For CEOs and founders who place a premium on products, developing and delivering software products is insufficient to guarantee economic success. A clearly defined monetization plan is required to produce income.
Finding and implementing the optimal monetization plan for your business can seem like a daunting task for newly hired finance personnel and CFOs—and it is. Even with a very well-liked product, long-term, sustainable earnings cannot be ensured just by user demand and sales volume. That can only be achieved with a thoughtful product monetization strategy.
We will define SaaS monetization, highlight its significance in generating income, and offer practical advice on how to create a fruitful monetization strategy. This article will offer helpful insights to help you maximize profitability and give a great client experience, whether you are a B2B SaaS company or a mobile app developer.
What is Monetization Strategy?
The price plan and billing choices you make to make money off a good or service are known as monetization strategies. It’s crucial for businesses in the software sector to think about various monetization tactics because doing so can diversify their income streams and enable cash flow patterns other than just monthly subscriptions. This is especially true for SaaS businesses, which depend on subscription-based recurring revenue to stay in operation.
Your company’s ideal monetization strategy should focus on striking the perfect balance between earning profit and offering a satisfying client experience. Three essential elements make up effective monetization techniques:
1. It feels like a genuine win for your customers. Even though the end goal of a monetization strategy is to drive revenue, it shouldn’t feel that way to your customers. Nothing increases buyer resistance like a bold-faced cash grab. Any strategy you put in place should create a better user experience by offering a genuine benefit.
2. Your monetization strategy should capitalize on your unique market and business situation. When it comes to SaaS monetization, your choices should be guided by the specific realities of your market, industry, and customers.
3. It boosts revenue while carrying minimal costs. This aspect of your monetization strategy is crucial. If your revenue-boosting technique has high upside potential without being resource-intensive, you can be relatively confident you have a good idea.
A monetization strategy that has these core components can help increase customer loyalty, improve profitability, and drive business growth.
With that in mind, let’s look at some specific SaaS monetization strategies that can help you optimize your cash flow.
1. Software licensing solutions
A software license is a legal tool governing the distribution and use of your software. License models can protect your intellectual property in source and object-code forms. This strategy offers software protection and safeguards your product against any infringement, including software piracy, unauthorized duplication, sharing or using your intellectual property, and utilizing multiple creative pricing strategies such as penetration pricing and premium pricing.
- Example: SAP
SAP monetizes the platform by providing Enterprise Software and SaaS to its 400,000 global subscribers. To gain access to the software, you have to purchase a license and then accept the license’s terms and conditions. This software monetization strategy applies to both B2B and B2C environments.
You can rely on one of the software licensing models when you want to retain ownership of the software until the end user pays for the license to use it.
2. Subscription business model
Great for both B2B and B2C, this strategy represents one of the most effective software monetization solutions as it drives revenue through recurring access fees at regular time intervals, such as monthly or yearly.
A Zuora report shows that while 53.3% of subscription-based businesses remained unchanged by the coronavirus pandemic, 23% of these businesses reported accelerated growth.
Use a subscription model to enhance customer experience through regular updates and improvements, and maximize revenue through recurring fees and monetize existing customers.
- Example: Hubspot
HubSpot has ideally adopted this software monetization strategy as all of its products are offered on a subscription basis. Daily product updates and improvements ensure all clients enjoy different product varieties but at the same prices.
Read Also: Is SaaS a Tech Company?
Netflix, Amazon Prime Video, and other streaming services use this monetization strategy. While their ad revenue is lesser than streamers offering both free and paid versions, the value proposition of providing an ad-free viewing experience yields them better results.
3. Freemium model
This will see you give part of your software on app stores for free to your user base. In a saturated software market, a freemium strategy reduces purchase barriers and encourages an end-user to sign in and try out your software product.
Acquiring clients through ads, sales, and marketing can result in high customer acquisition costs (CAC). A freemium app monetization strategy can substantially reduce CAC. The goal of freemium is to convince your growing clientele to use the free version and enhance customer experience enough to convince them to pay and experience all functionalities of the software.
You can use the freemium model to prove to your clientele that you can provide a positive and engaging user experience in both the free and locked versions.
- Example: HBR
A Harvard Business Review reports that while most businesses report a 2-5% conversion rate, Spotify boasts of having a 43% conversion rate.
Additionally, Spotify emphasizes data, experimentation, and dialogue to run a root cause analysis. These attributes enable Spotify to monetize the platform and generate revenue.
4. Open-source model
This developer-focused strategy allows developers to ‘throw’ their code out there for everyone to access, customize, and control. There’s a lot of money in the open-source ecosystem, with some big tech giants such as MongoDB making $13.6 billion.
Open source code is free and offers features that help end-users perform their daily tasks, customized to meet their business needs. However, monetization applies when an end-user needs additional technical support, premium features, hosting services, and SaaS.
You can use open source when you want to create an engaging user experience while allowing users to contribute to the improvement of your software.
- Example: MySQL
MySQL, an Oracle-owned database and self-dubbed “the world’s most popular open-source database,” has free, open-source software. Nevertheless, there are three other enterprise versions with annual subscriptions and premium features absent in the free and open-source code, such as Oracle premier support for MySQL.
5. In-app purchases
This B2C strategy allows end-users to make purchases for deliverables within your software. ZDNet reported 2020 in-app purchases of $380 billion, globally.
