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Case Study 1 – Pandora and the Freemium Business Model

Q1: Compare Pandora’s original business model with its current business model. What’s the different between “free” and “freemium” revenue models?

In the beginning Pandora tried to get music subscribers by giving people 10 free hours, then asking them to pay $36 a month after that for the service. Of course no-one was willing to pay so much for a service that they could get for free by switching on an FM radio (Laudon and Traver 103).

After that model failed they tried several other options until they decided to use the “freemium” model they are using today. With a freemium service the basic service is available for everyone for free, but with strict limitations in bandwidth and ads between songs which results in a lower quality listening experience (Laudon et al. 103).

The premium service is priced at just $36 a year, 1/12 of their previous asking price. Three dollars a month is much more easy for a consumer to justify. The premium service offers higher bandwidth songs and no advertising (Laudon et al. 104).

Q2: What is the customer value proposition that Pandora offers?

Investopedia.com defines a value proposition as “A business or marketing statement that summarizes why a consumer should buy a product or use a service. This statement should convince a potential consumer that one particular product or service will add more value or better solve a problem than other similar offerings.” (Investopedia.com) So I went to the About page on Pandora to find the value proposition.

What Pandora does for its customers is provide access to music through the “Music Genome Project.” This project was started by the founders of Pandora and offers a way to classify music so that similar music by different artists will group together into what they call a personalized radio station (“About”).

The music is evaluated by professional musicians for genre, and then within each genre 200-500 different data points are...