Last week Music Business Worldwide reported that Pandora plans to experiment with bite-sized subscriptions, allowing registered users to purchase the ad-free version of Pandora for 24 hours for only $0.99. Pandora CFO Mike Herring said this is ideal for parties or other celebrations where you want to play Pandora without the ads, but you aren’t ready to commit to a monthly or annual subscription.

For those who do subscribe to Pandora’s premium product – Pandora One – the Internet radio company has made other changes in the last year. In December 2014, Pandora restarted its annual billing program for subscribers who upgrade on their computers. For existing Pandora One subscribers, the monthly subscription price will remain at $3.99 per month, while as of May 2014, new subscribers are now being charged $4.99 per month.

According to the article, while Pandora’s most lucrative growth opportunity is ad revenue, it is a challenge to balance advertising revenue and subscription dollars.

Herring says, “The problem with subscription is that it tends to attract our heaviest listeners, and the heaviest listeners can eventually be unprofitable. It’s about a 72 hour break-even period. So even though the revenue-per-use is higher, the profit per user – because the licensing costs are so significant – is a balancing act.”

He added that Pandora is always looking to optimize revenues and profits, and anticipates adding more price points and a larger portfolio of products to optimize the business.

Insider Take:

According to Pandora’s 2014 year-end financials, the company has positive cash flow and expects 2015 to be a year to position the company for long-term growth. Last year, Pandora had 81.5 million active listeners, 7% growth over the previous year. Those users listened to a total of 20.03 billion hours of Internet radio last year, a 20% increase over the previous year. Of those listeners, approximately 3.5 million are paid subscribers, according to a Forbes article from October 2014.

Pandora reports $732.3 million in advertising revenue, or 80% or total revenue, and $188.5 million in subscription and other revenue, or 20% of total revenue, for the year-ended December 2014. Total revenues represent a 44% increase over 2013.

With such a significant percentage of its revenue coming from advertising, it makes sense that Pandora would continue to focus on growing that portion of the business. However, it is also critical that Pandora address the needs of its listeners and subscribers. While content acquisition costs are high ($446.4 million in 2014), without updated content, listeners and subscribers won’t have a reason to stick around.

With only 4% of its listeners being paid subscribers, Pandora has a huge opportunity here. Pandora should explore tiered subscriptions and new products and services to offer its listeners, finding that sweet spot to grow both sides of the business without neglecting subscribers who have other options. It might also consider partnerships with businesses like Jukely who offer different, but complementary services.