Problem Definition
StreamWave is a US-focused music-streaming service with approximately 8.0 million paying accounts and 16 million monthly users on its free, ad-supported tier. Subscription revenue is about $1.1 billion a year and advertising adds roughly $80 million. The catalogue is the same one every major service licenses, so StreamWave has always competed on price: its plans sit $1 to $4 below the market leaders.
That strategy is running out of room. The global market is growing (IFPI reports that recorded-music revenues rose approximately 6% to about $31.7 billion in 2025, with paid subscription streaming making up just over half of that). But the leaders have been raising prices every year. Spotify raised its US Individual plan to $12.99 in early 2026, its third US price increase in four years, and Apple Music moved its Individual plan to $11.99 in July 2026. The labels take about two-thirds of every revenue dollar, so a low-price service keeps very little. StreamWave's gross margin is 24%, against approximately 35% for Spotify's Premium segment.
The CEO wants to redesign the tier structure before the next label renegotiation. The board is split. One camp wants to follow the leaders up on price. The other fears StreamWave will lose its only point of difference, and would rather add a cheaper "Lite" plan and a premium "Pro" plan for superfans.
How should StreamWave redesign its price tiers to improve profitability without losing its subscriber base?
Additional InformationAsk for dataInterviewer’s data
If asked, please share that:
- Monthly churn on paid accounts is about 2.8%. Antenna data reported in 2024 put Spotify's monthly churn at around 2%
- Switching between music services runs at roughly a quarter of the rate seen between video-streaming services (Antenna), because the catalogues are nearly identical and switching means rebuilding playlists
- Besides royalties, cost of revenue includes payment processing, streaming delivery and customer service, about 10% of revenue and mostly fixed in the short run. That is why StreamWave's gross margin is 24% rather than 35%. For the case, treat royalties as the only cost that changes with price
- StreamWave's label contracts pay rights holders the greater of 65% of subscription revenue or $5.00 per subscriber per month
- A free-tier user generates about $0.50 of gross profit per month from advertising
- StreamWave has no audiobooks, video podcasts or lossless audio today
Question 1Structuring
How would you structure the redesign of StreamWave's pricing and tiers?
Hint · Structuring
Build 3–4 branches that are specific to this client and question, not a generic framework. Check they don't overlap and together cover the problem.
Additional InformationAsk for dataInterviewer’s data
- Share current plan prices if asked: Individual $10.99, Duo $14.99, Family $17.99, Student $5.49
- Competitor prices are in Exhibit 1 (Question 2); you can share them now if the candidate asks
Try it first, then checkCheck my answerModel answer
A strong structure has four branches:
1. Willingness to pay and price position
- Price gap to Spotify, Apple Music, YouTube Music and Amazon Music by plan
- Price sensitivity by segment (students, families, heavy users, casual listeners)
- Expected extra churn if prices rise, and break-even churn for each plan
2. Tier architecture
- Which plans exist today (Individual, Duo, Family, Student) and what each is for
- Room for a lower tier (Lite) to convert free users, and a higher tier (Pro) for superfans
- Cannibalisation: how many existing subscribers would trade down or up
3. Unit economics per plan
- Revenue per account and royalty cost per account (65% of revenue or the $5.00 floor, whichever is higher)
- Gross profit per account per plan, and how it changes for each design option
4. Competitive and partner response
- How the leaders and the labels react (labels want higher prices, which helps in renegotiation)
- Brand risk: "the affordable one" is StreamWave's current identity
What the interviewer is looking forInterviewer’s viewInterviewer’s view
A good candidate separates the "price level" question (should every plan go up?) from the "tier architecture" question (which plans should exist?). A strong candidate brings in the cost side: royalties scale with revenue, so pricing moves profit less than revenue. An excellent candidate spots that the main risk is not the headline churn rate but who churns and where they go: downgrades to a cheaper tier, or losses to competitors.
If the candidate jumps straight into Good/Better/Best tiers, ask: "How would you know whether StreamWave can charge more at all?"
So What? cascade:
- Level 1: StreamWave is cheaper than competitors
- Level 2: the price gap is no longer needed to win customers, because rivals keep raising prices and music churn is structurally low
- Level 3: every dollar of price StreamWave leaves on the table is mostly profit it gives up. Its margin problem is a pricing problem more than a cost problem
Question 2Numeracy
The pricing team proposes raising every plan to the prices in Exhibit 1. Using the churn estimates provided, what is the impact on monthly and annual subscription revenue?
Hint · Numeracy
Write the formula before you plug in numbers, keep units and zeros explicit, and sanity-check the order of magnitude at the end.
