The cost of a happy premium

In January 2015, the Swedish digital music streaming giant, Spotify, launched a limited time offer giving customers the chance to experience 3 months of the companies Premium service at just 99p per month, only 10% of what premium membership usually would cost.

This was an ingenious example of low-balling played at its’ best. The technique of low-balling is a sales tactic whereby companies offer potential targets a low cost option – or throw the low ball. This is a temporary offer given to engage commitment from the target market. Once a customer has committed to the initial offer, for example Spotify’s 3 months, they build a loyalty or preference to the service, so when presented with a more costly option, they are more likely to perform this costlier option in order to maintain the commitment they have made. This can be effective in not only gaining new customers, but also persuading existing subscribers who are currently only using the free service. By offering a low-cost trial of the premium service, customers are experiencing a better music streaming experience in what they believe will be a temporary decision,  only for them to find it is easier to stay committed to a paying service than to cancel the subscription, even if the option has become more costly! Spotify premium services would usually set you back by £9.99 a month. With only 15 million of their 60 million subscribers opting for a paying service, Spotify needed to come up with an incentive for ‘freemium’ service users to switch to becoming premium service users, and the low ball technique seemed to have scored for Spotify.

Although this deal serves as a loss leader for Spotify - by this I mean initial costs are generating a loss for the company – in the long term, this loss will lead to a potential longer term profit by gaining subscribers and converting more free subscribers to paying ones.  

Empirical research has given support to Low-Balling techniques as an effective tool in persuading individuals to perform an action, even after the cost increases. Cialdini, Cacioppo, Bassett and Miller (1978) asked University students to take part in an experiment. They were either told beforehand that the experiment was at 7am (control condition) or they were told after having already agreed to take part (low-ball condition).

Figure 1: A bar chart of the mean percentage compliance across conditions for behavioural and verbal agreements. 

Figure 1, above, highlights the main findings. When under low-ball conditions, i.e. already having committed to an act when the costs were low, and then having costs increase, makes individuals more likely to phone up to book an appointment (verbal agreement 56% vs 31%) and also makes them more likely to actually turn up on the day for the experiment (behavioural agreement 53% vs 24%), when compared to individuals who knew the cost from the beginning.

So it seems to be, that once you have committed to something you are likely to stay committed even when the cost increases. This is why Spotify offer so many deals, for example the free trial month, in the hope of getting customers to stay with the service - not to mention the added bonus of customers who want to cancel before payment increases, but forget to do so!

References

Cialdini, R. B., Cacioppo, J. T., Bassett, R., & Miller, J. A. (1978). Low-ball procedure for producing compliance: commitment then cost. Journal of personality and Social Psychology, 36(5), 463.