What is monetization strategy?
First, let’s understand: what is monetization? Monetization strategy refers to how a company decides to make money by offering its product or services to customers. This is a company deciding what they’re going to start charging users for them to use their products or services. Figuring out how you make money is tied in with what you’re naming it, when you charge, how often you charge, and how much it costs. For most software companies, revenue is the ultimate metric, and monetization is the strategy that touches revenue the deepest. The key reasons for a company to prioritize monetization strategy are:
- Monetization allows companies to make money, which enables the team to reinvest into growth.
- Monetization completes your product-market fit: it’s a reflection of your product’s positioning and packaging that ultimately allows you to build a sustainable and profitable business.
- A focus on monetization strategy forces companies to focus on growing the set of users with the highest ARPC.
- Rather than cost cutting, monetization strategy is a lever for accelerating revenue through its compounding effects on acquisition and activation.
To grow a company, product and marketing teams will think about several strategies, including but not limited to common ones such as acquiring paid users, reducing product friction, and improving product retention. When it comes to revenue, it seems like sales alone is somehow responsible for numerical dollar amounts, and it can feel as if product and marketing will dust their hands and work on user and retention problems (often times as proxy or leading indicator) rather than directly on revenue ones.
For product teams, the first default tactic to impact the bottom line is often to “cut costs”. This is also true for marketing teams that track metrics like LTV:CAC, where after a 4-5 years, LTV rarely grows and instead we look to decrease the cost basis of the users we acquire. Product teams often look at the traction of their time investments and determine whether products and features are additive or detrimental – if the latter, we shut down the feature, or roll it back. If the product or feature is neither good or bad, then usually nothing happens and is handed over to sales and marketing to grow adoption. These are problematic perspectives that are miss the mark on distributing a product to an end customer. Ultimately, a user will purchase a product that they need if the price and packaging are right in their moment of need. Companies can inspire users to get to that moment, but for the most part, a product’s core job is to get users to that point.
Pricing strategies today – SaaS & enterprise
Pricing is a very relevant topic today, where companies need to adjust prices due to the rising costs of doing business as a result of decades-high inflation rates. Companies like Netflix or Beamer for example, have announced their price increases. Some of these companies are taking extra care to word their messages by addressing value-added features to justify the increases (Netflix explained that they are providing a lot more value through an extensive new collection of movies and TV shows). Yet others simply saying that their costs have risen and they need to increase prices as a result (Beamer announced that COGS have increased). Regardless of the circumstances, price changes will impact users in different ways, such as affecting the satisfaction of existing users or changing the perceived value of new potential users. Prices also affect how users perceive a company’s competitive positioning. In the examples above, companies expressed that their prices were forced due to broader economic conditions, and that they had no choice but to begrudgingly change. But while these example are driven by an increased cost basis, there are many benefits to thinking about pricing and packaging proactively relative to positioning.
In a world where user growth is typically seen as a proxy to revenue growth, there are many missed opportunities when it comes to driving growth through the components of monetization. Let’s break those down into the raw pricing and packaging components that a monetization strategy represents:
If we only rely on growing the # and composition of users to grow revenue, we missing out on a big part of our conversion engine. For example, what if your business only offered two plans today – one for consumers and the other for businesses, and you found out that the prosumers using your product were looking more for business-type features, but were paying for the consumer plan? That’s both money and potential users left on the table, so there’s a ton of value in exploring how you could create a separate package for your prosumer users. The company Webflow, a low-code website builder platform, does a great job of identifying several distinct segments of users that would want to pay to create a website. Though the monthly prices are each within a low range of prices, they individually speak to the specific type of customer who is looking to create a website through the tool – a blogger would look at the CMS plan, whereas a small business would start with the business plan, and someone who is just getting started and doesn’t have the need to collaborate with others or utilize scalable page types would go for the starter or Basic plan.
Why don’t companies use pricing as a growth lever?