Exhibit 1StreamWave Plans, Proposed Prices and Competitor Benchmarks (US, monthly)
| Plan | Accounts (M) | Current price (rounded) | Proposed price | Est. extra churn from increase | Spotify (Feb 2026) | Apple Music (Jul 2026) |
|---|---|---|---|---|---|---|
| Individual | 4.5 | $11.00 | $12.00 | 4% | $12.99 | $11.99 |
| Duo | 0.9 | $15.00 | $17.00 | 3% | $18.99 | n/a |
| Family | 1.2 | $18.00 | $20.00 | 2% | $21.99 | $19.99 |
| Student | 1.4 | $5.50 | $6.50 | 10% | $6.99 | n/a |
| Total | 8.0 |
Competitor prices are published list prices. Even after the increase, every StreamWave plan remains at or below both leaders.
Source: StreamWave case file
Additional InformationAsk for dataInterviewer’s data
Share Exhibit 1 and the following:
- Use the rounded prices in Exhibit 1 for the calculation
- The "extra churn" is a one-off loss of accounts caused by the price increase, on top of normal monthly churn
- Assume the account mix is otherwise unchanged
Try it first, then checkCheck my answerModel answer
Step 1: Current monthly revenue
- Individual: 4.5M x $11.00 = $49.5M
- Duo: 0.9M x $15.00 = $13.5M
- Family: 1.2M x $18.00 = $21.6M
- Student: 1.4M x $5.50 = $7.7M
- Total: $92.3M per month (about $1.11B a year)
Step 2: Accounts after the extra churn, and new revenue
| Plan | Accounts kept (M) | New price | New monthly revenue |
|---|---|---|---|
| Individual | 4.5 x 96% = 4.32 | $12.00 | $51.84M |
| Duo | 0.9 x 97% = 0.873 | $17.00 | $14.84M |
| Family | 1.2 x 98% = 1.176 | $20.00 | $23.52M |
| Student | 1.4 x 90% = 1.26 | $6.50 | $8.19M |
| Total | 7.63 | $98.39M |
Step 3: Impact
- Monthly: $98.39M - $92.3M = +$6.09M (+6.6%)
- Annual: $6.09M x 12 = +$73.1M
- Accounts lost: 8.0M - 7.63M = about 370,000
Step 4: Break-even churn (1 - old price / new price)
- Individual: 1 - 11/12 = 8.3% (estimate 4%)
- Duo: 1 - 15/17 = 11.8% (estimate 3%)
- Family: 1 - 18/20 = 10.0% (estimate 2%)
- Student: 1 - 5.5/6.5 = 15.4% (estimate 10%)
Every plan has a safety margin: at least twice the estimate for Individual, Duo and Family, and about 1.5 times for Student. Student is the tightest, and it is also the plan where the royalty floor bites (see Question 3).
Step 5: Gross-profit view (approximate)
- About 35% of the extra revenue is kept after royalties: $73.1M x 35% = about $25.6M a year
- That is roughly 2.3 points of gross margin on a $1.1B revenue base. It is useful but does not close the 11-point gap to the leader on its own
- Refinement for an excellent candidate: Student sits on the $5.00 royalty floor both before and after the increase, so StreamWave keeps all of its Student gain (gross profit rises from $0.70M to $1.89M a month). Applying the royalty rule plan by plan gives about $3.15M a month, or about $38M a year. The 35% shortcut is conservative
What the interviewer is looking forInterviewer’s viewInterviewer’s view
Look for a clean table: current revenue, then accounts kept, then new revenue, plan by plan. A strong candidate also works out break-even churn (the loss of accounts at which the price increase stops adding revenue) and notices that all the estimated churn figures sit well below it. An excellent candidate adds that about 65% of any extra revenue goes to the labels, so the gross-profit gain is only about a third of the revenue gain.
So What? cascade:
- Level 1: revenue goes up by about $6M a month
- Level 2: Individual, Duo and Family could lose at least twice the estimated accounts and still come out ahead; even Student has about 1.5 times headroom, so the decision is robust
- Level 3: under percentage royalty deals only ~35 cents of each extra dollar is kept (about $25M a year), so pricing alone cannot close the margin gap. The tier structure has to do some of the work
Question 3Judgement & Insights
The board also wants a $7 "Lite" plan and a $20 "Pro" plan. Using Exhibit 2, should StreamWave launch one, both or neither?
Hint · Judgement & Insights
Read the exhibit title, axes and units first. Lead with the ‘so what’, then back it with one or two numbers.
Lite is ad-free with limited skips and no offline listening. Pro adds lossless audio, early ticket access and artist extras.
