How To Select the Right Pricing Model for Product Monetization Opportunities
The success of a product, apart from the product itself, often hinges on how a company chooses to leverage its monetization opportunities. Some opt for the direct approach, leveraging tried-and-true advertising. Others would rather collaborate, opting for commercial partnerships to jumpstart new user acquisitions. Both are entirely valid — as are many of the other more common product monetization strategies. However, they pale in comparison to one of the most overlooked strategies: pricing.
Setting a price involves several factors: costs, competition, profit margins, demand, pricing objectives, and more. It’s no wonder so many companies price themselves out of the market. Finding the middle ground can be tricky, but it all comes down to evaluating the environment and the target audience. These two components will serve as the starting point for your product monetization efforts, and then you can begin looking for ways to improve.
Selecting a Product Monetization Model
Arriving at the right product monetization model comes down to your target audience and the environment. Here’s what you need to do to get started:
• Identify the actual value. The subscription-based model has become famous for a reason: It provides consistent value. SaaS offers similar benefits, giving subscribers reliable access to continually updated services. Regardless of the model you choose, it’s still a good idea to determine whether the product’s value aligns with user sentiments.
To see whether this alignment exists, you should quantify the product’s value through surveys, feedback, and qualitative research. While the ultimate goal is to arrive at the ideal product monetization strategy, your learnings can also help identify gaps and highlight improvement opportunities. For example, streaming product monetization and pricing models offer options that align with how users prefer to engage in streaming entertainment.
• Update pricing options. During your research, you might find that a particular segment of users doesn’t align with your pricing structure. At this point, you have options: Do you base pricing options on the most valuable use case? Or do you scale pricing to suit different target markets? You could also rework which features to charge for or adjust the price itself.
Or, perhaps introducing a new use case would correct the issue. In doing so, you have the potential to expand your user base. However, you’d also need to determine whether to implement the use case vertically or horizontally. Vertical implementation involves the creation of a new use case, while horizontal implementation adds on to every existing use case.
If the costs involved are high and customers across use cases would benefit from its application, a horizontal strategy might be better. On the other hand, vertical is often the best choice when the costs are minimal and a subset of users would benefit from the addition.
• Think user-centric optimization. It’s good to remind yourself that users are the lifeblood of a product. They’re your revenue source, after all. The best product monetization strategies keep the consumer in mind by leveraging the four customer states: existing, potential, at risk, and former. With each stage, it’s crucial to understand the customer’s reasoning and determine how to change or maintain the current state.
For existing customers, it’s more about increasing the product’s perceived value to encourage expansion. With the rest, attention will still be on the perceived value, but the intent is conversion, naturally. Educating the consumer is often a good start. Changing perceptions around price in relation to value is also a wise tactic.
4 Questions to Improve Your Product Monetization Strategy
Once you select a pricing model, you can make improvements over time. Strategies for improving product monetization often fall within one of two categories: model strategies and optimization strategies.
With model strategies, the focus is on changing an underlying component, such as adding a new use case or modifying the monetization model lever on an existing use case. With optimization strategies, the focus is instead on optimizing revenue from a current monetization model by driving better conversion, expansion, retention, or resurrection of buyers.
Here are four questions to ask yourself to determine what changes you need to make:
1. What do we charge for?
If the price of your product isn’t comparable to the features or benefits it offers your users, it can impact acquisition and lead to churn. You might want to try adopting the freemium model. It may seem counterintuitive to offer up your product for free. However, the success of products like Miro and Figma indicates that users will pay for a premium version of your product once they form habits and trust your brand. A premium version should offer enhanced features, greater data storage, or, in the case of entertainment platforms, fewer ads and access to more content. You must give people a reason to upgrade. Often, that reason will be aligned with your product’s North Star metric, which best measures the value users experience with your product.
2. How much do we charge?
Acquisition and retention will suffer if the price isn’t right. Raising subscription fees, for example, might cause users who were initially attracted to the price to abandon your product. If you have data about your target audience’s average income, you can use it to identify a price they would likely consider reasonable. Or, you could conduct a price sensitivity survey within your existing user base. Always keep your audience in mind with your monetization efforts.
3. When do we charge?
It’s a good idea to offer several payment plans. For instance, you might charge monthly, but your audience might prefer per transaction. Several platforms already give users this choice. Grubhub, which usually charges per transaction, offers Grubhub+, a monthly subscription that eliminates order delivery fees. Amazon goes a step further with Amazon Prime, which promises free shipping, a range of delivery options, and complimentary access to its TV and movie streaming library. While both companies allow consumers to pay according to their preferences, they also incentivize them to subscribe by offering valuable perks.
4. How does price scale?
Users might seek out more affordable alternatives if you only offer two pricing options. That’s why Google Drive offers three subscription plans: basic, standard, and premium. All three plans provide more than the standard free service, but the extent of their perks scales with the price. For instance, the premium plan gives subscribers 10% back in the Google Store. In contrast, the standard plan gives 3% back, and the basic plan gives nothing. This alone could compel a user to subscribe to the premium plan. Just remember that scaling prices only makes sense when you give consumers a reason to spend more money.
Delivering business results while setting the price for your product takes time. You want to arrive at the right price for the value your product provides, which is why it’s so important to keep the consumer in mind throughout the process. The value they see will be the deciding factor for product success.