While it makes sense that we would want to package appropriately for our target customer segments, there are still reasons why companies don’t prioritize monetization as a growth lever. Based on my experience working at large companies like Pinterest and Facebook, to smaller startups like Indiegogo and Descript, these are the key reasons why companies don’t prioritize pricing changes as a growth lever:
- It seems customary to focus on getting customers first, then getting monetization right later. For many consumer companies, we’re trained to think of the goal as a hockey-stick shaped user growth curve. SaaS companies track ARR, but even then, revenue growth is driven by assuming changes in the number of paid seats rather than increasing revenue per user.
- Pricing and packaging isn’t a typical skill set for anyone on product or growth teams – it feels like an abstract decision that is driven by experienced people.
- Pricing changes aren’t easy to make. Not only are these changes deeply embedded within existing product flows, such as checkout experiences, feature gates, or pricing pages, they are also decisions that no single team can make alone. Changing prices also risks the satisfaction of your core customers, if you’re not doing it right.
Given the potential hurdles of getting buy-in from internal stakeholders such as the CEO, product and marketing leaders, to your own customers, updating your company’s pricing can be hard to get started. But the changes of a company having gotten pricing and packaging right on the first try is low, and particularly as a company is scaling its growth, there are many reasons that make pricing changes incredibly advantageous.
How do you build a monetization strategy for your product?
There’s an art and science to landing a monetization strategy. There’s no one-size-fits all strategy, even as a baseline, that will apply to the specific context of the product and market that you’re building for. The best thing to do is to start with the intuition you have for your customer set, and begin to validate it through experiments. Start with your own baseline and go from there. There’s no one else’s pricing strategy that you can copy and instantly become successful with (in fact, it can often be detrimental to just follow what your peers are doing without considering how it impacts your customers). That said, here are a few of the most important considerations for creating your baselines and experimenting from that point:
- Monetization isn’t just price changes, it’s about positioning relative to your understanding of customer value and how your product delivers it. Think about how packages are separated, and make the decision points clear for customers. Your goal isn’t to confuse them on what they want, but rather to offer them a clear way to make a decision on how pricing scales value for their usage of your product.
- Don’t bet all of your eggs in one basket, test changes where you can. Geographical or audience roll outs are a great way to test without disrupting the entire user base.
- Don’t reengineer all of your product SKUs right out of the gate. Painted door tests are a way to get real reactions that mimic true conversion rates.
- If unit economics / profitability don’t work yet, don’t rely solely on cost-cutting. Look toward pricing and packaging as a lever proactively, as it could change your COGS considerations.
Implementing a monetization strategy at your company
So then how do you know if you even have the right monetization strategy before you’re a prime candidate for pricing and packaging changes? The reality is that pricing and packaging is never going o be a decision made in a vacuum. Being at the bottom of the funnel, monetization strategies will see the compounded effects of acquisition and activation for better or for worse. You might be charging the wrong price or on the wrong value metric for the right customer, even if it gates access to the right thing.
Monetization is an incredibly interdisciplinary sport. In this topic alone, you’ll end up running through at least these functions:
- Product marketing view of different segments.
- Qualitative and quantitative research to run pricing surveys such as Max diff or conjoint analysis.
- Data science-led pricing tests, with test vs. control audiences, a/b variants, or other tests of statistical significance.
- Customer support management to manage new and existing user questions and sentiment.
- Sales & marketing will need to update pricing and packaging messages across the website, emails, and in external publications.
- Finance to work through implications of how it impacts bottom line and other company numbers.
- Product and design to identify the right flows to introduce pricing and packaging.
Not only does pricing require a strong general manager skillset, it also requires driving alignment amongst many stakeholders. Monetization isn’t going to be as simple as one person’s decision – because it ties to revenue and product, it will likely require working with the CEO in earlier stage and growth stage companies. This will involve bringing data, customer insights, strategic insights, risk management, and more to the table just in the process of writing a proposal alone. Given the complexity of pushing through pricing changes, testing every change isn’t always possible. Sometimes, you just have to roll it out and see how it works. If it doesn’t work well, you can roll back as long as you’re transparent and keep your customers updated each step of the way.