Growth teams are typically quick to deploy resources to experiment with acquisition and retention strategies. We concentrate teams there and roll out changes frequently.
But when we talk about changing something with monetization, we tend to get lukewarm responses or a lot of pushback.
Experimenting with monetization can feel like a difficult problem that is hard to improve in a meaningful way.
In this lesson from the Monetization & Pricing program at Reforge, we will break down why monetization is so hard to talk about, the most common monetization mistakes, and how to avoid them.
So let’s get into it!
What Makes Monetization So Hard?
So what makes monetization so hard for teams to execute against? There are a number of reasons, and we should be aware of them so that we know how to counteract them.
1. Sacred Cows
This first reason is what we call sacred cows. Monetization decisions are typically made early in a product's life cycle and usually by the founders. Over time, they become sacred cows, decisions that collectively the organization believes should not be touched.
Products that launch and gain some success end up in a false positive feedback loop. The success reinforces the false conclusion that they got their monetization levers right the first time and that they shouldn't be touched. But there are many things that contribute to success, and oftentimes the monetization strategy ends up with some serious gaps.
The second reason monetization changes can be so difficult is there's a lot of fear that monetization changes will end in a customer revolt.
But here's the problem. The fear of customer revolt actually increases your chances of a customer revolt. The longer you go without changing your monetization, the bigger the hole you dig yourself, and then the bigger the eventual change you need to make.
If you establish a frequency of change and communicate that properly, customer revolt can be avoided.
3. Ripple Effects
The third reason that monetization changes can be so difficult is that they have ripple effects across the rest of our growth engine -- acquisition, retention, and engagement -- so there's a lot of sensitivity around making these decisions. When you change one part of the growth system, it impacts all of the other parts. So those working on monetization, they need to understand how their changes impact the other parts of the system to be effective. This is difficult but definitely possible.
4. Stakeholder Involvement
The fourth reason monetization changes can be so difficult is that any monetization decision we make has a lot of stakeholders interested in the decision.
Since changes can impact finance, sales, customer success, marketing, and product teams, everybody wants to have their say, but typically, every function has its own chain of command and decision-making process. You not only end up with more people but also, different processes to make decisions. If not done effectively, it ends up in a tangled mess.
5. Requires Massive Lift
The fifth and final reason monetization changes can be so difficult is that we need the proper infrastructure to make changes.
A change to one element of monetization can require updates to a lot of other parts of the system, from frequently asked questions to customer support documentation to pricing and contracts and so on.
As a result, monetization initiatives end up being a big undertaking requiring some tech operations and product effort, but all of this is doable with the strategies that we'll teach you in this program.
6 Monetization Strategy Mistakes
So, monetization is hard. Does that mean we ignore it and move on? Definitely not. This challenge is also our opportunity.
Your competition has all of the same barriers and misconceptions as everybody else. As a result, it means that they are unlikely to be prioritizing monetization efforts.
If your competition isn't focused on something, it's likely an opportunity for you, and this is exactly what we see in the data.
Before diving deep into your pricing strategy, it’s important to take a look at the six big monetization strategy mistakes that teams need to avoid.
The six monetization strategy mistakes include:
- Making monetization decisions with only a business view.
- Treating monetization as a silo from the rest of our growth system.
- Considering all revenue as good revenue.
- Looking at monetization just as price.
- Setting and forgetting monetization strategy.
- Using monetization as a short-term lever for growth.
Now, let's dive into the first monetization mistake.
1. Making monetization decisions with only a business view.
The first mistake product teams make is that they consider only the business view when making monetization strategy decisions, and underemphasize or completely ignore the view from the consumer's perspective.
To get somebody to transact with us and convert into a customer, they need to perceive that the value they will receive from the product is greater than the price.
If they think the value is less than the price they have to pay, they aren't going to transact with us.
However, when we work on monetization, we commonly focus on understanding the business view, which is oriented around price.
