What's Your Monetization Strategy?

Image by ZeroOne via Flickr

In talking with venture capital firms and with the startups that pitch to them there are many key areas to emphasize in a business plan. I'll be posting about some of these over the next few weeks.

One such area, however, is your "Monetization Strategy". At various times in the recent past - coinciding with the formation of a bubble or pending market bust - investors have not cared about this. It was all about "eyeballs" or "land-grabs" or whatever the then-fashionable euphemism for forgetting about how to be a business person and real investor. Fortunately - with a few exceptions such as Twitter (where it will still come) - investors and business people have returned to basics and now want to know "how will you turn this idea into something someone will pay for, and what will be the resulting revenue stream?"

However it can be very complex if, say, you're a software company or a web-based services company. Your software licensing model may be the traditional (a.k.a. outdated) expensive perpetual licence and annual software maintenance contracts. A perpetual licence gives the buyer the right to use the software in perpetuity but you'll need to pay 20% or so of the original license fee per year to the seller to access support, get upgrades, bug fixes etc (ie: to insure it still works).

These days its highly unlikely - impossible, really - that you'll get funding (or market traction, come to that) for a startup software company with a perpetual license monetization strategy. In part that's because there are far better alternatives - for customers, investors and for you. Term licenses bundled with maintenance in essence take a software rental approach. You still take "delivery" of the software and have to install it at your site; however you use the software for a defined period of time for a set fee - or for a variable fee that might be based on number of users, transactons processed or whatever. Obviously you can renew the license when the term is up (though you will not typically guarantee what the price to the customer will be when that happens). A big advantage for an early stage seller is that its typically easier to get the customer to adopt your solution than with a big upfront fee - think of this as the leasing model for a car, vs. a cash purchase.

More common now is an "on-demand" or "software-as-a-service" ("SAAS") delivery and monetization model. The customer doesn't install the software at all. They log into a web-based service you've set up - which can be very customized for them - and they pay by usage, number of seats (individuals in the company using the service, etc). No other license fees, no ongoing "maintenance", underlying software is always up to date (because its completely run and managed by the provider as service on their platform). This is a great model because its easy to understand and sell, it scales from one user to thousands without any changes or upgrades, etc.

Many other monetization models now exist, thanks to the on-line nature of many businesses. Advertising-supported models have become a huge factor, with Google, Yahoo! and others being such major players, and hosts of other companies providing tools, services, channels and so on around this. So much so that there has been major dislocation in all of the previously off-line, ad-reliant businesses - newspapers being an obvious example. 

So what's your monetization model? In my next post I'll consider some of the factors to think about as you develop yours!