Case | HBS Case Collection | March 2010 (Revised November 2010)

Pandora Radio: Fire Unprofitable Customers?

by Willy C. Shih and Halle Alicia Tecco

Abstract

Pandora Radio is at a crossroads. Founder Tim Westergren has just been told by a well known VC to get rid of his unprofitable customers in order to get his costs down, but Westergren is not sure that such actions are consistent with his company's business model. Pandora Radio is the largest Internet music stream site, and its rapidly growing user base loves the free customizable music stream under an advertising supported model. Pandora has to pay royalties for every song streamed, and has other variable costs that scale linearly with hours consumed, but it has taken no steps to restrict the amount of usage among its heaviest and most loyal users. Can Pandora make its model work when a significant percentage of its users cause it to lose money?

Keywords: Business Model; Customer Satisfaction; Music Entertainment; Venture Capital; Profit; Growth and Development Strategy; Consumer Behavior; Internet; Media and Broadcasting Industry;

Citation:

Shih, Willy C., and Halle Alicia Tecco. "Pandora Radio: Fire Unprofitable Customers?" Harvard Business School Case 610-077, March 2010. (Revised November 2010.)