One of the most important questions from the opportunity assessment questionnaire we saw in the article about “A lot of opportunities” is the question: “How are we going to measure success and make money from this product?”. It deals with two subjects: metrics and revenue. We already discussed metrics in the “Be a data geek” article. Now let’s talk about revenue.
What are the costs of developing, distributing and operating a digital product?
Every software development has a cost. When this software is a digital product — that is, software that has users — the product has, in addition to the development cost, the operating cost, which is the cost of getting that software to users and depending on the type of product, the cost of storing data from these users.
Before the internet, software products were sold in boxes with manual and floppy disks, or installation CDs. The revenue came from selling these boxes with the software. Some companies even charge an annual maintenance fee, which gives customers access to newer versions as they become available.
This digital product runs on the customer’s computers, meaning that all operating costs are your responsibility. The manufacturer recommends a minimum equipment configuration to run this software and the customer is concerned with owning, configuring and maintaining this equipment.
In addition, administering this digital product is also your responsibility, as well as ensuring that it is running on equipment with sufficient disk space, sufficient memory, and that the generated data is safe and backed up. Revenue from the sale of this software product serves to pay for its development and distribution costs.
With the internet came the possibility of offering software to be used remotely, that is, it became possible to use software that is no longer running on the client’s equipment and does not need to be managed by it. This is what we are calling here as a software product. In this new commercialization model, there is not only the sale of the software but also the sale of the service of its operation. Even smartphones apps, which run on users’ phones, have mostly some online component, that is, they search and store data on remote servers, which will also bring operating costs.
That is, every digital product has costs to develop the product plus costs to operate it. To cover these costs, you need to have some kind of return on investment to build the product.
Digital Product Revenue Types
Basically, there are 3 ways to monetize a web product:
User Paid Revenue
It is the model used in most business digital products, such as products offered by Locaweb, Google AdWords, MailChimp, and more. In this case, the revenue comes from the periodic payment (monthly, yearly etc.) for the use of the digital product. Another very common option is pay-per-use (I’ll talk more about these forms of payment later).
Revenue paid by the user is also a form used by some end-user software products, but it is more difficult to charge this type of user. Netflix, Spotify, LinkedIn, and Dropbox are some examples. To understand how difficult it is to charge an end-user, imagine paying for Google search. That is, even if the end-user perceives a lot of value in a product, it is hard to justify for this type of user that she must pay to use it.
Revenue paid by someone interested in your user
In this model, you usually do not charge the user of your product, but someone who is interested in your users. This model is widely used in end-user digital products. Typically, the business model is ad selling. One example is Google, which allows anyone to use search, and charges companies for placing ads along with search results.
Another similar example is Facebook, which also offers free access to users, and charges for ads from companies interested in advertising to their users. Another form of revenue is selling reports based on usage data. In addition to advertising and selling reports, another revenue option is to allow other companies to sell services to their customer base and share revenue. An example is Brazilian personal free finance app Guia Bolso, which offers credit options to their clients, credit offered by financial institutions that share with the Guia Bolso part of the revenue generated with the loans.
An important point to note is that in order to be interesting to someone to the point that they want to pay to gain access to your user, you need to have a lot of users. Think in term hundreds of thousands who return often to use your product.
To attract hundreds of thousands of free users, you are likely to invest a lot of money, so you have to look for free ways to market your product. In addition, this should promote frequent user feedback, as this will give you an audience that will be of interest to anyone who wants to pay to talk to them.
To make your user base even more attractive to prospective advertisers, you should try to know a lot about your users, such as demographics, behavior, and preferences. This way you can offer more assertiveness and efficiency to advertisers.
It is the revenue you earn as a result of users using the software but not paying to use it. There are basically two types of 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, a 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 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
When you pay for the use of a product, it can be done in two ways:
- Recurring Payment: 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, clicks, 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 peruse. 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.
Digital Product Management Book
Do you work with digital products? Do you want to know more about how to manage a digital product to increase its chances of success? So check out this book I’m writing based on my almost 30 years of experience in creating and managing digital products. The book is called Product Management: How to increase the chances of success of your digital product.