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What is a Monetization Model?
A monetization model is a plan or strategy that outlines all the different ways a business will generate revenue. It is an important aspect of a company’s overall business model that involves identifying sources of income, establishing pricing strategies, and setting revenue goals.
Components of a company’s monetization model include:
- Subscription sales
- Ad revenue
- Licensing fees
- One-time product sales
- Volume discounts
- Intellectual property
- Reseller partnerships
- In-app purchases
- A founder’s personal brand
- How exactly they price the above products or services
To “monetize” literally means “to convert into money.” A monetization model describes how businesses turn their various resources into profitable revenue streams.
Basically, anything that plays into a company’s financial performance — including but not limited to sales, pricing, and partnerships — can be considered part of its monetization model.
- Product monetization model
- Product monetization strategy
- Revenue model
- Business model
Importance of Product Monetization Strategies
Since there are practically infinite ways a company can monetize its products, creating a structured monetization model made up of distinct strategies is a key part of market differentiation.
- Product-based resellers monetize by selling goods to customers at specific prices.
- Service providers charge clients for specific services rendered.
- Retailers buy from manufacturers and sell to consumers for profit.
- Advertisers monetize by selling ad space on websites, apps, or other publications.
- Online businesses run ads, market affiliate products, and/or sell digital products.
Underneath those basic strategies, there are hundreds of smaller niches and areas of specialization. For instance, a SaaS company might license one patented element of its software to other companies. A DTC ecom brand might offer price breaks to brick-and-mortar stockists. A retailer might launch an affiliate program and partner with influencers.
The point is, companies need to get creative when it comes to monetizing their products and services. Revenue diversification (thanks to a well-thought-out monetization model) can be the difference between a successful, profitable business and one that struggles to stay afloat.
Essential Ways to Monetize SaaS Products
SaaS companies in particular have a variety of monetization options to consider. Although they typically sell one core product, they also use a combination of tactics to maximize revenue. The following are some of the essential ways SaaS companies can monetize their products:
SaaS is defined by the subscription model. Customers pay a monthly or annual fee for access to the software, which is hosted on a cloud-based server.
The majority of SaaS companies offer multiple flat-rate subscription tiers, each with different features and price points (tiered pricing). Typically, there’s also a usage-based element to this — e.g., $30/month up to 5 users + $5/month for every additional user.
This unique pricing model allows software vendors to charge basic rates for most customers. Meanwhile, those who need additional features or larger teams pay an additional amount proportional to that value.
Free to Paid
The freemium model is one of the best ways to acquire new users for a SaaS product. With freemium, new users can access a limited software version at no cost, while paying customers are allowed access to premium features.
Freemium users fall into one of three categories:
- Customers who only need basic features at the moment. For these customers, allowing them access to a basic plan indefinitely won’t make the business any money directly. But it’s great for product awareness. And they might end up needing more in the future or recommending the tool to someone who does.
- Those who think they only need basic features. SaaS companies typically build all of a product’s features into its lower-tier products, then lock them off. That way, users can click on them in attempt to use them. That’s when they can produce a pop-up that explains the feature is only available in the premium version. When these customers realize their most important features require payment, they’ll eventually upgrade.
- Those who are testing out a tool with full plans to subscribe. A CRM platform might let free users input 50 leads before prompting them to pay for more. An email marketing tool may let you add 5,000 contacts before bumping you up to the next price tier. This way, customers can get comfortable and gauge how much they’d actually use the tool before committing to a paid plan.
The idea behind freemium models is the customer (a) has limited needs or (b) wants to try before they buy. Once they begin using it, they get a feel for the product’s core features. Once they’re familiarized, there’s no reason for them to go elsewhere.
For SaaS tools (particularly those with a mobile component), such as social media management tools or project management software, in-app purchases are one-off sales in addition to customers’ monthly subscriptions. These are generally add-on features that enhance the user experience.
