Show Me The Money

Investors are now more astute than ever. In fund raising discussions I’ve been involved with over the past few years I have seen a definite shift in attention to detail especially when it comes to funding tech start-ups. A good idea with great people is not enough to persuade VCs to invest. They are looking at metrics, traction and even with early stage companies lifetime value and churn. Fast Company called it in this article where they cited fewer dollars raises and fewer dollars committed to start-ups.

All of this means that a new set of challenges for product leaders has emerged. The venture capital climate has become increasingly challenging, making it imperative for product managers to shift their focus toward monetisation strategies. This shift in emphasis from user acquisition to revenue generation is vital for the sustained success of a product in today’s competitive market. 

The Changing Landscape of Venture Capital:

As the venture capital climate becomes more challenging, product leaders are finding it necessary to reassess their strategies. In 2023, the emphasis is no longer solely on scaling at any cost but rather on building sustainable and revenue-generating products. Investors are now more cautious, demanding clearer paths to profitability. I’ve been working closely with health tech for the past 5 years and have witnessed more caution than ever in this sector. It is clear that there is a marked change in attitudes of investors and as such product leaders, CEOs and founders need to reset their expectations. It is no longer possible to persuade VCs to allocate large sums of money to marketing funds for pre-product/market fit companies. Instead we need to examine the core principles of monetisation to lean in to revenue generation as soon as possible as a traction marker.

The Core Pillars of Monetisation

a. Pricing Strategies: Pricing is a critical element that can significantly impact a product’s success. Product managers need to carefully evaluate their pricing models, considering factors such as market demand, competitive landscape, and perceived value. Dynamic pricing, freemium models, and value-based pricing are strategies gaining traction in the current environment. Experiment quickly and see what’s working for your early adopters. Remember, your investors may not hold you necessarily to profitability but they will want to see proof that users will want to BUY your product.

b. Bundling and Packaging: Bundling allows product managers to combine multiple offerings into a single package, providing customers with added value and encouraging upsells. This strategy can be particularly effective in attracting new customers and maximizing revenue from existing ones.

c. Tiering: Product tiering involves creating different levels of product offerings with varying features and pricing. This allows businesses to cater to a diverse range of customers with different needs and budget constraints. Effective tiering can drive customer retention and expand market reach. Markup.io , for example, offer a combination of the Goldilocks effect strategy AND enterprise level upsell to monetise their freemium product.

d. Lifetime Value (LTV) Calculations: Calculating the lifetime value of a customer is essential for understanding the long-term revenue potential of a product. Product managers must consider customer acquisition costs (CAC) in relation to the expected lifetime value, ensuring a healthy return on investment. Investors are now very interested in these metrics in addition to churn and other product metrics – they need to see the true picture of how your idea is translating to success in the market.

Real-World Examples of Monetisation Shifts

Adobe Creative Cloud: Adobe’s shift from a one-time software purchase model to a subscription-based Creative Cloud model is a prime example. This transition allowed Adobe to maintain a consistent revenue stream, adapt to changing market dynamics, and offer customers a more flexible and affordable payment structure. Initially there was a push back on this model but resilience from Adobe’s leadership has ensured that customers have become used to this proposition. However, other players still believe that users dislike this way of paying for products – Affinity are a competitor than is going from strength to strength on fixed, affordable pricing for its excellent design and editing products.

Netflix and Subscription Models: The rise of subscription-based models, exemplified by streaming services like Netflix, showcases the power of recurring revenue. By providing a continuous stream of value and content updates, businesses can build long-lasting customer relationships. Again, just like Adobe, customers have been subjected to ‘ransom’ pricing increases and in recent times Netflix is seeing an uptick in churn as the cost of living impacts the monthly subscription price hikes.

Slack’s Freemium Model: Slack’s success can be attributed, in part, to its freemium model. By offering a free version with limited features and enticing users to upgrade for premium functionalities, Slack effectively converted a large user base into paying customers. Notion do the same.

 Some key points:

– Don’t take funding for granted, treat your investors and those who will hold you to account and ensure you understand their expectations

– Establish product/market fit as early as possible by de-risking your proposition, speak to users, get their feedback quickly and establish the value exchange so that you can demonstrate financial traction and revenue

– Once you’ve got a cohort of users who start to pay for your product be resilient and keep going. Ensure they don’t churn and work on growth strategies for paying customers – who are they? How can you reach out to them and grow that cohort of users?