I remember watching a clip of Facebook founder & CEO Mark Zuckerberg testifying before the US Senate, back in April 2018. Senator Orrin Hatch famously asked Zuckerberg how Facebook could exist and survive as a business if it didn’t charge its customers for the use of its software. Zuckerberg was stunned, and Mark deserves a lot of credit for not busting out laughing, said…”Senator, we run ads”.
I’m paraphrasing the conversation between Hatch and Zuckerberg, however it highlights the traditional way in which people see companies making money from their product ideas; charging your clients for the use of your product or service, as Senator Hatch was thinking.
Within the common fee or price model there are several ways to generate revenue.
You can:
charge a fee per unit sold. An example of this is anything you buy in a typical retail store, or online retailers such as Amazon and Etsy.
Charge a flat amount per month, per quarter or per year. This approach gives you unlimited use or access to the product during that period. An example would be a monthly fee to use Microsoft Office 365, or to use email and cloud storage for files, pictures and video from Google Suite.
A fee can be charged every time the product is used. Visa and Mastercard charge merchants about 2% of the value of the transaction, each time a customer uses their credit cards in their store. American Express charges about 3% per transaction.
If your product enables two parties to engage in a marketplace of products or services, you can charge a fee per transaction and generate revenue from both sides of a marketplace transaction. An example of this is each ride you take with Uber or Lyft, or each stay you have at an AirBnb location.
Or, the use of the product can be completely free...like Facebook, Google search or Yelp. I guess Senator Hatch doesn’t use Facebook very much, but I’d be surprised if his staff hadn’t used Facebook...for free...and seen the ads popping up in the feed.
Offering your solution or platform to users for free is a great way to get lots of people using it. Assuming on-boarding yourself onto the platform is easy, the company can generate lots of activity on the platform and that will validate your product idea to some extent. Of course, because it’s free users don’t have a lot invested in your product and if they don’t have a good experience (ie - it’s too painful to on-board or use), or it doesn’t really help them with a pain point, they will abandon your product quickly. Think of all the apps on the third page of your phone’s homescreen. Signing up users for free is a good start but you want those people to use your product regularly. Getting people to use your product, even for free, is a big undertaking and congratulations are in order when a company can get thousands of daily active users (DAUs) or millions or monthly active users (MAUs).
In a freemium model once you have lots of users there are two ways to generate revenue for your company. You can offer an upgraded premium version of the product with additional useful features, and charge a fee for the premium version. LinkedIn, Spotify and Strava (the physical fitness app) are good examples of this.
Or, you can find advertisers interested in the user base of customers and generate advertising revenue, like Facebook, Google, and The Score (sports scores app).
In 2014 Facebook bought WhatsApp for $16 billion, with a “B”.
At the time WhatsApp had 450 million regular users on the platform. That’s what Facebook wanted...the users. Lots have been written about what Facebook’s plans are to monetize the users of WhatsApp and we have yet to see if this has been a good investment for Facebook. Imagine Senator Hatch’s reaction if he knew Facebook paid $16B for something with 450 users...none of whom pay a penny to use the product?
How to make money from your product idea that many companies agonize over. Every business needs to generate revenue to cover costs and make a profit. It's why businesses exist. History will show that companies took one approach and then switched over to another method of monetizing their products. Being flexible and adapting to what the marketplace will bear is important for company founders and leaders. However, time does need to be spent upfront and before the product is released to think through the different monetization models, and their strengths and potential challenges.
Thank you for investing time in reading this post. Questions and comments are always welcome.
Shail Paliwal
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