- Additional storage space
- Advanced analytics
- Access to premium templates and designs
Some SaaS companies even allow users to create and sell their own customizations. Notion and Webflow are perfect examples of this.
In addition to their product subscription tiers, both companies have marketplaces, where users are able to templatize project management workflows (Notion) and websites (Webflow). Other Notion/Webflow users can purchase these and use them for their own projects.
Affiliate marketing is essentially where others build their own audiences, then promote your product to their own followers. When a follower clicks the affiliate link and purchases, the creator collects a commission.
- Direct affiliates are users that simply have registered accounts with your platform but don’t actually use it. They’re in it for one thing: passive income. These users will typically be ones with large email lists, niche blogs, or popular social media channels.
- Affiliate networks are companies that handle the logistics of affiliate marketing and ensure that affiliates get paid. These organizations often have a large number of members that specialize in various areas (e.g., social media channels, blogs, email lists).
Believe it or not, software is one of the most profitable niches for affiliate marketers. Since software subscriptions are such high-value (and scalable), deals in this space often benefit the affiliate significantly.
And for SaaS companies, setting up an affiliate program is as easy as getting the links, creating a webpage, and promoting it. In fact, more than 80% of companies (including SaaS) have affiliate programs.
The idea behind channel sales is to use partners or channels to sell your product in return for a percentage of the sale. This can take many forms, including:
- Referral partners are companies that continuously and purposefully refer buyers to you. These partners typically don’t resell software but do offer complementary products or services. Each time they refer someone, they get paid.
- Resellers act as intermediaries between your company and the end-user. They resell your product to customers in return for a commission. These types of partners are most valuable when (a) they cater to the same target audience or a qualified one you haven’t tapped into and (b) have existing relationships with potential buyers.
- Value-added resellers (VARs) act much like traditional resellers, except they also bundle their own products or services with yours. They’ll often offer the software as part of a larger package that includes hardware, consulting, and other services.
It’s hard for SaaS companies to find resellers willing to take on new products since they’re paid only after a sale occurs. This means you’ll need to start by targeting existing VARs in your niche (e.g., a VAR that specializes in digital marketing would be an ideal partner for an email automation tool).
SaaS companies can license out pieces of their software, technology or data for others to use. A prime example of this is Google Maps.
The latter option — raw data licensing — means that other businesses can create custom mapping tools using Google’s base and pay Google to access it.
Other examples of licensed products are:
- APIs. Rather than building out an integration for another platform, some companies will opt to have developers use their APIs (application programming interfaces) to do it themselves.
- White-labeling. White-labeling is where a company takes your product and rebrands it as its own. The third party can charge their customers whatever they want, and since they’re not reselling your product, the margins can be much higher.
- Software libraries. For SaaS companies that have built something superior (e.g., an algorithm or method), they might license it out to others so they don’t have to build from scratch. The reusable code can become a steady stream of passive income for the original company.
Some SaaS companies even create a sister brand to take on these licensing deals, so they don’t dilute their master brand.
Larger SaaS companies like Atlassian and Salesforce have built out marketplaces that allow other companies to develop and sell products that integrate with their own. This creates a mutually beneficial environment where both the platform and the third-party developers can profit.
For example, Salesforce’s AppExchange has thousands of apps from third-party developers that customers can browse and purchase to enhance their CRM experience. As a result, these developers gain access to Salesforce’s massive customer base and earn revenue through their apps’ sales.
SaaS Monetization Model Examples
Every company has its own business strategy. No two are exactly alike.
Here’s a look at some of the most interesting SaaS monetization models:
Co-founded by Neil Patel, it almost goes without saying marketing would be the dominant revenue driver here.
The heatmap software companies use to see how users interact with their website offers a 30-day free trial. Once that’s up, you have to use one of multiple paid plans (starting at $29/month and increasing gradually to $249/month).
What’s really interesting about Crazy Egg is how much the software company makes from other companies’ products. The Crazy Egg blog receives 130,000+ in monthly organic traffic.
