4 Monetization Models
Digital business is expected to generate billions in new revenue in the next four to five years. However, MGI Research predicts that digital businesses will need to increase their time to market by 40 percent. Many global executives admit they are unprepared to monetize their operations. The million dollar question is: how do you get from here to there?
Getting there requires adopting a new mindset that focuses on “revenue moments” instead of product sales. Revenue moments can occur whenever a customer interacts with your company through product, website, email, billing, servicing, provisioning, or other similar activity. For example, when a customer is notified that they are reaching a usage threshold on their plan, you offer them a plan upgrade. The good news is that there are hundreds of potential touch points that provide opportunities for customers to purchase additional upgraded services. Each of these interstitial points of connection with your consumer gives your business the opportunity to build customer lifetime value (CLV)—a key metric in measuring the health of your recurring business. Over time, this method of strengthening your customer relationship—which can be as significant and long-lasting as a marriage— not only increases profitability, but also cements customer loyalty to your brand.
In a recurring revenue model, monetizing your business goes way beyond exchanging products and services for money. You must leverage each and every revenue moment. Only then will you maximize customer lifetime value (CLV), retain more customers, and leave the door open for existing customers to buy more of what you’re selling.
Yet, retention starts with customer acquisition. Choosing an enticing monetization model that is also well suited to your business is key. Here are four popular ones worth considering:
This is the tried-and-true way to sell. Cash is exchanged for goods and services, and the buyer and seller part ways. But there’s a lot that remains unknown: Will the buyer come back? Who knows? One-time transactions depend heavily on constantly luring new customers and direct-contact methods of bringing old customers back, both of which are prohibitively expensive.
Pros: This model is widely known and used. Cons: Your business always starts at zero.
In this basic entry into recurring revenue, the customer receives a good or service, like software or magazines, and they pay the same amount every month to receive or use it. With subscriptions, a high percentage of customers are retained, and their CLV can immediately be added to the bottom line. The good news is that retaining a customer also costs up to 10 times less than acquiring a new one.
Pros: The flat-rate subscription model increases CLV. Cons: It can be a limited, one-size-fits-all solution.
Usage, or consumption based monetization is used for everything from car sharing to cellular data. Pay for what is used, no more, no less. Usage-based business is usually done on a membership or contract basis, so the recurring revenue and increased CLV that comes with subscriptions usually applies here too.
Pros: Usage-based services are a fair and easy way for the customer to buy your product with a low cost of entry and very low risk. Cons: Usage-based recurring revenue is not guaranteed. Usage can also vary, making revenue difficult to predict.
Tiered pricing can be based on usage (price per unit increases or decreases with usage). It can be offered along with additional features and levels of quality (silver, gold, platinum) or a combination of the two. The increasing price model is applied to reduce usage (think water and power). The decreasing price model can encourage customers to buy more, but pay less per unit. For example, for cloud storage, you might pay $.029 per GB up to 1TB, but you pay $.019 per GB for 1TB or more.
Pros: Tiered models provide more choice for customers, and more opportunities for revenue moments and additional revenue. Cons: Basic billing systems and many homegrown solutions may not be able to handle complex hybrid models, and customer service is more difficult without an integrated, single source for customer information.
What’s Right for Your Business?
Unless you are selling houses, one-time transactions are probably not the best way to sell your product. When you look at using any of the other models, you have to think about your technology and the processes necessary to handle the sophisticated transactions.
It may seem complex to pull off, but the end game is simple really. The goal is to serve the customer and create the best experience for them. To do so you’ll need to make sure all factions of the company and resources are aligned. With that in place, both your customer and business stand to gain.
Think of your digital business like any good marriage, you want to make sure that your partner (in this case, the customer) has excellent experiences with you to remember over the years. That will strengthen your commitment to each other, so you’ll live happily (and profitably) ever after.
By Tom Dibble