Tapping into monetization strategy as a lever for growth
All companies that sell a product or service must at some point make decisions about both their packaging—how they assemble their features, functionality and services into different editions that customers can purchase—and their pricing—what they actually charge customers for those different editions. Often, those decisions are made informally, based either on costs plus a desired markup or relative to perceived competitors’ pricing.
While both cost-plus pricing and competitor-based pricing are common and easy to understand, putting the emphasis on price alone overlooks an area of focus that drives growth more effectively than customer acquisition or retention—monetization. Optimizing your monetization strategy takes into account both to whom you are selling and which combination of packaging model, pricing model, and finally, specific price points would be optimal.
Despite the potential to accelerate growth better than acquisition or retention, the vast majority of companies invest little time, thought, or resources on getting their monetization strategy right. This is often because:
- It’s hard. Packaging and pricing are both an art and a science. There are no guarantees.
- It can be emotional. Everyone has an opinion on pricing, whether because they built the product or because their compensation depends on it.
- There are few experts. Digging into monetization requires a good grasp of theory, data, economics, go-to-market strategy, product realities, and market and industry insights.
- It can be expensive. There are excellent options for firms or consultants to help, however most come with a hefty price tag. Even if you have the resources to engage outside help, the process can consume too many cycles internally, and actioning the insights received before they become stale may be resource intensive.
Yet, making the time to take a rigorous look at your monetization strategy, whether or not you are able to invest in outside help or know how to do it perfectly today, has the potential to both preempt pricey mistakes and give your company a competitive edge. Here’s how to get started.
Gather the Data
Knowing objectively how your company is doing today is a critical first step to understanding both the potential risks or implications of a potential pricing or packaging decision or change. It is also foundational to setting goals for those efforts, as well as understanding how you are progressing towards those goals.
When gathering customer data, consider both revenue data and adoption or usage data. Joining these two types of data helps paint a clear picture that goes beyond who is buying your product to show you who is succeeding with it. Knowing both their revenue and usage patterns will help you interpret how they prioritize certain features.
Getting the data you need and connecting it may be a challenge. Few companies have a “single view of customer” without some caveats, and many are missing data. Do not let perfect be the enemy of good, and realize that statistical significance is probably a dream.
Instead, aim to capture a few key indicators that apply to your business to give you directional benchmarks, such as:
- Customer lifetime value
- Average customer lifespan
- Retention rate
- Average order value
- Monthly recurring revenue
- Sign up rate
- Conversion rate from free to paid
- Number of active users
- Login frequency
- Active integrations
- Cost of acquisition
- Distribution of customers across packages
- Purchase and use of add-ons
Even getting the team together who can assemble the data is a good first step in assembling a working team that can monitor and track changes over time. It is also an opportunity to identify early anything your company is not currently tracking that it should be.
Define Your Ideal Customer Profile
Can you describe the customer who gains significant value from using your product and provides significant value back to you? Would your team identify that customer the same way? An ideal customer profile, or ICP, is a set of traits that describe the primary one or two profiles of the customer who does exactly that.
By creating and rallying around an ICP, you provide your teams a shared language to focus their efforts, whether they are attracting, acquiring, retaining, expanding, or building products for customers. A clear ICP will provide direction on whose feedback to solicit and consider when asking about the relative value of features, willingness to pay, and likelihood to buy.
Constructing this holistic, 360 degree view requires data and analysis in three key areas:
- Demographic research establishes characteristics defining WHO customers, churned customers and lost opportunities are.
- Behavioral research helps illuminate HOW customers, churned customers and lost opportunities interact with the brand and use the product to help optimize future messaging.
- Psychographic research looks at WHY customers, churned customers and lost opportunities make buying decisions. It examines their motivations, personality, attitudes, beliefs, values, emotions and opinions.
Putting the quantitative and qualitative pieces together in this way reduces noise, as you evaluate all aspects of your monetization strategy.
Conduct an Audit
Your pricing page and every touchpoint in the customer journey that deals with sign up, subscription, renewal, upgrade, and even downgrade and churn, are key opportunities to underscore or undermine the value of your offering and how you position it. Before you embark on any packaging and pricing work, document each of those touchpoints and the associated messaging.
By creating an exhaustive list, you will have:
- A blueprint of where you can test new messaging along the way
- A checklist of webpage, email, and in-app message copy that must be updated or created
- A view of common flows and how consistent messaging is throughout the customer experience
Frame your Features
Now that you are clear on the data you are using, who your ideal customer is, and where people are encountering messaging around your packaging and pricing, it is time to take an honest look at the raw materials with which you can work and how people perceive them, in order to choose the best packaging model for you.
Group your features into roughly five “apples to apples” categories, with five to seven features per category. For example, if you were an email marketing automation platform, one category might be email creation, with email templates, drag and drop editing, dynamic content modules, and personalization tokens as available features. Another might be list management, with duplicate resolution, dynamic or smart lists, custom importer, and two-way syncing with CRMs or e-commerce platforms.
