6 Key Questions to Guide Your Startup's Monetization Strategy

“There’s no such thing as the perfect price—but there are ways to get it wrong.” —Ian Clark, founder of Crescendo Consulting Group

From defining a business model to advising on pricing and packaging, Ian Clark has spent the last decade helping teams figure out how to monetize. Based on his experience in pricing as a consultant, software engineer, product marketer, and investor, he has seen both startups and public companies struggle with similar challenges: “Should I be charging for subscriptions, or are usage-based models a better fit? Am I even tracking the right metrics in the first place?”

In a recent Founders + Leaders conversation for CEOs and revenue leaders at GGV portfolio companies, Ian tackled some of those frequently asked questions. Read on for his insights on monetization strategies that work, why customer segmentation matters, how to conduct qualitative interviews with customers, and more. 

What are some do’s and don’ts of monetization? 

Based on Ian’s experience advising startups like Evernote and ClassDojo to public companies like LinkedIn and Cloudflare, here are some basic rules of thumb:

• Don’t build a product and then put a price on it. 
• Don’t think about your costs: “It can peg you to an artificial number that is irrelevant,” Ian says.
• Do focus on: “What is the willingness of your customers to pay? And which segments of your market have a willingness to pay?”
• Don’t care about your competitors’ prices. According to Ian, that information isn’t relevant. “You always have to come back to what is the willingness of your customers to pay,” Ian says.

Remember: The biggest thing is to shift “from thinking about the price level (is it $9 or $10?) to thinking more about the price model, which is how the packaging and the pricing work with regard to the customer segmentation,” Ian says. “So pricing is not actually about economics and elasticity … It's actually customer segmentation in disguise, which is how can we better quote different price points and different packages to different pieces of the market? That's really the magic about pricing strategy.” 

What are the key components of monetization?

Ian breaks down the seven components of monetization:

1. Monetization strategy: Are you optimizing for adoption, revenue, or margin? “Most people overestimate the strategic impact, like they overestimate the network effects and they underestimate the impact of just having more revenue,” Ian says.

Pro tip: Better monetization has 8x the impact on revenue over acquisition–and 2x the impact on revenue over retention/renewal.

2. Metric: Are you charging per user or by usage? Did you even pick the right metric? This most important piece of pricing is also the hardest to change because “that metric is so embedded into your code base,” Ian says. “Changing the metric oftentimes has really big implications for how the business evolves over time, and it can be both disastrous and magical.”
   
   
3. Structure: How does the metric relate to time and volume? Do you have volume tiers? Any volume discounts? If you have a subscription model, is it annual, quarterly, or monthly?
   
   
4. Level: Is it $10 or $11? (This is the easiest to change.)
   
   
5. Packaging: How does your product experience differ by user? Is it more like a buffet (same experience) vs. dim sum (à la carte?)? Should you even have tiers of features?

The golden rule of packaging, according to Ian, is your packaging should reflect your market segmentation.

• Tiers may make sense if you’re able to provide differences in the features for customers. Keep in mind that many startups may begin with one small set of features. 
• Consider tiers “if you’re targeting three different customer segments at a minimum,” Ian says. “It goes back to segmentation in disguise.” For many startups, it’s common to target one customer segment at launch. 
• If any feature needs are positively correlated with a willingness to pay, tiers may also make sense.
  

6. Bundling: What goes into each tier? Is it sold as a bundle or à la carte?
   
   
7. Promotion/marketing: How do you bend the willingness to pay with promotions and discounts? Do you have a freemium model or free trials?

Pro tip: For free trials, it’s easier to change from three months to six months, but “it’s a massive endeavor to change from freemium to a time-based free trial,” Ian says.

How do you measure willingness to pay?

Ian points to two common methods to assess a customer’s willingness to pay.

Van Westendorp: Using this unaided direct pricing method, you can generate a demand curve for a single customer by establishing:

• At what price would you consider a product to be a bargain? 
• At what price would you consider it to be expensive?
• At what price would you consider it prohibitive where you wouldn't buy it even if you wanted to?
• At what price is it so cheap that you worry about the quality?

Gabor-Granger: With this aided direct pricing method, you can offer specific prices and ask if a customer would buy it (typically up to three times). Using the yes/no responses, you can then generate a demand curve based on the individual price points.

Should your pricing be public on your website, or private?

When your pricing is public, the bounce rate is typically much lower. “That’s where you should spell out the value prop,” Ian says. “You’re effectively buying customer attention. Consider keeping your pricing as private “if you plan to do a lot of negotiation or have an issue with sticker shock.”

Any advice on conducting qualitative interviews with customers?

To tease out a customer’s willingness to pay, Ian recommends focusing on value—not price. As Ian jokes, “it's a little bit like dating where you want to start off with questions like ‘Tell me about yourself.’ And then at the end you say, ‘And how much money do you make?’

Other tips include:

• Start with background, use case, and value drivers. 
• Ask questions like: “When you were deciding between different solutions, what was important to you?
• If a customer doesn’t mention price, follow up by asking where price factored into his or her decision-making process.

What’s an ideal frequency for doing customer studies?

Ian recommends that startups complete monthly studies, though you likely won’t do the same study each time. Instead, consider looking at different facets of the market with each study—professional services, students, or a deep dive of your freemium product.

“Usually I cycle through primary research (which is customer interviews and surveys) to data analysis (where we’re doing some internal work) and to experimentation, where we’re often doing some sales testing,” Ian says. “If you do that monthly, you’re going to see the market changing before it happens.”