You’ve done it. Poured your heart and soul into your shiny new product and you’re almost ready for it to be released into the world. And now you have to work out how to get people to actually pay for it. Unlike physical products sold in brick-and-mortar shops, there is a myriad of ways to monetize your online product. Time to choose a business model!
In a world where Netflix reigns supreme over evening entertainment and you can have everything from prepped meals to razor blades sent to your door every month, we’re all pretty familiar with subscription-based services at this point.
According to McKinsey&Company’s 2018 study, the subscription economy is on the rise. While the data they collected more closely relates to physical products, it’s not hard to see how this trend translates into online products. 86% of Adobe’s 2018 revenue came from subscription sales, a number which raised the previous year’s earnings by 77%. As Adobe is currently worth $127 billion, these are significant numbers for the subscription economy.
Choosing a subscription model for your product makes sense if your product is something you’re hoping people will use fairly regularly after purchasing. If your product falls into the realm of business software to be used day to day by professionals (CRM, design tool, etc) or something that fits into a person’s lifestyle (entertainment streaming, health, and fitness, etc) a subscription will feel familiar to your users, and is, therefore, a safe choice.
In the words of the stereotypical salesman “I’d love to just give this to you for free but…y’know how it is.”
Freemium operates on the basis of giving most of your clients something for free and trusting that enough of them will pay to upgrade to the premium version to pay your bills. Having such a large chunk of your customer base using the free version of your product might sound counterintuitive to your bottom line on paper, but if you’re in the right sphere it might help you dominate your industry. Spotify is a great example of this. Undoubtedly one of the biggest names in music streaming, Spotify has two main streams of revenue:
- Freemium: users stream the entire catalog for free, supported by ads
- Paid subscription: users pay a monthly subscription to remove ads and gain extra features like the ability to download and play offline
This model relies on your ability to find a way to integrate ads fairly seamlessly into the UX of your product. They must be visible enough to provide value to your advertisers, but not be so intrusive that they put people off using your product at all…but also be just intrusive enough that they’re willing to pay to make them go away. It’s a fine line that will take plenty of testing!
3. MTX / Microtransactions
MTX, in-app purchases, in-app billing, or in the gaming community ‘pay to win’, the microtransaction model has many names. Anyone with a smartphone who has spent any amount of time browsing app stores will be familiar with this concept – accessing free content which improves in quality once you start spending real-world money.
As disliked by users (perhaps down to misuse) as MTX is, this is the same model that earned Farmville $150M in 2010 according to Adweek. In 2018 Activision Blizzard made $4 billion from in-game purchases through games like Candy Crush and World of Warcraft. So perhaps there is some untapped potential in MTX which balances on that fine line of giving a great user experience and actually being profitable.
Most of the negativity surrounding the model comes from the fact that it puts some players at a disadvantage against those willing/able to pay money. But when the user is isolated in their experience of your product (ie, not competing against other users) they may feel they have more agency in their decision to make a purchase or not. Their empowerment could lead to your profit. This works for lifestyle apps which offer small amounts of content for free (a coached workout, a meal plan, a guided meditation session) and the user then makes a purchase to progress.
4. Pay Once for Full Access
You’d be forgiven for thinking that this feels the most natural to consumers, after all it’s the most traditional way to pay for products and mirrors what we do every week in the grocery store. But in terms of online products and services, we find this model to be pretty scarce. When we present customers with an upfront cost, we are asking them to consider 2 things:
- The price. Naturally, the price for unlimited access is significantly higher than a monthly fee, usually delving into numbers people aren’t used to paying for anything digital. Because human brains focus on immediacy, twelve payments of $10 seems a lot less than $120.
- Longevity. Your users will ask themselves, “am I really going to use it all that much?” when faced with that $120. But for $10 they may just give it a go.
A better way to encourage a longer relationship is to have a contract-based subscription, with the option of paying the full fee upfront at a slightly discounted cost.
5. Tiered model
A tiered model helps users to feel like they’re only paying for what they use, rather than only having the option of paying premium prices when they just want to use basic features.
Squarespace is an excellent example of this, though not the only example by far. While your cheapest package may not have you rolling in dollar bills anytime soon, it gives people an opportunity to try out your product at a lower price point, and then upgrade once they form an attachment.
Food for Thought
- Keep It Simple. An overly complicated multi-tiered subscription service with bolt-ons and random discounts might make perfect sense to you and your team when it’s laid out on a whiteboard in front of you. But it might not make sense to your users. If you can’t fit your prices in one easy graphic, simplify them!
- Look at how your chosen model fits in with your brand image. Does asking for one large upfront cost make sense for your relationship with your users, or would smaller optional microtransactions help to slowly build a stronger connection with them? Your pricing structure sends subtle messages to your users about how you value them.
- Talk to your marketing and sales teams. They’re the ones who know what your users want and what can be sold.