On the blog, you’ll find thousands of blogs, including:
- Software product reviews, including reviews for countless SaaS products
- Tutorials, tips, and best practices on how to do digital marketing better
- SaaS product comparisons (e.g., ClickUp vs. Monday.com)
- “Best of” lists and product roundups (e.g., best email marketing software)
- Case studies and success stories from SaaS companies using Crazy Egg’s software.
If you look closely, all these other products are affiliate partners. Each time someone clicks on a link in one of these articles, Crazy Egg earns a commission. If someone pays for a subscription, that’s even more revenue for Crazy Egg.
A few other SaaS companies do this sometimes, but no other is as aggressive with it. It’s genius.
On the surface, Notion is like every other project management software company — it makes it simple to collaborate, track tasks, and visualize workflows.
But, there are two elements of Notion’s product monetization strategy you might overlook:
- Marketplace — Notion users can templatize their own workflows and sell them to others. This saves other members of Notion’s user base the trouble of figuring out their own processes. For Notion, it’s an additional revenue stream. Users can charge whatever they want when they list their templates on the Notion marketplace, but Notion takes a percentage cut.
- No-code website building — What a lot of people don’t know is you can build an entire website using Notion as the backend with no coding skills. This makes the tool a great option for basic landing pages, portfolios, or simple websites.
Since Notion is primarily billed as project management software and not website-building software, they’re able to capture customers from a different audience who might not be looking for a full-blown website builder.
Unlike most SaaS companies, we don’t offer one product at multiple subscription tiers. We offer three products DealHub customers can purchase separately, each with all features ready-to-go. Or, since each product goes hand-in-hand, organizations can use the entire product suite (Billing, CPQ, and DealRoom) for a different contracted price.
The advantage to this monetization strategy is each of our customers receives a tailored pricing plan that fits their unique needs. It also allows for flexibility — we can support our ideal customers, even if they already have one or more of the three products we offer.
Best Practices for Product Monetization
As you can see, there are many different ways SaaS companies choose to monetize their products. There is no one-size-fits-all approach, but there are some best practices to keep in mind when developing your own product monetization strategy.
- Understand your target audience. Before deciding on a monetization model, it’s important to understand who your ideal customers are and what they are willing to pay for. This will help you tailor your pricing plans to fit their needs and budget.
- Consider a mix of different models. In addition to your main revenue driver, consider implementing other monetization models that can bring in additional streams of income. This could include things like partnerships, advertising, or affiliate marketing.
- Stay flexible. As your business grows and evolves, your product monetization strategy should as well. Stay open to new ideas and be willing to adapt if needed.
- Listen to customer feedback. Your customers’ opinions and needs should play a large role in shaping your product monetization strategy. Take their feedback into account and make adjustments accordingly.
Continuously test and analyze. It’s important to regularly review and analyze the effectiveness of your monetization strategy. Test different models, price points, and features to see what resonates best with your target audience.
People Also Ask
What is the difference between a business model and a monetization model?
Although “business model” and “monetization model” are sometimes used interchangeably, there’s an important distinction. A business model encompasses a company’s overall strategy, including its target market, value proposition, and approach to business efficiency. A monetization model is the final aspect of a business model that outlines how the company will generate revenue. Essentially, a monetization model is a subset of a business model (albeit a critical one).
What is a monetization strategy?
A monetization strategy is a plan or approach for generating revenue from a product, service, or business activity. It outlines the methods and models a company will use to make money, including pricing strategies, partnerships, and marketing/advertising opportunities. Successful monetization strategies align with the company’s overall goals and target audience.
What does it mean to monetize a brand?
Monetizing a brand means generating revenue from the brand’s reputation, image, and recognition. This can be done through endorsements, partnerships, or licensing agreements with other companies. It can also involve creating and selling branded merchandise or offering premium versions of products/services at a higher price point based on the strength of the brand. In short, monetizing a brand involves finding ways to turn its perceived value into tangible revenue streams.