Tips on 4 Monetization Options for Startups

Quick Summary - Many businesses fail simply because they ran out of money. With rapid changes in technology, it’s important to review monetization options for startups and SMBs.

Tips on 4 Monetization Options for Startups

Here we discuss four monetization models that are often ignored or not optimally applied and how easily they fit into your development plans.

One goal of your monetization strategy probably should be to maximize your average lifetime revenue per user. The monetization options you adopt should fit your branding, which may preclude some options (like in-app advertising). The support requirements of others may initially exceed your budget and/or team’s capabilities (newsletters or data products). Even so, you can always expand your options as your business evolves. Including them in your software development plans early on can save you substantial expense later.

Days or even weeks could be discussed on all of the monetization options available to businesses today. The four options discussed below are meant to provide a smorgasbord of “food for thought” for startups – but can be valuable to SMB’s, too.

Data monetization

While everyone’s familiar with the idea of Big Data, it’s important to your software development project to examine the data that you can and should collect from the beginning. The data that your software needs to collect should be specified in your project requirements. This warrants a discussion between the project owner, department heads, and the software engineer to define what data you can collect. This may not always be clear, particularly with IoT devices and their various sensors. It’s also important to discuss Personally Identifiable Information (PII) for compliance with the EU’s General Data Protection Regulations (GDPR).

The value of business and customer data can exceed the monetization potential of traditional goods and services. The credit reporting services offered by companies like Experian or Equifax for $19.95 monthly are offered for free by CreditKarma. CreditKarma makes its money matching advertisers of financial services with customers.

The big business question is whether you intend to sell your data raw or use it to develop data products? Selling the raw data requires minimal effort, but is less valuable than structured data that can require extra effort to assemble. Data monetization options extend to advertising, selling data products/services through data exchanges, among a variety of others.

While Big Data deserves a longer discussion in the future, we encourage you to investigate it further in connection with your software project. We have one extra tip for startups here. Expand your list of potential investors to businesses with an interest in the data you will be collecting. Ask them if there’s additional related data that you should try to acquire to make the data more meaningful to them. Even if you do not intend to develop data products, you may be able to partner with other businesses able to develop the data products for you.


Andre Weber of Simon-Kuchler & Partners on Data Monetization

Email promotions and newsletters

Software requiring registration automatically puts you on track to grow your mailing list. Quite a few companies don’t bother trying to produce an eNewsletter. Some may think it’s not useful. Others may not have the resources. Good email promotions require a significant effort, albeit separate from software development. Practically speaking, you only need someone to run your campaigns with an email campaign manager.

Email promotions help develop engagement with end-users, can generate revenue (with even as few as 100 subscribers), and can be a great networking tool. Moreover, if you intend to engage in crowdfunding, developing your mailing list and the skills to run email campaigns are vital. Core metrics to track include your email open rate and clickthrough rate, which can vary by industry.

Email newsletters and promotions can generate sales and can be a great monetization option. The bigger issue is execution. At issue, most companies are not very creative and stick only to promoting themselves, while also wishing they had more traffic. Most companies have a hard time running a basic 2x monthly newsletter or email promotion while also keeping the information fresh and valuable. So, Psychology 101 – What others have to say about you is 10-times as important as anything you can say about yourself. That’s the entire basis of a referral or testimonial – and why it’s nice to get (and give) nice reviews.

But what does this really mean? The number of backlinks to you is only limited by three things:

  1. Your willingness to say something good about what others are doing.
  2. Your honest assessment that what they are doing is valuable to your customers.
  3. How frequently you’re able to find matching interests.

It’s best to limit such reviews or promotions to non-competing interests in your industry or niche, or non-profit organizations working in areas important to you. If you are promoting others in this fashion, make sure to have a web page or blog post doing the same. If you are a non-competing interest in the same industry or market niche, they’re likely to link back to you – or quote you on their website or blog.

Just as an example that you can see, most Internet hosting services have a section in their control panel offering their subscribers discounts to a wide-range of other service providers. You’ll see coupons and discounts for Google Adwords, premium templates for WordPress, email campaign services, eCommerce applications, and more. Affiliate programs, co-marketing, paid or unpaid advertisements, mini-reviews, and more can all be used to promote other companies’ products and possibly earn commissions.