But we aren't as good at understanding the consumer view, which is oriented around value. There are three reasons why we tend to not look at the consumer view as much:
- The first is that monetization decisions are often made with many stakeholders in the mix, many of whom don't interact with consumers, like finance and analytics teams. So there's distance between the decision-makers and the actual customer.
- The second is that when we're building a product for an audience that we don't personally relate to, it's hard to put ourselves in the user's place and understand how they think about value. Even if we try, we're biased by our own understanding of the product and ecosystem.
- The third is that getting a good understanding of our consumers, especially at scale, is time-intensive product work. We need to do a fair amount of qualitative research, which is a lot more time-consuming and harder to interpret than a simple funnel analysis.
As a result, products set prices by looking at hard data like competitive benchmarks, costs or targets, instead of doing the hard work to understand how consumers perceive the value they get from the product. They're not understanding what features consumers value, how they want to transact, and how much they're willing to pay for it.
Great growth teams understand that the monetization strategy has to capture value around a problem and the audience we're solving this problem for.
We need to align our monetization strategy with the consumer's perception of value and know the methodologies of how to uncover that value.
2. Treat Monetization As A Silo
The second mistake we see companies make is that they treat monetization as a silo from the rest of their growth efforts.
They pump all of their energy into acquisition and retention in hopes that this will drive growth. They put monetization in a different category.
This leads to a common, but false trade-off question: monetization or growth.
While it's true that acquisition and retention are both critical elements of growth and can drive monetization, they don't realize that monetization is not just an output of growth, but it's also an input to growth.
The question isn't about growth or monetization. It's about how monetization feeds growth as part of a holistic system.
We see this manifest in the way the teams are structured. Acquisition and retention sit within growth or product teams, while monetization tends to be in its own silo.
We also see this manifest in the way decisions are made. Product teams build new products and features, and then monetization teams just join later to slap on a price afterward.
Good growth teams understand that monetization just isn't an output of growth. It affects each element of growth as well.
Great growth professionals understand that we can't make monetization strategy decisions without it impacting our acquisition, retention, and engagement.
When we make monetization decisions, we evaluate the impact monetization strategies has on those other elements and strategies. We also involve the stakeholders in the monetization decisions.
3. Consider All Revenue As Good Revenue
The third mistake we see companies make is that they consider all revenue as good revenue.
Let's look at Munchery as an example. Founded in 2010, Munchery was a food delivery service that tried a bunch of different monetization strategies, from gourmet meals prepared by chefs, to a meal prep subscription kit, and even an offline store in SF.
After raising $1.25 million, with a valuation of $300 million, they declared bankruptcy and shut down in 2019. How did they run out of cash so fast?
First, Munchery had high acquisition costs. They spent a lot acquiring customers, large incentives to new users, referral programs, and paid marketing.
At the same time, they had a high cost to serve each customer, from food prep costs to shipping costs, waste management, customer support, and other overhead as they scaled the company and acquired and served more customers.
As a result, the total capital available after they had acquired and served each customer wasn't sufficient to sustain their high cost of customer acquisition, and as a result, they bled through all of their VC funds and had to declare bankruptcy.
Munchery serves as one example of many companies that don't account for all the costs of revenue while building their growth models, and soon find that they don't have the unit economics to become a profitable company.
Good growth teams realize that not all revenue is created equal. There are costs to acquire and serve that revenue.
Measuring the cost of acquiring, serving, and retaining each dollar of revenue is critical as we make monetization strategy improvements. We need to take things like contribution margins and payback periods into account when improving monetization strategies.
4. Look At Monetization As Just A Price
The fourth mistake companies make is that they look at monetization just as price.
They think their monetization strategy starts and ends with the price tag, so they use price changes as the only way to drive monetization outcomes. It's pretty easy to understand why companies make this mistake.
First, we've traditionally associated price with monetization. That price tag is the most visible element of a monetization strategy.
Second, consumers are extremely sensitive to price changes. Any increase or decrease in prices can have a direct impact on consumers' decisions to transact with us.
The reality is that price alone doesn't determine a consumer's decision to transact with us, and if we don't understand that we end up leaving a lot of value on the table.
