Making money

By Tien Tzuo on January 28th, 2013

Which payment model is right for your company? It’s a question many start-up businesses face and it’s one that is even more difficult to answer in the digital age. With the internet bringing widespread and often free access to so many products and services; it’s one thing to have a good idea, but now more than ever, the question of how to monetise your idea is a difficult one.

“Freemium” is one of the most commonly used payment models. An example of this in action is the app market. Most apps are available in a free format where a basic, stripped down version of the game or service is offered. Running concurrently will be a more advanced version of the app, which costs money to download.

Users after a more advanced experience are more likely to make the premium purchase, and those that would rather not pay are still allowed to sample the product in the hope it will convince them otherwise. Quite often, 90 per cent or more of customers will use the free product, but enough convert to the paid product so that you ultimately make money.

This model is not restricted to apps, and companies like Box offer their services using this same model. Its collaboration service is free for up to 10GB of sharing, whilst at the same time a more advanced package is available for higher usage demands. For consumers the service is free, but for business usage, the company charges based on data use. In a variation of freemium, users are able to familiarise themselves with the product for no charge, and then if they require more advanced access, the company can monetise the need.

Some companies need to introduce a pay-as-you-go model straight away. Subscription models used by companies such as ZipCar, where you can pay for use of a company owned car, involve access to valuable products. Companies therefore need to bring charges into the business plan from an early stage or else run the risk of damage to valuable company assets.

Other products are free for a limited time. Often a product or service is provided free of charge for a period of time, then a charge is levied for the product that was once free. Spotify’s UK launch was an example of this in action. The service was offered for free for a period of months and spread like wildfire. Once the user base was sufficient, the company was able to start charging.

In marketing terms, it’s the “foot in the door” technique. This model offers a great way to entice users via a form of free trial. However, a company must have a unique proposition to be able to offer this model.

No matter where a company is in terms of its growth, it needs the right model. That right model is one focussed on the needs of customers. If the payment model isn’t customer-centric, then no matter how established the company is, it won’t last long.

Now that we’ve discussed what options are available, it’s simply a matter of finding the payment model that’s best for you; or, to put it another way, to find the customer relationship that is right for you. To offer the best service, you have to appreciate where the customer is coming from and the different motivations behind their potential purchase.

Is this an impulse purchase by the customer, or is it a big decision? Buying a house or a car or a golf club membership is a big decision; trying out a music service for 1-2 months is a small decision.

Is there a big range of potential value points the customer can get from your service?  Is your product or service the type which some customers may only use occasionally, while other customers use it every day? If so, you should look at scaling your pricing.

Are there clear “segments” or groupings of customer types? High net worth vs middle class vs a graduate with a big loan to pay off?  If so, an edition strategy where the names and features set resonate with that segment could be a good option for you.

Is there a big variation month-to-month in usage from your customers?  If so, a usage based model could make sense. Similar to the plans and tariffs offered by your mobile phone operator, you could offer plans with various usage levels, and then have overage charges for when those levels are exceeded.

Although the most efficient models of payments may change as markets and demand evolves, the principle behind charging for your product or service remains the same — understanding the customer and their situation.

Putting the customer and their requirements first is the single most important factor in a payment model. Situations change and so does market demand. But any company which puts customer relationships and preferences at the centre of its payments strategy will be well prepared for success.