Developing a profitable product monetization strategy for your business

The modern world is looking to disrupt its laidback approach and business processes to grasp the opportunity digitization brings to every industry today!

So, bravo, and congratulations on getting your digital product developed. You have taken a crucial step forward in your digital transformation initiative, and we couldn’t be happier. After being in a digital product development company, we understand the grit and determination you have broken free from the traditional approach.

For modern businesses, app monetization models are essential for the success of their app development. Whether you want to develop a paid app or the ones that users can download for free, your app monetization strategy must provide a particular type of value to your customers or users, keeping your company profitable.

For instance, subscription services are best suited for news apps and fenced-off content, while gaming or productivity apps can profit from the in-app purchases users make to suit their needs.

Our article today will cover the general methods businesses use for monetizing their apps and the definitions of some essential terms.

What is a monetization strategy?

Monetization is the process of drawing revenue from the value you offer to the customers. Your product must deliver value to customers, and only then can you expect to receive their loyalty, feedback, and money in return. This money you earn from your product’s sale or the customers subscribing to your service contributes to revenue.

Before getting ahead through the content, let’s talk more about the term monetization strategy. You’ll be seeing this used throughout the range.

Let’s go into the origins of this phrase and understand why it’s so frequently talked about. Then we’ll talk about its importance to any business today!

Input Y = Output X

Business owners must put dollars against their revenue bracket in layman’s terms by converting their X into Y.

X can be their business times, their software, or the content, and it depends on the industry you hail from.

Y is the payment customers are required to make for enabling your services or part of the services.

In the modern business and economic scenario, earning money from services and products is more sophisticated for companies than the traditionally more straightforward transactions like buying groceries from the local convenience store in exchange for dollars!

Such a rise in monetization sophistication is evident in companies like YouTube, Twitch, Apple, Amazon, and various others.

For instance, the e-commerce giant Amazon didn’t make a profit for over a decade. The primary focus of Amazon is — and arguably always will be — to provide its customers with extreme value for the purchase they make.

And how do they do it?

They do so by providing the most budget-friendly price on the goods by cutting costs and plowing money back into the business to drive better efficiencies wherever possible.

Amazon can and sort of does sit pretty on top of a huge cash pile yet chooses to enhance the value proposition for its customers by offering lower prices via razor-thin margins and loss leaders.

The revenue they earn from this business model allows them to experiment with even loss-making product ideas, is Kindle Fire Phone ringing any bells for you? It is still profitable enough to put its competitors out of business and branch out into web services.

What is a business model?

A business model is a company’s plan for making a profit. The business model helps business leaders identify the enablers for profit, like products or services, keeping anticipated expenses in mind.

It is a no-brainer to add that business models play a pivotal part in paving the way for your new or even an established business. It helps budding companies to

• attract investment
• recruit talent
• motivate management and staff

It is essential for established businesses to regularly update their business plans as it enables them to anticipate the market trends and counter the challenges way ahead of time.

It is also important to note that business plans allow investors to evaluate any new company’s future growth and ROI scope. A business model is a company’s core strategy that drives its profitability in a more straightforward sense.

The business models generally include essential information such as

• products or services the business plans to sell
• their target markets
• every anticipated expense to cater the product or service in those markets

Example of a working business model

Let’s consider two competing companies that are running a business of movie rental and selling.

Both businesses made $10 million in revenues after spending $5 million on their respective movie inventories. This means both of these companies have a gross profit of $5 million. They also have the same gross profit margin, calculated as 50% of gross profit divided by revenues.

Then, the internet’s divine intervention takes place, and Company 2 wants to take its business into online streaming. Now that they do not need to store the dozens of physical copies of one movie, their business model gets disrupted due to lower logistical and inventory management costs.

Even though the movie and television series licensing fees didn’t change, they were now saving a lot on inventory, considerably cutting down the same. If speaking in numbers, the disruption reduced their storage and distribution costs by $3 million. So, the new gross profit for Company 2 now stands at $5 million-plus $3 million, or $8 million. The new gross profit margin is 80%.

Meanwhile, Company 1 went with the traditional approach and soon started experiencing a lower gross profit margin. This resulted in a decrease in sales.

How to measure the success of your monetization strategy?

You all have been there, haven’t you! The CEO has an out-of-the-box idea, and he wants things to move faster towards the revenue-generating model. But like anything else, you must consider that there are users out in the market who will love to pay for a product or service that drives value for them. And depending on your industry, you have to decide at which stage of the product cycle the monetization will take place. Based on the type of product or service for some businesses

It will make more sense to acquire a large proportion of users before getting to the revenue part. For others, revenue generation takes priority for the app to be successful and continue operations in the first place. And some apps never go for monetization.

We need to make a hypothesis here for gauging the degree of success. Depending on the type of app you have created, you need to set Key Performance Indexes. Even these KPIs are specific to the kind of app.

