Everything you do in your company is a process, and you should think of monetization in the same way. Every startup founder must have a clear monetization strategy in place for the current situation and future plans.
Entrepreneurs have many models to choose from when it comes to pricing strategies, and it can be overwhelming sometimes, but it is not difficult. While choosing models, entrepreneurs must consider the market they are in, their customers, and their competitors. However, some founders think that once they put a pricing model plan in place, it's over, but it's not that easy. The monetization model needs to be updated and renewed to suit the company's stage and increase its financial returns. We will be highlighting the five most popular monetization models from Monetizing Innovation by Madhavan Ramanujam and Georg Tacke.
It occurs when the customer makes periodic or automatic payments to receive certain services or to access the company’s offering continuously, such as subscribing to the Netflix platform. Among the advantages of the business model subscriptions is the amount of data accessible to the company to know the customers’ behaviors and preferences to create offers that suit them. Also, the relationship between subscribers and brands is stickier than transactional ones, the customers will have a strong relationship with the company, and they can be unofficial ambassadors for the brand, thereby increasing referrals and the brand’s value.
Subscription models work best for products or services that are used continuously. They also work in highly competitive industries.
It occurs when product pricing fluctuates based on factors such as season, time of day, weather conditions, or other considerations that may affect customers' willingness to pay (WTP).
With the progress in data collection and analysis, companies and sectors can now use more complicated algorithms to adjust prices more frequently - Uber is a prime example of this. Uber's peak-time pricing is an example of dynamic pricing, but companies can fall into ethical issues like what happened with Uber. Their algorithms raised the price of the trip fourfold in a dangerous area that was being shot. The incident was described as taking advantage of people's needs, and campaigns were launched against Uber by American citizens. Uber has made promises to refund the cost of trips affected by the price hike, as well as offer free trips to customers to improve the brand's image.
A way to know if dynamic pricing works for your product or service is to ask yourself what factors impact this volatility and whether you could set your price based on these factors.
It occurs when auctions determine prices based on competition for goods or services. The first auction dates back to 500 B.C, and today, thanks to technology, everything can be sold at the auction - from securities to artwork.
Google works with this model through AdWords. Companies bid on specific words that describe their company so that when a customer searches for a particular word, the company that won the auction appears first in the search result of Google browser. For example, two air conditioner maintenance companies compete for words like air conditioner, malfunction, and the highest bidding company appears higher. Another type of bidding may be in the name of the company. When you write a brand name in the Google browser, the competitor might appear first in the search result. One of the advantages of this model is that the market views you as a neutral party because customers bid on each other and move the price accordingly.
In the first half of 2015, the auction-based ad-words of Google accounted for 70 percent of their $35 billion revenue. Another prominent example of an auction-based business model is eBay, which generates $18 billion annually from a two-sided marketplace.
This model will not work in a market where customers have many options, so it is ideal for markets with limited supply. If the technology implemented does not facilitate fair bidding correctly, it could lead to disastrous brand risk as it will not be acceptable by the customers.
It occurs when customers pay as much as they use the service and not a specific price to all customers. Among some examples of the model, when a medical equipment manufacturer sells the machine to small and medium hospitals that do not bear the machines' cost in exchange for a fee each time the equipment is used. The same medical manufacturing company can use a different pricing model and support it with another model to increase sales just as General Electric (GE) did and increased its sales by $ 1 billion in 2011.
Companies that do not have full control over the customer's added value must not rely on or use this model.
It occurs when offering two or more levels of product or service, one of which is free. The goal of this model is to attract a massive customer base to the free edition and later convert them to paying customers. LinkedIn and Dropbox have successfully used this model. One of the advantages of this model is that it becomes a marketing tool for paid packages, which reduces a customer's acquisition cost. Also, customers will rely heavily on the application, which makes it difficult for them to switch to competitors.
The freemium pricing model only works if you have a low production cost or a minimum fixed cost that can be offset by increasing the number of customers. An important note to be aware of is that the number of users who turn into users is usually less than 10% in software companies. Slack is the only company that managed to break this barrier with a customer acquisition rate of 30%.
There is no better pricing model than the other; your choice depends on your company’s industry, product, and customer. You can change the pricing model or support it with other models in different stages of the company to create the best possible value for your customers and increase your profits.