In the previous article, we wrote about tips to build a marketplace. This time, we would like to highlight some startup monetization models you can use. We are sure, you’ve got a great idea for a startup business, and you’re ready and raring to go!
The next step is to think about how you are going to make money from it. Even if you don’t charge users money for your product or service, you will need a solid model in place.
A flawed or non-existent monetization model can cause problems for your startup. One of the reasons why SoundCloud failed was down to its confusing subscription tiers that couldn’t compete with its competitors.
So, in this article, we will look at the different business monetization options you can use, as well as their advantages and disadvantages.
We’ll also answer some of the questions we are commonly asked by startups when choosing a model for themselves.
Startup monetization models
This is a list of some of the most common ways that people can monetize their startups:
- Direct/one-off price
- In-app purchases
- Commission/transaction fees
- Affiliate marketing
The easiest way to earn revenue is to charge customers a one-off price for your product. For example, if you have a mobile app startup, you can charge people a fee to download it from their app store of choice.
The advantage of this monetization option is that you earn money straightaway. The disadvantage is that people may not be willing to pay a one-off price, especially if your product or app is expensive.
Only 3.3% of apps on the Google Play store are paid-for. This leads us neatly on to the next model you can use…
An alternative to charging for an app or product is to offer it for free and then let customers pay for additional features or content. This is sometimes known as a ‘freemium’ or ‘gated features’ service.
Many mobile app games work with this revenue model. Customers can download the game and play for free, and then pay for unlocked levels and new characters. It’s estimated that up to 20% of customers have paid for in-app purchases.
The freemium model is also popular with software as a Service (SaaS) providers. For example, Buffer lets you schedule up to thirty social media messages at a time for free. You can then pay if you need to schedule more messages or want additional features like reporting and metrics.
The benefit of in-app purchases overcharging a one-off price is that it allows customers to try out your product or app. They can then pay to upgrade if they like what they see.
With the freemium monetization model, it can be a balancing act determining which features to offer for free and which to charge for. If you provide too many features for free, customers won’t see the need to upgrade and if you don’t offer enough, customers will start to walk away.
Subscription is when you charge customers a regular fee for using your product, app, or service.
This approach is commonly found in SaaS, where customers can pay a monthly or annual fee. There is also the option to provide tiered pricing, where customers pay more for additional features.
Subscription models are good as you can lock customers in for an extended period of time, ensuring a steady stream of income. However, some people may prefer to pay a one-off cost for something rather than a regular fee.
If you want to offer your product, service, or mobile app for free, you can use advertising to bring in revenue.
Many of the social media platforms are great examples of using the advertising model. Although it is free to use platforms like Facebook, Instagram, Twitter, and LinkedIn, users are served advertisements and promoted messages.
Examples of ads you can use to bring in income for your startup include:
- Banner ads (these are ads that appear at the top or bottom of a web page or mobile app)
- Takeovers (this is when a company takes over the background of a website or page with their branding)
- Panel ads (these are ads that recommend multiple advertisers in one advert)
- Interstitial ads (these are full-screen ads that are commonly seen on mobile apps)
- Native ads (these are content-based ads that don’t feel like your typical advertising)
You can either liaise with companies and arrange advertising directly with them, or work with a third-party provider like Google AdSense to deliver advertising on your behalf.
Although advertising can be lucrative to monetize your startup, many customers don’t like it. In fact, two out of five people worldwide now have ad-blocking software installed on their computers.
With advertising, especially in mobile apps, you need to have usability in mind at all times. If you have advertising banners and interstitials, customers need to be able to use your product without getting frustrated or annoyed.
A paywall is when you let someone view a certain amount of content for free, but then they must pay to see more.
The paywall model is commonly found with online newspapers and magazines, as well as blogging sites like Medium.
Paywalls can help foster loyalty amongst key customers but can frustrate other users. It can also lead to a high bounce rate for your website, which can have a negative effect on search engine results.
Commission-based models are commonly found in marketplaces. Although sellers and buyers can sign-up for free, you charge a commission fee when a sale is made. This can either be a set amount or a percentage of the sale.
For example, freelancer site Fiverr charges sellers a flat 20% commission on any sales they make. Quite a good model, isn’t it?