In-app purchases are popular among app developers developing mobile apps (both Apple iOS and Android), as it is a great way to drive revenue; however, they can disrupt customer experience and lead generation if not done right. To encourage in-app purchases:
- Notify of the presence of in-app purchases within your software
- Use push notifications to notify existing users
- Implement customer loyalty programs to enhance user experience
You can use in-app purchases to improve the user experience and ensure the end user receives great value.
- Example: Candy Crush
You can be stuck on level 534 in Candy Crush, where you need to clear all jellies in 25 or fewer moves to earn at least 200,000 points. To maneuver out of these levels with your game lives intact, you can purchase extra lives, movements, and color bombs. These purchases will not only help you in the game but also increase customer satisfaction.
6. In-app advertising
A report shows device users spent more than 1.6 trillion hours on their gadgets. Software and apps have a higher click-through rate (CTR) than web ads, making monetizing ads vital. In-app advertising makes ads appear natural thanks to target advertising, and you can custom tweak the ads to appear at various stages in the in-app journey. Because of this, many social media and news apps utilize this monetization method.
Use this B2C strategy to target specific demographics and improve your software to encourage more frequent and prolonged visits.
- Example: Facebook
Facebook has come a long way since introducing in-app ads in 2007. From social ads, sponsored stories, mobile ads, banner ads, native ads, campaigns, video ads, and ad sets to the current eight separate advertising options. This software monetization strategy has seen Facebook drive revenue over $31 billion.
7. Partnership or sponsorship model
Sometimes, it takes two to build a successful software application. Partner with an independent software vendor (ISVS), like-minded developer, or one specializing in the same niche as you, and combine resources to improve your products and accelerate new user acquisition.
Employ this software monetization strategy to increase clientele, enhance customer experience and raise awareness.
- Example: BMW
The BMW i8 was designed to match Louis Vuitton’s exclusive four-piece bags and a suitcase that fit into the sports car’s rear deck. These two brands have an affluent clientele in common and, combined, drive considerable revenue. The vehicle costs $ 135,700 while the bag and suitcase set costs $20,000.
8. Pay-as-you-go model
This pay-as-you-go software monetization strategy has a low barrier to entry for customers, as it offers flexibility around their needs, and there’s no commitment. It allows a user to pay a one-time cost for the software to gain access and use it at that particular time. If they need it again, they pay for it again. In short, the user will only pay for the software when the need arises.
You can use this software monetization strategy to diversify your clientele, including those who don’t favor other pricing models and acquire those who prefer a more controlled and flexible pricing plan.
- Example: Twilio
The cloud-based telecom platform, Twilio only charges active users, and charging commences once communication begins.
9. Premium model
If you’re looking to charge higher prices than your competitors, consider a premium pricing strategy. The premium strategy doesn’t consider initial low prices to penetrate and establish in the market; instead, you can set a high price for software usage upfront and present your software as a high-quality product.
Use this B2C strategy to establish your software as high quality in your client’s minds.
- Example: Rolex
Rolex adopts this monetization strategy to the tee. You can buy a regular wristwatch at $30 and still tell the time. On the other hand, a Rolex watch will fetch $10,000, and it can have fewer features than a regular watch. Consumers equate the high price to extremely high quality giving the brand a status symbol.
10. Product model
Sometimes, clients don’t pay for the use of an online service or software. If clients aren’t paying for it, then the app provider is monetizing customers, making them the product.
By utilizing data analysis, the provider leverages data they collect about you, sells ads to advertisers who pay high CTMs to target you with ads and CTAs.
Use this strategy to enhance customer experience through target advertising.
- Example: Google
Google offers a host of free services such as Gmail and Google Search. By enabling a tracker in your account, Google collects your data, and sells ads to advertisers who then target you with ads.
11. Affiliate marketing and lead generation
In this strategy software monetization strategy, all you do is promote a link(s) inside your software or app. Businesses and other developers insert links inside your app with a CTA, such as download and install. For every successful CTA, you get a commission. Similarly, you can capture the data of users showing genuine interest in a CTA. In lead generation, you get a commission by capturing such data.
Utilize this B2C strategy to diversify your revenue streams and establish your product across multiple industries.
- Example: Maxweb
MaxWeb—a global affiliate network, can pay you to promote various brands across various industries by embedding links inside your app. For every successful CTA, you earn a commission.
12. Email marketing
Research shows that global email users amount to 4 billion. Additionally, 85% of B2B marketers work with email marketing tools to assist with content marketing, while 90% prefer email engagement to measure content performance.
With the help of email marketing software, you can send ads, share valuable info about your new product, and a CTA.
Utilize this B2C strategy to accompany your users in their journeys and promote user engagement through up-to-date updates.
- Example: Mumsnet
Mumsnet relies on automation and sends pregnancy newsletters triggered by a user’s due date. Future moms subscribe via custom email signup forms that capture their due dates. When the due date approaches, Mumsnet’s system automatically sends the pregnancy newsletter to the new mom.
By using several monetization techniques that generate income, you may monetize. These methods of software monetization make certain that price receives the attention it merits.
A comprehensive architecture that explains software monetization is known as a software monetization model. A software monetization plan can assist you in setting the appropriate price for optimum revenue generation because pricing software can be challenging, particularly for startups who are doing it for the first time.
Open source software is available to everyone and can be downloaded for free. The source code won’t generate fresh cash for you, but you can increase it by offering extra services like technical help and advertisements.