Vanity item monetization

We covered vanity items at some length in our Crowdfunding for Startups Guide. There, we also talked about the Pareto Principle and how up to half of your sales may come from just 1-5% of your customers. These are whales and their reasons for spending money are many and varied.

A waitress serving a $200 bill for a dinner received a $5000 tip just recently. Occasionally, someone wants to be generous. They may love what you offer and want to see more of it. It could be for their own vanity. In gaming, there are those who want speed leveling, quality of life improvements. Others want to impress their friends not with gold, but platinum credit cards. In business, some might be angling for a favor or see a promotional opportunity.

Vanity items cater to these purchasing habits. Crowdfunding sites like Kickstarter and Indiegogo are veritable catalogs for vanity product ideas. One of our favorites was the $12,500 Founder’s Pack for Path of Exile – an otherwise free-to-play online game. Included in were a variety of limited-edition “digital” items (pets), a listing in the credits, in addition to a bunch of other game paraphernalia.

Blizzard frequently conducts vanity item promotions in conjunction with non-profit organizations and disaster relief efforts. Holidays and special events can be the impetus for creating new vanity products. Digital vanity items are ideal as they can often be created and distributed with minimal effort.

Vanity items are wacky, and while you can’t base your business on them, the basic rule of thumb is, “No one’s going to buy what you don’t offer.” You may not be able to emulate Dota 2’s “Ethereal Flames Pink War Dog” – a cosmetic item for a Free-to-Play game that sold for $38,000. If they can do that… well, let’s just say you have options.

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Subscriptions

Though we discussed subscriptions as a distribution model, it deserves discussion as a monetization model, as well. Subscriptions used to be the gold standard of all monetization methods – it’s how the telecoms, cable companies, newspapers, and magazines made their money and got big. Recurring revenue is great for business planning and showing investors that your product/service already has traction.

It’s worth noting that both the App Store and Google Play only charge a 15% commission on subscription-based apps after the first year. If you’re retaining mobile users that long, you’re doing freakin’ awesome.

The main point to reiterate is having several subscription tiers while also making use of other monetization options. Otherwise, you are effectively putting a hard cap on how much your best fans can spend with you. That brings us back to the Pareto Principle where your top 20% of customers are likely to buy more than the other 80% combined.

Dungeons and Dragons Online is another Free to Play game that offers a variety of perks with monthly subscriptions of $9.99. They have a store with a lot of in-game items that can be purchased with in-game or real currency. A +8 Tome of Supreme Ability is sold for roughly $55.00 — the equivalent of nearly six months of subscription play.

A few lessons from Amazon

Amazon does a lot of things right, but two monetization issues reign supreme. The first is to always work toward improving your metrics in everything – conversion rates, average purchase per user, reducing shopping cart abandonment rates, etc. The second is to examine ways to make it easy for others to participate in your business – and actually want to. Amazon has over 2 million third-party sellers, 1.1 million employees, 900,000 affiliate websites, plus 200,000 robots. About half of Amazon’s line-item sales are covered by third-party sellers. Amazon gets a commission on every sale and the customer data that goes along with it.

Some More Lessons from Blizzard and World of Warcraft

Game developers have proven especially innovative with their monetization models. Conventional and professional businesses of all types can pick up a few tips from them. While there’s been a lot of drama over at Blizzard over the years, there’s also been a fair amount of monetization, too.

Blizzard uses every monetization model except the white label option. First, they have a lot of games. Each game has its own mailing list, which is part of their global mailing list. They frequently cross-promote their games, special offers and special event vanity products. Blizzard makes heavy use of Premium Sales, periodic DLC releases, Freemium play options, a storefront with a variety of vanity and quality of life game enhancements (like speed leveling).

Take a look at how Blizzard and other successful game developers monetize their software. Don’t be afraid to copy their efforts (but don’t copy their IP).

Getting the Right Team

Our blog extensively covers how IT outsourcing can extend your funding runway. Software development is one of the largest expenses for tech-first businesses. Not having the “right team” is itself the #3 reason for business failure according to CBI Insights. The average Agile Software Development Team has 7-8 developers. Depending on your location, the cost of hiring an in-house developer exceeds the cost of hiring 2-4 highly qualified developers from Ukraine.

If you would like to discuss IT outsourcing or different monetization models for your software project, please let us know with the form below! We’d love to hear from you.

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