Pandora Radio

The Music Genome Project has been used in order to understand people’s music habit and taste, analyze the musical elements and find out the songs that they would probably like to listen. Understanding their customers’ need is one of the most important core values of Pandora, because it provided a way to understand the people’s desires in the music industry and offer them what they really want.

Core Capabilities II

Customer Segmentation
 Pandora has 29.5 million users with their information.
 It is the other competitive advantages and Pandora can
use it as an asset to get the attention of advertisers.
 The advertising revenue increased 5.5 times since 2009; therefore, advertising has been their important revenue
(Edwards, 2011).

Core Capabilities III

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Costs

Pandora’s fixed cost
Technology
Overhead
Genome Project

On the other hand, Pandora
has three major variable costs;
 Revenue based royalties
 Streaming
 Commissions constitute

Pandora’s Business Model Analysis I

Pandora’s Business Model didn’t work and had to be improved. They were not able to generate positive cash flow.
The subscription model didn’t work. However their customers accepted and started to use free hours, they quitted when the free hours were done. They didn’t continue to be subscribers because they could use freemium option.

Although the paying users of Pandora are 500,000 whereas the free users are 29 million, the paying user(36,000 $) create nine times more revenue than the free user(4,000 $).

Pandora’s Business Model Analysis II

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Pandora’s Business Model Analysis III

According to the Pandora case study, only 60% of the available ad space was been used. It is the major source of the revenue(TR); it is a good idea to increase that ratio because it helps to increase TR.

The variables costs(VC) are high because of the free users (unprofitable customers). In order to decrease TVC, free users should be used more efficient to create advertising revenue.

Discussion of The Situation
Should They Leave Their Unprofitable Customers?
Although the paying user create 9 times more revenue than the free user, WOM in order to bring in new customers is very important.
Pandora doesn’t spend lots of money on advertising because Pandora uses WOM as an advertisement; therefore, Pandora can’t risk losing the customers even they are unprofitable.
Additionally, the competition has been increasing. According to Tim Westergen the three most important competitors are Google, Spotify and iHeartRadio.

Discussion of The Situation
Should They Leave Their Unprofitable Customers?
The advertising revenue has been increased 5.5 times since 2009. As seen in the graphic below, the revenue line does seem to be rising faster than the total costs line. It shows Pandora has changed its future by increasing its advertising revue (Edwards, 2011)
Therefore, Pandora should try to utilize their unprofitable customers effectively instead of just leaving them and losing them.

Discussion of The Situation
Should Pandora Need The Venture Capital’s Money?
As Tim Westergen mentioned they don’t need their money.
What they need is to create new income or increase the current one.
One thing needed to change their future is switching their business model as mentioned in the analysis section.

Pandora has higher CTR (Click Through Rate) and it will help to get more revenue from advertisement through attracting more advertisers to fill-in the remaining 40% of ad-space.

Key Points in Pandora Music
 The VCs were very high. Furthermore, the scale of the unprofitable customers had been increasing VC.
 Although it affected negatively VC, it was increasing the popularity of Pandora as an Internet radio.
 On the other hand, their customers were loyal for the freemium model. Therefore, they are not sufficient for the subscription model. According to Shih and Tecco, it was “Leaky Faucet” problem (p. 6).

 Pandora’s revenue also increased with this large scale of usage. The 87 % of total revenue came from the 98 % of Pandora’s users (Lazaro, 2011).
 Although it had a large amount of users, they couldn’t use them efficiently in order to increase pay-per click based advertising revenue.

 In conclusion, they had two main problems in their business model, which were the “Leaky Faucet” and 98% unprofitable customers.

Possible Solutions
 Increasing in Advertising: The scale of its customers is very important; therefore, Pandora should add more advertisements to increase their CTR(click through rate). In the affiliate marketing when Pandora gets more click rate, Pandora can get more advertisements and gain more money from those digital advertisers. Furthermore, Pandora should find a way to increase the usage percentage of ad space. Pandora would be able to earn more money and increase its revenue by achieving these goals.

 Going with the “Freemium’’ Model: The Freemium model is attractive option to capture the new and keep the current customers. Pandora should add specific service in order to get money from the customers who are free users.

Possible Solutions
 Implementing A Subscription Model: This model requires getting payments from all customers. Spreading the costs on the wide customer base lowers the cost per user. It might cause losing customers. There is possibility that a lot of customers would stop using Pandora.

 Charging Money According to Listening Hours: In this solution, there shouldn’t be any charge to the customers who listen to Pandora less than 40 hours per month. Pandora could charge 0.99 $ per month on their customers who listen to the music 40 hours to 80 hours during the month.

Furthermore, Pandora could charge more than .99$ to the customers who used the system more than 80 hours during a month because the variable cost from these customers is high and .99$ isn’t enough to cover it.

Quantitative Analysis to Find The Best Solutions

 First of all, we should find the breakeven situation with the current scenario (Shih and Tecco, 2011)
* Average contribution from a user/hour= $0.0294-$.0258=$0.0036 Average hour per user per day=2.5 (p.11)
* Average contribution from a user/day=2.5*0.0036=$0.009
Current fixed cost=Head Count + Other Fixed Cost = $ 22 million
* Fixed Costs/day= $ 22 million/365=$ 0.0603 million
 Breakeven would happen if the number of users/day ratio reaches 0.0603/0.009=6.7 million users. With the same business model, Pandora has to have at least 6.7 million users which were 1.8 million. Therefore, the business model should be changed.

Quantitative Analysis to Find The Best Solutions

 Second of all, if Pandora decides to take $0.99 from users above 40 hours of usage;
Total Variable Cost/Hour = $0.0258
0.0258*(H-40) = 0.99H=78.4 this is the breakeven point. After this point, the positive contribution switches to negative. If the customers who listen to Pandora internet radio more than 80 hours per month are charged $0.99, Pandora will lose money. Therefore, the customers who use Pandora more than 80 hours should be charged more than $0.99.

Our Suggestions
 All of the above suggestions should be used with the extra “Leaky Faucets” awareness.
 Pandora should improve affiliate marketing team. They also should manage affiliate marketing by using their customers and iPhone application powers.
 The best fit proposal for Pandora’s customers;

If the monthly usage of Pandora’s customers is less or/and equals to 40 hours than there wouldn’t be any charge for service.
If the monthly usage of Pandora’s customers is between 40 and 80 hours, Pandora charges 0.99$ to its customers.
If the monthly usage of Pandora’s customers is more than 80 hours, Pandora charges 2.99$ to its customers.