The advantage of a commission site is that users don’t have to pay if they don’t make a sale. However, if the commission is too high, they may make a move to a site that doesn’t take as much of their income.
Affiliate marketing is when you earn money by promoting other company’s products and services. When a customer clicks on your link and buys a product, you earn a commission.
Affiliate marketing is commonly found on sites including blogs and podcasts. The market is expected to be worth over $8 million by 2022.
Affiliate marketing is good as it is free to implement and can provide passive income for your startup; however, some startups can find it hard to make money. Some brands may refuse to work with recently established companies or those who cannot guarantee a certain number of sales.
Some startups sell merchandise and promotional items alongside their product or service.
For example, Google has an official merchandise store where fans can buy t-shirts, stationery, and pin badges featuring their iconic brand colors.
Offering merchandise allows customers to show their loyalty to a brand. If customers post photos of themselves with the merchandise on social media, it can also provide free publicity for a startup.
The disadvantage is that the startup has to spend money on procuring, storing, and distributing products.
Which monetization model is the right one?
The honest answer is… it depends!
Some models will work well for some startups, others not so much. There is no perfect answer.
However, we have answered some of the questions we are commonly asked by new businesses to help you come to an informed decision.
How to choose the right startup monetization model
As you can see, there are a lot of different models for generating revenue for your startup. Here are our top tips for picking the right one.
- Think about the product or service you offer. Different models will work best with various startups. Think about what your ultimate goal is, and how monetization will help you reach that goal
- Think about how much revenue you want, or need, to make. Knowing this will help you choose the model that best suits your requirements
- Do your research – see what your competitors do to make money and talk to your target audience to find out what they want to see. Are your prospective customers happy to see a few adverts if it makes your product or service free?
- Plan for the long-term. Think about which startup monetization model will help you now, and which will help you in five years’ time
- When you have launched, look at your statistics. If you have advertisements on your site or app, how many people are clicking on them? If you offer in-app purchases, is there a specific time or location that people buy? This information will help you see if your model is working and help guide your marketing strategy
When do I need to start thinking about a monetization model?
Ideally, you should start thinking about the right startup monetization model when you develop your proof of concept.
Knowing how you will make money from your product, service or mobile app will help you market it as efficiently as possible. It will also help you gain funding from investors, who will want to know how you are going to give them a return on their investment.
However, just because you think of how to monetize your startup doesn’t mean that you have to implement monetization straight away. Some startups choose not to monetize when they launch in order to build up a base of customers. Once they have built a loyal following, they can then bring in monetization later on.
For example, TikTok launched in 2016 but only launched its advertising platform in 2019. By this point, the app had been downloaded nearly 700 million times. The app now ranks as the second-biggest app worldwide when it comes to consumer spending.
Can I change my startup monetization model?
It may be that you change your monetization model as your startup grows and evolves. This is perfectly fine to do! It shows that you are responding to the changing needs of your customers as well as the market.
Take, for example, Adobe. Originally customers purchased products like Photoshop and Illustrator outright. However, in 2012 Adobe introduced its Creative Suite and moved to a subscription model. A subscription model means that customers always have the most updated version of the product and as it is cloud-based, they can use it wherever they are.
It also means more profit for Adobe, with revenue increasing 44% year-on-year.
Can I mix and match monetization models?
Yes – you don’t have to stick to one model.
For example, you can have advertising on your website or app, and customers can pay a subscription fee for ads to be removed. That way you are earning revenue from both advertising and subscriptions.
For a successful example of this, take music-streaming service Spotify. Customers can either listen to the free version that contains ads, or the premium version that is ad-free.
Bear in mind that using too many monetizations may frustrate your customers and ultimately limit the revenue you receive. Whichever combination of shared models you choose, it is critical to do your research first.
Choosing a startup monetization model can be challenging. You don’t want to choose the wrong one and risk isolating your prospective customers.
However, get it right and it will help your product, service, or mobile app to flourish and grow.
Need a little extra help? You Are Launched is here to support you
You Are Launched has been working with lean startups, accelerators, and venture capital companies since 2014.
Our team of specialists has the experience and expertise you need to help get your startup up and running. We can help you choose the monetization model (or models) that best suit your business needs. Feel free to contact us.