Our monetization strategy and pricing levers involve asking five questions.
- One, what is our use case? What problem are we solving and who are we solving it for? And how are we monetizing it?
- The second, what are the features or attributes we're monetizing on that use case?
- The third, how does the value scale for our customer, and how does our price scale with it?
- Four, what is the amount we charge?
- And five, when do we charge for it? Never? Every transaction? Every month? And so forth.
Ultimately, our monetization decisions are much more than price. We need to understand all of these levers from both the consumer perspective and the business perspective. We'll go much deeper on each of these later in the program.
5. Set-and-forget monetization strategy
The fifth mistake we see companies make is that they set and forget their monetization strategy. They select a monetization strategy and don't revisit it for years.
Airbnb is a great example of a company that constantly keeps its eye on its monetization strategy.
When they first launched, Airbnb didn't charge the hosts any commission. Back in 2010, Airbnb was a fairly new concept for hosts. People were reluctant to invite strangers into their homes. However, as the sharing economy gained popularity, and the behavior was normalized, the types of hosts started to change.
Over time, two shifts occurred. First, more professional hosts joined Airbnb -- hotels and property managers who rent multiple small properties.
This group had a higher willingness to pay a commission since they were running it as a business.
Second, as Airbnb became more trusted and well-regarded, mass market nonprofessional hosts got a lot more value from it and felt more comfortable renting out their home.
Airbnb recognized the shifting balance and changed its pricing model in a big way. They now charge all hosts a percentage of the booking value and a higher price for hosts that are businesses that have a higher willingness to pay.
If Airbnb didn't revisit its monetization strategy, they would have left a lot of value on the table as its host profile changed.
The endpoint here is that great practitioners understand that we need to revisit our monetization decisions and align them to changes to the product, consumers' perception of value, and the company's product and growth priorities.
6. Use Monetization As Short-Term Growth Levers
The last mistake we see companies make is to use a monetization strategy as a short-term lever to meet growth goals while ignoring the long-term effects on revenue and other growth metrics like acquisition and retention.
This most commonly happens with companies that use discounting to acquire customers, but end up diluting the quality of their customers.
Take Zynga, for example. Each quarter Zynga would set revenue goals for each of its games. At the start of the quarter, the product team would launch revenue-generating features like campaigns and new content.
Towards the end of the quarter, the product team might realize that they're falling just short of their target.
So they'd run a flash sale or massive discounts to meet their quarterly target. They then start the next quarter with the new target, and the same cycle would repeat itself.
However, by the end of this quarter, the same level of discount wouldn't be enough to drive the same amount of revenue. Zynga would increase the percentage discount.
Over time, discount fatigue set in because of their short-sided monetization strategy. Users were always expecting discounts. They never transacted the full value, and the value of game purchases were permanently eroded over time.
Then we have companies like LeadPages, Ipsy, and others who use discounts for annual plans. They incentivize users to choose a longer commitment.
This increases overall revenue that they get from these users, but more importantly, builds better long term retention. They give a discount, but in a structured way that encourages good behaviors and habit building.
What separates Ipsy, LeadPages and others' use of monetization levers from Zynga is that they consider long-term strategic implications of their monetization decisions instead of just making short-term changes.
Avoiding These 6 Monetization Mistakes
To summarize, there are six common mistakes that companies run into while building their monetization strategy.
But brands can take steps to avoid each of those costly mistakes. First, they need to align the monetization strategy with the consumer's perception of the value of the product.
Second, they need to evaluate the impact of monetization on all elements of our growth model and system.
Third, they need to account for the cost to acquire and retain revenue while making monetization decisions, because all the revenue is not created equally.
Fourth, they need to understand what we charge, when we charge, the price, and how that price scales over time.
Fifth, they need to evolve the monetization strategy with changing consumers, products, and the environment.
And sixth, they should consider the long-term implications of monetization levers when making these monetization decisions.
Want to learn more about crafting the perfect monetization strategy? Apply to Reforge now and enroll in our comprehensive Monetization & Pricing program!