Innovation: How to get a return on the investment from building a digital product?

What are the costs of developing, distributing and operating software?

Digital Product Revenue Types

USER PAID REVENUE

REVENUE PAID BY SOMEONE INTERESTED IN YOUR USER

INDIRECT REVENUE

  • Revenue from sale or lease of physical or virtual items: This is the case with online stores that use online store software and services as a software product to sell or rent physical items. Amazon and Submarine are good examples. There are also stores that sell or rent virtual goods, such as Netflix’s streaming service or Amazon’s Kindle book sales. In the case of books, the sale is per item. In Netflix’s service, they charge a monthly fee to access streaming content. It is worth noting that the trading sites that broker the sale of physical items such as eBay and Etsy are not of this type. They are the type in which the revenue is paid by the user of the digital product, that is, by the person who places the physical item for sale, paying a commission for the sale. These sales brokerage sites are in the platform category.
  • Cost savings: This is the case of internet banking, high school or college intranet, system for access to laboratory test results, among other software products that do not market anything and do not charge for access. In this type of product, there is no revenue, but cost reduction. Internet banking reduces the costs of face-to-face customer service at branches; the intranet allows for a more streamlined communication flow between school and student or student parents, saving you on college and college visits and meetings; and access to results via the Internet reduces costs for other forms of exam delivery, such as printing and mailing.

Payment Types for Digital Product Use

  • Recurring Payment: it is a lump sum payment to use the product, such as a cable TV subscription or a gym membership. If you fail to pay, you can no longer use the product and no longer have access to all information that may be stored on it. The most common periodicities are monthly and annual.
  • Pay Per Use: In this case, you pay for the use of the product. This usage should be very easy to measure and track. For example, in an email marketing product, which allows email messages to be triggered to an address book, you may be charged for the number of messages you send. Another good example is paying for ads, which can be paid per view, click, or ad conversion. The commission charged by intermediary sites selling physical items like eBay and Etsy is another example, as is Skype’s charge to make calls to landlines and mobiles.
    It is also possible to have a mixed model, with recurring payment plus pay per use. A good example is a product for internet telephony, where you can charge a monthly fee for access to the product, plus a charge for outgoing calls, such as Locaweb’s Virtual PBX. Another example is a product that offers the possibility for its user to have an online store. In this case, you may be charged a monthly fee plus a usage fee based on the number of sales your customer makes using this store.

Getting Return from a Platform

WHO SHOULD WE CHARGE?

  • Scale Sensitivity: If one side realizes that your platform is more valuable based on the number of users on the other side, this side will be scale sensitive and willing to pay for the platform. For example, in Google, the more people search, the more interesting the platform gets for advertisers.
  • Competition Sensitivity: If one side realizes that the platform is more valuable the smaller its side is and, consequently, the smaller the existing competition, this side will be the competition sensitive side and more willing to pay. An off-line example is the entrance fee charged by bars, which decide whether to charge cheaper from women or not charge them at all, but charge men full entrance, who will be willing to pay because they understand there will be less competition. To attract more female customers, the bars often have a “free entrance for women” policy, sometimes on a ladies’ night. In some cases, these policies have been challenged in lawsuits as discriminatory, and are illegal in some jurisdictions in the United States, but is a good example of competition sensitivity if we frame these bars as a two-sided platform were men and women go to meet.
  1. There are always two sides: who advertises and who consumes the platform.
  2. For advertisers, the more people consume the platform, the better.
  3. For those who consume the platform, ads or the content itself can be an intrusion if Facebook and Google can’t make them relevant.
  4. For those who advertise, each business started or deal closed through the platform represents a gain.
  5. For those who consume the platform, each business started or deal closed through the platform represents an investment with a possible outlay of money.
  6. For these reasons, especially for the last two, it makes sense for advertisers to pay.
  1. There are also always two sides: who advertises and who has an interest in what is being advertised.
  2. For advertisers, the more people consume the platform, the better.
  3. For those interested in what is being advertised, the more offers available, the better, as there are more chances of finding what you are looking for.
  4. For those who advertise, each business started or deal closed through the platform represents a gain.
  5. For those who are interested in what is being advertised, every business started or deal closed through the platform represents the possibility of getting what you were looking for.
  6. For these reasons, especially the last two, it may make sense for both sides to pay to use the platform. On the other hand, considering items 2 and 3, it also makes sense that both sides can use the platform at no cost. In this case, it may make sense to analyze who is least price sensitive and what the market practices are.

WHAT SHOULD WE CHARGE?

  • Access: People may be charged for access to the platform. Something like a monthly fee, for example. This is the least common way to charge, as one of its main benefits is the number of people on different sides. This model can be found in platforms that work on exclusivity, where member quality is their main value proposition, and quantity is not relevant. Some platforms, after reaching a certain critical volume, may decide to charge for access to ensure quality and exclusivity. It is also possible to implement two levels of access, one free and one paid, with different functionalities and service levels, such as who is free is only supported via the Q&A site, and who pays is entitled to personalized support by telephone.
  • Usage: You can charge each time people use the platform. For example, on a job posting site, you may be charged for each job opening advertised. Another example is AdWords, where you are charged each time someone clicks on your ad, that is, each time your ad is used.
  • Rate / Percentage: In this model, the amount to be charged is a percentage or a variable rate of the benefit that one side of the platform has with each business conducted on it. Typically, auction and payment intermediation sites (PayPal, etc.) often use this billing model.

HOW MUCH SHOULD WE CHARGE?

WHEN SHOULD WE CHARGE?

Concluding

Digital Product Management Books

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Digital product development advisor, coach, and board member. Also an open water swimmer and ukulelist.

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Joca Torres

Joca Torres

Digital product development advisor, coach, and board member. Also an open water swimmer and ukulelist.

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