Product Monetization Strategies: Top 5 You Should Know
If you're new to this series, and wondering why monetization should even be your problem, have a quick go at this humbling conversation with our expert Stephane Lebas (CPO @ Qare) first. Be warned, if you're a product person, your feelings won't be spared...
If you want to get serious about your product monetization, then your first step is to go broad and learn about different types of strategies before settling for one (or worse, just copy pasting your main competitor's price page). As Stephane says, "sticking to the only model you know just because you benchmarked the competition is a huge missed opportunity".
In this article, you will get to open your "CEO of Product" mind and be introduced to 5 essential monetization strategies for digital products and services – which, once mastered, can lead you to almost limitless combinations to enable revenue, growth and profitability.
What is monetization ?
Monetization is more than just defining a price for your products and services. It is how you choose to package and structure your offer to deliver value to your customers in the first place.
In other words,
Monetization is the process of deriving revenue from the value you offer, package and price to your customers.
A simple example.
Airbnb has 2 types of customers.
- Hosts, who want to delegate the job of listing their place to potential guests, handling the booking process, and securing the transaction. That’s the value they’re in demand for, and willing to pay for. In exchange of that value, Airbnb charges them a 3% commission on every booking transaction.
- Guests, on the other hand, want to find alternative locations to stay at across the world. For that service, Airbnb charges them a service fee between 5% and 15% of the booking transaction.
These are the 2 sources of revenue for Airbnb. By monetizing the value offered to both guests and hosts, through collecting service fees, Airbnb generated $5.99 billion in revenue in 2021.
In this article, we will focus on optimizing monetization for digital services such as Airbnb. It is also assumed that your value model is already identified and defined to some extent.
Meaning you have some level of confidence about:
- Who is your target customer group? Ex: Hosts and guests
- What value are you offering them? Ex: Helping hosts list their places, and guests book places, through a peer-to-peer platform
Once you're clear on the above, great! You're ready to start experimenting with monetization.
Here are the 5 monetization strategies you should know (by heart)
What is important to note here, is that these strategies are NOT mutually exclusive. On the contrary, you may decide to combine several or all of these strategies at different moments of your product lifecycle, different parts of your product, or with different segments of your customer base.
Usually, it is the optimal combination of these strategies that will form your monetization model. It is dynamic and evolutive over time, and to get there you will need to learn which factors and business inputs to analyze in order to pick the best combinations for your product.
But we’ll get there in time. For now, let’s get familiar with some of these 5 strategies. It is not a comprehensive list, but a selection of the most commonly used strategies especially in the Digital services economy.
A subscription model asks customers to pay a recurring fee to access content or services. This can be done monthly or yearly.
The best example is Amazon Prime. For a monthly or annual fee, Prime subscribers can enjoy faster delivery service and access to movies and TV shows.
Subscription models are great for:
- Securing recurring revenue. Meaning your product revenue can be pretty well predicted on a month to month basis. Unlike a site that sells hundreds or thousands of items that have ebbs and flows of popularity depending on a variety of factors, subscription services sell a single product that is guaranteed to the buyer, and in return, the buyer guarantees their payment.
- Developing solid customer relationships. Because of the monthly nature of subscription services, you have an extended period of time to develop a relationship with your customer. This means you can learn what they value and what they’d like to see change. Their feedback can allow you to further improve your model and retain customers for the long term.
There are some drawbacks though:
- High risk of customer churn. You’ll need to consider the possibility of customer turnover and what you’ll do to avoid high cancellation rates. You can work to retain customers by consistently offering new products, providing high-quality customer service, and making it easy for customers to cancel if they choose to do so. Making it harder for a customer to cancel will only make them resent your business more.
- Initial subscription avoidance. It’s easy for consumers to purchase a new product once—there’s no commitment, and if they don’t like it, they can return it or simply avoid buying it again. But when there’s a contract involved, things get a little more tricky. Many customers are wary of signing up for an ongoing service since they aren’t sure if they’ll find value in the product. They may want to avoid the commitment, or they may be worried about getting stuck in a contract that’s hard to get out of.
- Constant need to provide new value. Today’s consumers are easily bored—and even more easily distracted. For this reason, subscription business models need to constantly provide new value to their customers, which can be exhausting and time-consuming. Just as Netflix is constantly changing the movies and TV shows offered on their platform, other subscription services need to stay relevant by coming up with new products and services.
Probably the most popular and well-known strategy among the 5 – more like a tactic than a strategy, to be honest.
