From Features to Profits: Mastering Monetization as PM
It's not what happens to you, but how you react to it that matters - Epictetus
Hey 👋 people, Andy in the house today. Many of you have been reaching out to me asking for insights into pricing and monetization. This is also a question that you’d be asked in Product execution interviews. So today’s post will hopefully give you insights into monetization strategies and give you an insider view of how I think about pricing.Â
A good PM not only focuses on building features and functionality that benefit the end users but also recognizes monetization is a core part of it.Â
Of course, PMs may build features for different reasons such as to drive adoption, reduce churn, competition parity, etc. but they should never lose focus on the core north star which is revenue expansion.
First and foremost, monetization strategies vary by company, by country, and sometimes by season as well.Â
Some of the most common GTM pricing motions for SaaS companies areÂ
SubscriptionsÂ
Seat-basedÂ
Ad-based revenue models are decreasing in popularity as the competition is intense in the ad-based revenue space.Â
A few other, less prominent types of monetization are through Partners, ISVs, resellers, etc.
Again within the seat-based or subscription you might have freemium models (part of the product is free forever and you need to pay to upgrade to premium features) or a Free trial where you can test the product for a few days and then consider buying it. There is also a reverse free trial model which is combo of freetrail and freemium. But all of these flavors broadly fall into subscription or seat-based models.Â
Companies are moving away from a volume/usage-based model as the revenue becomes unpredictable. Another type of monetization that is pretty much dead right now is a license for a software standalone application. Â
Subscriptions
As most of you guessed, almost all of the consumer-facing products are subscription-based like Spotify, Netflix, Pateron, etc., or Ad-based like Instagram, Snapchat, Hulu, etc.Â
Subscriptions are generally paid monthly for self-consumption and some offer discounts in yearly payments too. Consumers are also very volatile and can cancel subscriptions with 1 click of a button.Â
In Ad-based models, users and customers are not the same. You are the end user but the Advertising company who pays to place their Ads in front of you is the customer. As a PM you need to think about monetization for this entire chain. You are generally getting the product for free but the customers might cut down on Ad spend during hard times.Â
Seat based pricing
Enterprise software on the other hand generally works on seat-based purchases like JIRA, Salesforce, and G-suite. This means your company pays for your seat and you get unlimited usage.Â
Enterprise software deals are generally multi-year ranging anywhere between 1-5 years and also more stable during market downturns like recessions.Â
They are also generally sales-led and are harder to churn as you have a lot of inertia built up in the product already.Â
As a PM, from a revenue perspective, your job is to build features and products that either
Enter into a new market and unlock an adjacent use case for your customersÂ
OR drive additional features that will drive add-on revenue to your existing products
Both of these will increase the LTV of the customer and reduce churn. The golden standard is to sell more of your products and make your customers integrated into your eco-system
For example, entering into a new market for Apple is launching the Apple watch in tandem with the iPhone and expanding its use case with you.Â
On the other side, adding more features would be getting you into their iCloud subscription after you purchase their iPhone which is driving add-on revenue with the same products that you already have purchased.
I like to look into the pricing power my product has, some questions I think deeply about are whether this feature/product is a blue ocean launch or are players already in the market? Will this be self-serve or will sales guide through attachment? What is the buying capacity of the customer and what is the Service addressable market etc.? Â
For example, I built a 0-1 API product which is an add-on to the core eSign business at DocuSign. There was a clear use need and the product was built from the ground up understanding the core user journey.Â
When it came to monetization, I had 2 options, the first was to monetize per API call, which would encourage good design architecture by the customer but would make the customer make very conscious choices. However, the downside of this is that you cannot predict usage by a company in a given time frame and this would lead to uncertainty in revenue projection metrics like MRR and ARR. Not to mention I had to align internal Sales teams as their incentive comes from selling software before usage begins, not after consumption.
After brainstorming extensively with our product marketing and pricing strategy teams, I aligned the team on a seat-based model for the API product. The customer can make any number of API calls and we would sell the API product as an add-on for the number of users that were on the original base plan. This drives win-win outcomes, customers get unlimited upside if their business grows and also company can be aligned on predicted MRR.Â
There are also other ancillary forms of revenue that you can drive like adding adoption consulting or professional services to your offering which will handhold the customer in the implementation of your software in their systems which are all typically billed hourly. I refrain from counting this toward my MRR projection for any pricing conversations.Â
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