Exhibit 2Tier Research (survey of 6,000 StreamWave users, weighted to the base)
| Behaviour if tier is launched | Share | Accounts | Notes |
|---|---|---|---|
| Individual subscribers who would move to Pro ($20) | 10% of 4.5M | 450,000 | Heavy listeners, 30+ hours per week, concert-goers |
| Individual subscribers who would move to Lite ($7) | 20% of 4.5M | 900,000 | Casual listeners, under 5 hours per week |
| Free-tier users who would subscribe to Lite ($7) | 3% of 16M | 480,000 | Never paid for music before |
| Free-tier users who would subscribe to Individual ($12) | under 0.5% | small | Cited price as main barrier |
Extra delivery and licensing cost for Pro features (lossless streams, extras): about $0.30 per Pro account per month.
Source: StreamWave case file
Additional InformationAsk for dataInterviewer’s data
Share Exhibit 2 and remind the candidate that:
- Royalties are the greater of 65% of revenue or $5.00 per subscriber per month
- Assume the Individual plan is already at the new $12 price, with 4.5M accounts for simplicity
- A free-tier user earns about $0.50 of gross profit per month from advertising, which is lost when they upgrade
Try it first, then checkCheck my answerModel answer
Step 1: Gross profit per account per month
| Plan | Price | Royalty (greater of 65% or $5.00) | Other cost | Gross profit |
|---|---|---|---|---|
| Lite | $7.00 | $5.00 (floor applies; 65% = $4.55) | - | $2.00 |
| Individual | $12.00 | $7.80 | - | $4.20 |
| Pro | $20.00 | $13.00 | $0.30 | $6.70 |
Step 2: Lite impact
- Trade-downs: 900,000 x ($4.20 - $2.00) = -$1.98M per month
- New payers: 480,000 x ($2.00 - $0.50 lost ad profit) = +$0.72M per month
- Net: -$1.26M per month (about -$15M a year)
Step 3: Pro impact
- Trade-ups: 450,000 x ($6.70 - $4.20) = +$1.125M per month (about +$13.5M a year)
Recommendation
- Launch Pro. It adds about $13.5M of gross profit a year, targets the users most loyal to StreamWave, and helps with the labels, who want higher-value subscribers
- Do not launch an open Lite plan. The royalty floor makes it a margin trap. If the board wants a stepping stone for free users, fence it: offer it only to accounts that have never paid, on mobile only, and ask the labels for a lower floor on a restricted product
- Watch the Student plan. At $6.50 its royalty is also the $5.00 floor, which leaves $1.50 per account. It should be treated as an acquisition channel with verification and a hard age limit, not as a profit line
What the interviewer is looking forInterviewer’s viewInterviewer’s view
This question has a trap. Lite looks like a growth play: it converts 480,000 free users into payers. But the $5.00 royalty floor means a $7 subscriber leaves only $2.00 of gross profit, and 900,000 Individual subscribers would trade down. A candidate who counts only the new payers will recommend Lite. A strong candidate computes gross profit per account per plan before looking at volumes.
So What? cascade:
- Level 1: Lite adds 480,000 paying accounts and Pro has 450,000 takers
- Level 2: per account, Lite earns $2.00 of gross profit, Individual $4.20 and Pro $6.70, so the direction of each move matters more than the count
- Level 3: launch Pro now. Only offer Lite if it is fenced (for example, only to free users or only in a mobile app), because an open Lite plan destroys more profit than it creates
Question 4Creativity
Beyond list prices and new tiers, what other levers could StreamWave use to increase revenue per subscriber or reduce churn?
Hint · Creativity
Brainstorm in buckets (e.g. internal vs external, short vs long term) so ideas stay structured and you can see gaps.
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Price structure
- Annual plans at about two months free: lock in revenue and cut monthly churn
- Price increases for new subscribers first, with existing ones grandfathered for 6 to 12 months, to spread churn risk
- Stricter Family and Duo checks (same household), so Individual users cannot share a plan cheaply
Packaging and add-ons
- Add-ons on top of any plan (lossless only, concert pre-sale access, podcast extras) for users who do not want the whole Pro plan
- Partner bundles (mobile carrier, broadband, gaming subscription) that lower acquisition cost and churn
Retention
- Win-back offers only for users who cancel for price reasons, rather than blanket discounts
- Better personalisation for new subscribers in their first 90 days, when most churn happens
Free tier
- More ads, or tighter limits on free listening, to push the 16M free users toward paying plans
- Ad formats with higher prices (audio and video sponsorships) to lift the $0.50 of monthly gross profit per free user
What the interviewer is looking forInterviewer’s viewInterviewer’s view
Look for ideas grouped into buckets (price structure, packaging, distribution, retention) rather than a random list. Strong candidates tie each idea back to a number already in the case: churn of 2.8% vs. about 2%, 16M free users, the $5.00 royalty floor.