Let’s take a look at some of the most popular methods for discounting digital products:
- Discount codes. Most of us have encountered discount codes, which often come in combinations of short words, numbers, letters, or other characters. The customer must enter the code at the checkout before the discount can be applied to their final purchase. Discount codes are easy to use and distribute, and there are a variety of tools and plugins available to add the functionality to your digital product store; if you are already an Easy Digital Downloads user, you’ll already have built-in access this feature. They are also one of the most effective ways to get customers to sign up for newsletters / mailing lists, or otherwise collect contact information.
- Conditional discounts. This type of discount can apply to things like certain combinations of products (for example: when the customer buys one product, they could get a related product for 50% off), a specific number of products (for example: “buy 3 and get 1 free”, also known as a quantity or volume discount), and (similar to product combinations) discounts based on the customer’s previous purchases (for example: “based on your recent purchase of X product, we thought you might enjoy 10% off of these related products).
- Incentive discounts. In general, incentives are very effective when it comes to inspiring action, and incentive discounts are no different! An incentive discount may require that the customer take a certain action, such as liking your store’s Facebook page or sharing a social media post. This action not only increases sales conversions; it also expands your reach, builds social proof, and generally boosts your promotion without requiring much effort on your part. Referral bonuses have existed since long before eCommerce, so this is a time-tested strategy!
Subscription x Discount = Trial
Now, let's see how some (if not all) of these 5 basic strategies can be combined together to form even more powerful combos. This is just to get your creative juices flowing, as we start to explore the possibilities offered by your basic set of 5.
For example, you can combine a subscription model with a discount strategy, by offering a trial period.
There are different forms of trials, but basically the idea is to reduce the price of your service for a limited time or as an introductory offer.
For example, Amazon Prime offers a 30-day free trial. After the free trial ends, users can either pay or must stop using the product. The benefit of free trial is that you can get more people to try your whole product, and experience the features they might be willing to pay for. It also creates a sense of urgency to pay, which is great to drive conversion.
Another form of Discount approach, is the well-known freemium model.
In a freemium model, users can access a limited version of the product, for free and forever. They may upgrade to a paid plan at some point to access additional premium features, improved level of service or more usage.
For example, Slack free version limits your message history and premium features like integrations or the ability to onboard external partners. Freemium is great to expand your user base, at a lower barrier of entry and cost of acquisition. Even if a user isn’t paying for your product, they will build a habit of using it, generating useful data to help you understand what would make them pay. Plus, they might advocate for your product and bring other people into your product who may pay.
A bit less known form of trial, is the reverse trial, combining the best of both free trial and freemium.
With reverse trial, the idea is to give free access to your full product for a limited time period, before reverting users to a traditional freemium product. You get to maximize usage, advocacy and conversion.
Companies like Canva or Toggle have been using this reverse trial strategy.
Ok, time to buckle your seat belt now. Let's look at value metric strategies, which are an entire world of its own.
Value metric strategies are a very powerful way to structure your offer directly based off what your customers value the most in your product.
A value metric is something your customers associate value with. They view that aspect of your product as valuable, and it is part of the reason why they’re willing to pay for it. Said simply: what’s in it for them?
A value metric should be:
- Easy to understand,
- Aligned with the value effectively received by your users,
- And it should grow with your user’s business.
For example, Hubspot segmented their plans according to the number of contacts. By letting their customers (mostly marketers and salespeople, for whom leads are essentially bread and butter) managing more contacts, Hubspot delivers them more value, and in the process gets a share of the value generated. Hubspot grows, as their customer grows. Win win.
And no, your value metric isn’t necessarily the number of users on the plan. Slack is rather the exception than the norm, because of the network effect (paid users are motivated to bring more users onboard to better collaborate). To find out yours, think about it from a desired outcome perspective: if your product generates more value for your customer, and helps them succeed, in which areas of your product will this success be reflected?
Once you identified a value metric for your product, you can combine it with either a subscription model (where your users will get monthly access to more or less of that value metric depending on which plan they choose, like the Hubspot example above), or a bundle strategy (where your users purchase a definite amount of that value metric in one transaction), or an add-on strategy (where your users can top up or refill that value metric with an additional transaction).
We hope you learnt something today, and that this article convinced you that:
- Like chess, monetization can be learnt in minutes, but takes years to master :)
- You can get started, with just these 5 basic monetization strategies
- The rest is like a Lego game: figure out what is a good fit for your business, then experiment with combinations