Next, create a survey that forces respondents to rank each feature within its category, relative to the others in the category, as most likely or least likely to get them to purchase or renew. Do this for each category you have identified.
Include in your survey a high level description of your solution and its value, along with questions meant to uncover willingness to pay. These question are:
- At what price would this solution be priced so low that it makes you question its quality?
- At what price would you consider this solution a bargain?
- At what price would this solution begin to seem expensive?
- At what price would this solution become too expensive for you to consider purchasing?
- Independent of price, how likely are you to purchase this solution?
Send the survey to an audience outside of your customer base that is reflective of your ICP, with the goal of getting a minimum of 30 or more qualified responses. These respondents can come from your own email lists, network, or social media audiences, or you can purchase a panel that meets your needs from a company such as Wynter or SurveyMonkey Audience.
Once you have the responses, build a rough value matrix that will provide directional clues as to which packaging strategy might be best for your situation. Willingness to pay is the vertical axis, and relative value is the horizontal axis. Plot each of the features from your categories along the horizontal axis based on the aggregate score from its ranking and along the vertical axis based on aggregate willingness to pay from those who picked the feature as MOST preferred or important.
You can download the editable value matrix template accompanies this DIY Packaging and Pricing Guide.
Choose a Packaging Model
By building this value matrix, features end up placed in one of four quadrants. The upper right represents high value, high willingness to pay features that should be considered value drivers for your audience. The lower right indicates core features, that is, features with high value yet low willingness to pay, suggesting they should be included in your solution. The lower left shows features that are neither high value nor high willingness to pay and should not be a material focus of your packaging. Finally, the upper left flags features that are of high value to a small number of people with a high willingness to pay and should be considered for potential add-ons.
Once you have plotted all the features surveyed in your value matrix, take a step back, and observe where they fall and how they cluster. That distribution may lend itself to one of the following packaging models:
- All-in-One Bundling – One offer with everything included. Example: Microsoft Office early on, when Word was the strongest offering.
- Category Bundles – Packages include all relevant products in a product or content category. Example: Zendesk for service versus Zendesk for sales.
- Segment/Role/Use Case – Packages tailored to the needs of different segments and/or types of users. Example: LinkedIn Recruiter versus LinkedIn Professional.
- Good/Better/Best – Packages with increasingly more products, functionality, and/or features. Example: HubSpot Marketing Hub Starter versus Professional versus Enterprise.
- Modules/Build Your Own – Build-your-own package approach with multiple product discounts. Example: Twilio Voice versus Programmable Messaging (SMS) versus SendGrid Email API.
Do you find many features in the upper right quadrant? You may be a good candidate for Good/Better/Best packaging, as you have many features to work with to create graduating plans with increasing value—and price.
Are the majority of features clustering around both axes? This may indicate your audience values everything your solution provides, however pulling individual features out to create different plan levels may be challenging, and an all-in-one model may be more appropriate.
Spotting a few standouts in the upper left? Those may be candidates for add-ons. This allows you to take advantage of the high willingness to pay of a few for those features, without complicating your packaging strategy.
Finally, if further segmentation of survey responses reveals strikingly different relative preferences by, for example, role or industry, packaging by segment, role, or use case may be an option. Your value matrix can also highlight which strategies you may want to avoid.
Choose a Value Metric
Having multiple packages sold as different plans with different pricing is one way to scale value. Your value metric provides another. A value metric is a scalable metric the growth of which best correlates with how your buyer perceives value scaling from your service. It determines how you charge for your service, and how you limit each pricing tier.
Your value metric must be based on the buyer’s perception of the value your software provides—not the value you think it provides. Choose a value metric that confers obvious increasing value to your customer, as it grows.
Keep in mind, what works for one solution may be disastrous for another. Sales CRMs often use seats or users as a value metric. This makes sense for systems that typically generate more revenue from each one of those seats. In contrast, an applicant tracking system that limits the number of employees that can participate in the interview process because of limited seats may compromise the whole hiring process for that role. Open job requisitions are a much better fit, in that scenario.
Pick a Price
As mentioned, your actual pricing is just one part of your overall monetization strategy. Now that you’ve built the foundation, leverage all the work you have done so far to zero in on pricing. To arrive at final price points, take into account the survey data around willingness to pay, which can give you outputs suggesting optimal price, using a Van Westendorp model.
Combine this with insights you have about your market, your ICP, and your competitors to arrive at a sound pricing structure. At this point, you can begin testing how your packaging model, value metric, pricing, and positioning resonate with different buyers within your ICP.
While having experts to shepherd your company through building and optimizing your monetization strategy is ideal, it is not attainable for many companies. Use this DIY guide to build the most informed framework you can, with the resources you have, and iterate quarterly, as you learn.