Question 5Synthesis
The CEO meets the board tomorrow. What is your recommendation?
Hint · Synthesis
Answer first: the recommendation, two or three reasons with numbers, then risks and next steps.
Try it first, then checkCheck my answerModel answer
Recommendation: raise prices on every plan, launch a Pro tier, and do not launch an open Lite tier.
- Raise prices to the proposed levels. This adds about $73M of revenue and about $26M of gross profit a year. StreamWave stays at or below Spotify and Apple Music on every plan, and Individual, Duo and Family can each absorb at least twice the expected churn (Student about 1.5 times) before the increase stops paying.
- Launch Pro at $20. It adds about $13.5M of gross profit a year from 450,000 heavy listeners and gives the labels a reason to offer better terms.
- Reject an open Lite plan. The $5.00 royalty floor turns each trade-down into a $2.20 monthly loss, a net loss of about $15M a year. Try a fenced version for free users only.
Combined impact: about $39M of extra gross profit a year (about $25.6M + $13.5M), or roughly 3.5 points of gross margin on about $1.1B of revenue. This is conservative: counting the Student plan's royalty floor exactly, the price increase alone is worth about $38M, and the total about $51M.
Risks and mitigations
- Churn higher than expected: roll out Individual first, track cancellations weekly, and pause if churn nears the break-even rate
- Loss of the "affordable" position: keep Student and Family clearly below the leaders
- Label renegotiation: use the higher revenue per account to negotiate the per-subscriber floor down on restricted products
Next steps: test the new prices on 5% of new sign-ups for four weeks, write the Pro feature list with two labels, and model the Student plan's economics under a lower floor.
What the interviewer is looking forInterviewer’s viewInterviewer’s view
The best answers lead with a clear recommendation, give two or three numbers, and name the risks. Good candidates recommend the price increase. Strong candidates combine it with Pro and reject an open Lite plan. Excellent candidates reframe StreamWave's position: the "cheapest" identity is worth less than the board thinks, because music churn is low and rivals keep raising prices, so the brand has to rest on something else (discovery, curation, artist access).
Data Sources
Market facts in this case come from public sources. Figures are rounded for interview math. StreamWave and its financials, survey results and contract terms are fictional.
| Fact used in the case | Publisher | Title | Year | URL |
|---|---|---|---|---|
| Global recorded-music revenues of approximately $31.7B in 2025, up approximately 6.4%; paid subscription approximately 52.4% of revenues, up approximately 8.8%; approximately 837M paid-subscription users | IFPI | Global Music Report 2026: Global recorded music revenues grow 6.4% | 2026 | https://www.ifpi.org/global-music-report-2026-global-recorded-music-revenues-grow-6-4-as-record-companies-drive-innovation/ |
| Spotify US prices from Feb 2026 (announced 15 Jan 2026): Individual $12.99, Duo $18.99, Family $21.99, Student $6.99; third US increase in four years | Variety | Spotify Is Raising U.S. Subscription Prices in the Next Month | 2026 | https://variety.com/2026/digital/news/spotify-price-increase-us-subscription-plans-1236632136/ |
| Apple Music US prices from Jul 2026: Individual $11.99 (was $10.99), Family $19.99 (was $16.99) | Digital Music News | Apple Music Once Again Bumps Its U.S. Prices — Individual Increases to $11.99 Per Month | 2026 | https://www.digitalmusicnews.com/2026/07/17/apple-music-price-increase-2026/ |
| About two-thirds of music revenue is paid to rights holders | Spotify | Loud & Clear: Your Questions, Answered | 2026 | https://loudandclear.byspotify.com/faq/ |
| Spotify Premium segment gross margin approximately 35% (€1,511M gross profit on €4,331M revenue, Q2 2026); 300M Premium subscribers; Premium ARPU €4.89, up 7%, driven mainly by price increases | Spotify Technology S.A. (SEC Form 6-K) | Interim financial report for the quarter ended June 30, 2026 | 2026 | https://www.sec.gov/Archives/edgar/data/0001639920/000162828026052543/spot-20260630x6xk.htm |
| Spotify monthly churn around 2%; churn between music services about a quarter of churn between video-streaming services (Antenna data) | Music Ally | US study hails loyalty of Spotify's music-streaming subscribers | 2024 | https://musically.com/2024/06/04/us-study-hails-loyalty-of-spotifys-music-streaming-subscribers/ |
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