What is the difference between pricing and monetization?
tl;dr: How do monetization, pricing, and mobilization work together? By designing your offer structure and pricing plans with the right triggers, fences, and caps. What's all that? Read on :)
This is a question we get rather frequently. The better question yet is what’s the relationship between monetization and pricing? Further, the question that should be asked but not asked is how does mobilization play into all this? Whoa, that’s a lot of lingo. Let’s unpack them.
Monetization is the process of creating an offer structure that translates non-revenue-generating sources of value into sources of revenue.
Monetization is the process of creating an offer structure that translates non-revenue-generating sources of value into sources of revenue. A prime example is getting paid to solve a particular problem by using your know-how, process, expertise, or experience where these sources are packaged as a piece of technology, a tool, a product, or a service. Some other examples are:
- Facebook monetizing the value of a network by selling access levels to advertisers.
- HubSpot monetizing their lead generation expertise through a lead management SaaS offering.
- A tax accountant monetizing their knowledge via tax filing services.
- A connected hardware supplier monetizing their technology by offering IoT enabled devices.
A good monetization plan has three components: First, is an offering that is provided by an entity and desirable by another. The second is the delivery mode by which value will be realized by the buyer. The third is an exchange mechanism between the two parties. This is where pricing comes into play: Pricing defines how and how much value is exchanged between the provider and the buyer.
Pricing defines how and how much value is exchanged between the provider and the buyer.
Pricing is the process whereby a business sets the price at which it will sell its products and services. By definition, the pricing process is used to align the price points with value delivered. The pricing process also determines the relative value of an offering with respect to its competitive position or in relation to a portfolio of other offerings.
Most companies use the monetization process to define their revenue streams and the pricing process to define the magnitude of these streams. However, this is much too narrow an understanding of both concepts and it misses the mark on how either of these concepts can be used as growth levers. Monetization must be a dynamic strategic activity as the value can be monetized in various ways, and not just by transacting. Firms should treat their net new client monetization and existing client monetization strategies separately. Similarly, they should investigate the monetization models from direct and partnered channels separately.
Pricing too must be a dynamic strategic activity. Just as the firm’s activities on value creation (R&D, product management, operations, etc.) and value communication (Marketing and Sales) are dynamic so must be their activities in value capture (Pricing and mobilization). For example, as firms continue to invest in product features, service benefits, and user experience by continuously rolling out updates, upgrades, and additions, they effectively increase the value delivered to their users and neglect to adjust their pricing. A living pricing strategy ensures that firms can monetize the value that they create commensurate with the value that they deliver.
A shared goal between the monetization and pricing processes is maximizing the lifetime value of a customer – and that’s where mobilization comes into play. Your mobilization strategy defines the conditions to be met so that you can move customers from lower-value offerings to higher-priced tiers, and it can be achieved in a number of ways. Mobilization happens naturally when your pricing perfectly scales by how much your customers benefit from your offering. In the absence of perfect alignment, which is common, you can still mobilize customers by instilling the right caps, fences, and triggers between the levels of value. Whoa, even more lingo:
- Caps are used to communicate the levels of benefits that a customer receives, for example, you can get up to 2TB of storage on Dropbox for $9.99 per month. The 2TB is the cap.
- Fences describe the types of caps that will be used in order to separate the levels of value. Continuing with the Dropbox example, the fences among the Dropbox plans are the amount of storage, the number of concurrent users, length of data retention, and document-share file sizes. The types of fences and the magnitude of caps are determined quantitatively and strategically as these drive the segmented adoption goals that Dropbox aims to achieve. Dropbox regularly analyzes its adoption and utilization data as well as surveying its user base for uncovering segmented behaviors.
- Triggers define the event-driven points at which a customer will be offered a path to upgrade, upsell, or cross-sell. For example, when customers reach 90% utilization of their storage, they might get a notification and call to action for acquiring more storage. Similarly, if they are frequently sharing files with the same 3-4 users they might be offered a family or team plan etc.
Your mobilization strategy defines the conditions to be met so that you can move customers from lower-value offerings to higher-priced tiers.
Now, how do monetization, pricing, and mobilization work together? If all three of your strategies are aligned, your offer structure and pricing plans will have the right triggers, fences, and caps. Doing so will not only drive segmented acquisition by aligning the value with the willingness to pay of your segments but also mobilize customers to higher levels of value in a way that is native to their adoption and usage of your offering.
Take this example from a training technology client of ours. Before optimizing their plans, our client sold online training and accreditation for family, professional, and institutional caregivers in healthcare. They sold their programs by using a menu-based approach and a per license metric. The summary of their offerings and their segmented revenue distribution were as shown below.
After we optimized their monetization, pricing, and mobilization strategy, they were able to move 20% of their Team buyers to the higher-priced Institutional plan, achieved a 15% increase in their revenues and realized a 30% increase in their margins.
Hope this article helped in making the connection between monetization, pricing, and mobilization. Before you go, note is that incorrectly sizing the caps, fences, and triggers is the number one source of churn especially in digital offerings. As always, we’re here to help with all that. Feel free to schedule a free discovery call.