• For a news app, it is measured as per the number of articles read by the users.
• It might be about the number of miles users run and the badges they earn and share amongst their peers for a fitness app.
• Regardless of the KPIs, you need to assess them to get more concrete results regularly.

Based on the data collected inside the app, you can now decide which particular feature or segment of the app you want to monetize and if the users will stay, let’s say, for the next six months.

Monetization strategies

Some classic monetization strategies that business owners can consider for themselves. But before we move ahead, here’s an essential statutory warning for you. “Deciding to monetize your digital product and choosing the source of revenue depends on the C-level executives and how they want to proceed with their product 5 years down the line.”

1. Commercializing your existing technology or products

Some already established businesses might already have an array of different revenue systems without even realizing it. How?

Apart from the core value, you deliver to your users, other tools and technologies might support the business infrastructure.

For instance:

• You might have deployed customer service reporting tools that work with third-party APIs and provide accurate revenue forecasts.
• An API might be used by your engineers internally for performing specific business functions
• You are already using an invoicing automation algorithm for generating invoices in 25 different currencies

While these products or technologies are parallel to your core product offerings, yet they can provide value when monetized for the general public. As a business owner, you can consider taking these subjects and commercializing them in ways that might bring in additional revenues. Do the following while deciding whether you want to monetize your digital product.

• Look for other companies in your vertical or different verticals that require the tools you have built for your internal purpose?
• Try to find opportunities for making your APIs public and charging an ongoing fee for access.
• Take your invoicing automation technology and package it into something more meaningful which external customers can access.

Look at how Amazon’s AWS service has a more significant share in its operating income its ecommerce business. So how did Amazon decide to monetize AWS? AWS was initially built as an internal product for supporting its core business’s infrastructure, and then it got commoditized into a product for the end-users.

2. Subscriptions

The subscription model works by offering ongoing services in exchange for ongoing payments. As a business owner, you can choose to deliver your product through a subscription. You can also upsell additional value through subscription models by providing a multi-tiered approach.

Subscriptions are a predictable and reliable source of income that also helps with forecasting and revenue modeling. Although a vast majority of users might be hesitant in opting for your subscription plans, you need to consider giving additional value for the price to make them stay.

So, before jumping the wagon try to find answers for a few points mentioned below.

Audience

Is the audience willing to pay for a subscription-based service?

Value

Is the offering valuable enough for users to pay $X per month on an ongoing basis?

Differentiation

Is the product differentiated sufficiently for preventing the customers from getting a free or similarly priced alternative?

3. Advertising or commercial partnerships

When you talk about commercializing content or products through advertising and commercial partnerships, it may sound easy, but it’s not that simple.

Before commercializing a product, you need an audience. And if you have an audience, the wrong advertisement context may cause them to get alienated and move on to the next offering. When you are introducing advertising and commercial activity, we highly recommend you to consider these factors:

Context

Are the users going to feel the friction between the ad context and the actual message behind it? We all remember Google’s controversial email-targeted ads. They didn’t go down well with the audience and felt aggressive and unpleasant.

Brands

Are you ready to be associated with another brand if it brings in the required remuneration? It would be best if you considered the repercussions of associating with another brand.

Messaging

The tones your advertisement message carries can positively or negatively impact your product/business.

Format

Who else here has been growing hateful of the occasional display auto-play ad online? If you use such invasive ads, think about the hate or dislike your product will get from your users.

Volume

When you consider the human psyche, then a minute of ad breaks between episodes watching a TV series through video on demand platforms still is tolerable. Imagine sitting through 5 minutes of such ads!

Control

Well, you might be able to stand the 30-second ad break on YouTube, or you might not. Provide your users with some degree of control over the commercial content they must access so that they feel more valued and in possession.

4. Bundling and packaging your offerings

If you are offering standalone and disparate products that do not hold much value on their own, bundling and packaging them into a new, unique offering will generate a fresh revenue stream for your business.

Take Amazon Prime as a fine example of product bundling.

When they ask their customers to make a payment of $x/month or per year, they’ll not only get the core value also will get:

• Prime Now — one-to-two-hour delivery
• Prime Video — unlimited streaming of thousands of TV shows
• Prime Music
• Prime early access
• Prime photos
• Kindle First
• Twitch prime
• Prime reading

If you want to do the same, you need to look laterally across your business and seek other under-utilized offerings.

Take away: Revenue is your end goal; a Stable revenue stream is a right path for it

As we have earlier mentioned, your industry, the degree of services you provide, and the number of products you have in your arsenal help decide the commercialization aspect of monetizing your existing or newly developed app (mobile or web).

But before you start marketing your digital product or choose the monetization strategy,

• How ready is your app for the real world?
• How confident are you in its usability and success amongst your userbase?

These are the questions you must ask yourself to define methods you must use for monetizing your apps.