15 by the active year-on-year expense-growth assumption in row 34.

**D57:G57:** subtract operating expenses from gross profit. **D58:G58:** divide operating profit by total revenue.

This separates the business's content costs from research, sales, marketing and administration. Applying one margin directly to total revenue would hide that operating structure.

The forecast uses reported operating expenses as its simplified base. Those historical expenses include share-price-linked payroll taxes, which may not repeat. Before using this as a real investment forecast, you would isolate those effects and assess which costs are recurring. We retain the reported basis here so the calculation remains transparent.

Operating profit excludes financing and income tax. It is not free cash flow, and this case does not make a cash-flow or valuation claim.

### Hints and worked explanation

1. Use the prior-year quarter, then subtract the resulting expense from this forecast quarter’s gross profit.

2. The expense driver is on row 34. Gross profit is on row 53; total revenue is on row 48.

3. D56: ='Historical'!D15*(1+D34). D57: =D53-D56. D58: =D57/D48. Copy right.

## 7. Read annual results and compare scenarios (5 minutes)

Finish **H42, H43, H44, H54, H58 and H60** in Model.

**H42:** year-end subscribers are Q4's closing balance. **H43:** average the four quarterly average subscriber counts; each quarter represents three months in this simplified model. **H44:** annual Premium revenue divided by annual average subscribers and 12 months gives weighted monthly ARPU.

**H54 and H58:** calculate annual gross margin and operating margin from annual profits and annual revenue. Do not average quarterly percentages. **H60:** calculate forecast total revenue growth against reported 2025 revenue, Historical!H13.

Check the Base-case answers before changing assumptions. Then open the case's **playground** and switch C5 between 1, 2 and 3. The same forecast recalculates from the active driver rows; historical figures stay unchanged. Compare annual revenue, operating profit and margin, and record the outputs with the scenario name in your notes.

The scenarios combine pricing, growth and cost assumptions. Their profit difference is not a causal estimate of pricing alone. The separate price-volume experiment isolates a narrower question.

### Hints and worked explanation

1. Annual balances, amounts and ratios need different aggregation rules.

2. Year-end subscribers come from G42. Divide annual totals to derive annual ARPU and margins; do not average the quarterly ratios.

3. H42: =G42; H43: =AVERAGE(D43:G43); H44: =H46/H43/H8; H54: =H53/H48; H58: =H57/H48; H60: =H48/'Historical'!H13-1.

## 8. Test the profit break-even point (8 minutes)

Return to the separate experiment on rows 62–72. It uses reported Q4 Premium gross margin as its starting point, but assumes **80% of baseline Premium costs vary with subscribers** and **20% stay fixed**. Variable cost per subscriber is unchanged by pricing. These are fictional cost mechanics, not Spotify's royalty agreements.

Normalise baseline revenue to EUR1. In **C69**, subtract variable cost per original subscriber from that revenue. In **C70**, calculate contribution per remaining subscriber after the price increase.

In **C71**, calculate the positive subscriber-loss percentage at which the new total contribution equals the old contribution. Fixed costs cancel in this break-even comparison. In **C72**, calculate the percentage change in Premium gross profit at the assumed 3% subscriber loss, keeping the fixed portion of baseline costs unchanged.

Compare the profit threshold in C71 with the revenue threshold in C66. Different cost behaviour produces different thresholds. In the playground, change the variable share in C68 to 0% and 100% and explain the result.

Finally, write a short recommendation in **B82**, the threshold and its assumptions in **B85**, and two limitations or missing pieces of evidence in **B88**. Use the guide's self-review rubric. Your numeric grade checks spreadsheet mechanics; the memo is not automatically graded.

### Hints and worked explanation

1. Work per original EUR1 of revenue. Separate costs that disappear with subscribers from costs that remain.

2. Baseline variable cost is (1 − gross margin) × variable cost share. Divide old contribution by new contribution to find the subscriber retention needed at break-even.

3. C69: =1-(1-C67)*C68. C70: =1+C63-(1-C67)*C68. C71: =1-C69/C70. C72: =((1+C64)*C70-(1-C67)*(1-C68))/C67-1.

## Scenario answer key

These outputs use the supplied hypothetical inputs. Change the scenario selector, then compare annual revenue (H48), operating profit (H57), operating margin (H58) and ending subscribers (H42).

| Scenario | Revenue, EUR m | Operating profit, EUR m | Operating margin | Ending subscribers, m |
| --- | ---: | ---: | ---: | ---: |
| Base | 19428.12 | 3047.77 | 15.69% | 321.0 |
| Higher price | 20001.50 | 3248.46 | 16.24% | 317.0 |
| Slower growth | 18509.10 | 2232.21 | 12.06% | 306.0 |

## Decision memo rubric

Write a recommendation in B82, a quantified threshold in B85, and limitations / requested evidence in B88. Review it against four questions:

- Is the recommendation supported by a model result?
- Does it distinguish revenue break-even (4.76% subscriber loss with a 5% ARPU rise) from the illustrative gross-profit break-even (9.46%)?
- Does it explain the cost assumptions? The final experiment assumes 80% of starting cost of revenue varies with subscribers, unchanged cost per subscriber, and 20% is fixed. It gives about 9.81% gross-profit growth at a 3% subscriber loss. This is separate from the quarterly model's cost-to-revenue ratios.
- Does it name at least two limitations and useful additional evidence: price elasticity and cohorts, churn versus gross additions, geography / currency / plan mix, royalty terms, or the payroll-tax component of operating expenses?

The memo is self-reviewed; the browser grade checks formulas and values, not investment judgement. A defensible alternative recommendation can pass the rubric.

## Source and scope

[Spotify Q4 2025 shareholder update, 10 February 2026](https://www.sec.gov/Archives/edgar/data/1639920/000114036126004482/ef20065075_ex99-1.htm). Case cutoff: 10 February 2026; later results are excluded. Quarterly cost of revenue is derived from reported revenue less reported gross profit and reconciles to the full year. Reported monthly ARPU already reflects currency and product mix. Forecast average subscribers use a simple opening/closing average; this will not reconstruct Spotify's reported revenue precisely. Historical operating expenses include share-price-linked payroll taxes; using their pattern is a simplifying assumption.