How can you monetize your digital product?

Former CEO of Google, Eric Schmidt, likes to say that revenue solves all known problems and it is the one metric that product managers and executives cannot game. Product Managers at Startup House could not agree more. There are numerous examples where startups did not monetize their products properly and went bankrupt. The most common examples of bad monetization are annoying ads, invading user privacy and killing value propositions for users. Needless to say, usually the sales team plays a crucial role and their target is what matters most for the organization. It is crucial to distinguish a bad sales team and a good sales team. Bad sales teams do whatever it takes to reach their targets, without thinking about how that may kill the product value for the customers. Good sales teams are very aware that, in the long term, revenue growth is generated both by a sales strategy and a product that delivers real value for its users.

What is monetization?

Let’s start with a clear definition of what monetization means for us at Startup House. It is the process of deriving revenue from the value you offer your users. If your product is worth using and delivers a real value to your clients, it is quite fair that you expect something in return, including money. In other words, monetization is about how much you should charge and who you should charge for the product that you are building. In an ideal scenario, your users should pay for the value that you generate through your product. For example, you only pay Uber if they find you a driver who will take from point A to point B. You do not pay for downloading the app, Uber’s referral program or permanent access to drivers. 

More importantly, the way you think about monetization depends on the stage of your product. For instance, before reaching product-market fit (PMF) you should figure out why people should use your product. In other words, a value proposition needs to be clearly defined. If you want to dig deeper and find out how to find product-market fit. Once you reach PMF, you should think about how to grow revenue sustainably and scalably grow the business. You can read more about product growth strategy after reaching product-market fit here.

Factors determining your monetization strategy

Monetization is not easy. There are many factors out there that impact your business model. Below you will find 3 factors that we consider the most important to take into account.

Market trends

You have to make sure that you are up to date with your market trends. We will examine two extremely important macro trends. The first big trend is big data. Currently, companies are collecting a huge amount of data, such as Google charges many companies (their clients) for data that enables them to gain a better understanding of both market trends and patterns of consumer behaviour. As a result, these companies are able to provide more personalized recommendations for purchases, etc… The second big trend is a sharing economy. Think about Airbnb. Technology enables Airbnb to avoid the cost of owning real estate, while generating a ton of revenue from renting these properties.

Depth vs Breadth

Once you know how to launch and monetize the product, you need to understand whether at the beginning you should go deep or go broad. Going deep means that your target group is one niche or one region or even one country and you will understand user needs extensively, while reaching a lower number of users. Going broad means that your target groups are many niches or many regions or even many countries and you will understand users needs universally, while reaching a higher number of users. Each product is different, so there is not one recipe for success. Growthhackers.com examines case studies of the most successful products and analyzes the depth vs breadth issue.

Psychology of price 

Last but not least, according to the renowned psychologist, Dan Ariely, every time we pay, it inflicts psychological pain and this happens no matter how big the amount of money you are paying is. Also, his studies indicate that in general it is more about pricing than getting the prices right. Namely, you have to align a payment structure with the cash flow of your customers. You should ask your clients to pay when they have a surplus of cash on hand. Another important takeaway is that you should use digital payments or automatic deductions to reduce this pain. The more abstract the money, the more the pain decreases. We strongly recommend following Dan’s work on the psychology of money. This video is a good start. 

There is no everlasting strategy

It is out of the question that monetization is hard. Numerous factors have an impact on it. The bottom line is that you have to understand what you should take into account while working on your monetization strategy and you have to remember that this strategy will change over time and will depend on the stage of your product.

Recommended Readings:

Dan Ariely - Predictably Irrational

Georg Tack, Madhavan Ramanujam - Monetizing Innovation

Dan Ariely, Jeff Kreisler - Dollars and Sense: How We Misthink Money and How to Spend Smarter

Do you need to scale your product up and consider hiring a product team? Drop us a line: hello@start-up.house

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