A thought experiment that started at Business school continued post graduation, when I interviewed product managers at startups to understand what percentage of time their teams spent thinking about monetization. The answer invariably was ‘less than 5%’. In most cases, monetization was an after-thought.
The pendulum swung from one end of the spectrum where firms lived by the philosophy that ‘Maximizing return on investment was the sole purpose of a firm’, leading to the rise of corporations that left scandal, pollution, and poverty in their wake, to the other end of the spectrum where startups, built on mission, started putting growth at the forefront of their existence, albeit at the expense of monetization and profitability and in the process failing their key stakeholders — customer, employees, and partners. When pandemic of an unprecedented scale hit, many startups that relied on funding from external investors for ‘growth’, found themselves less than prepared. What followed was extreme measures to apply band aid by instituting tough financial directives — hastily downsizing staffs, cutting projects to reduce burn, and shifting focus to monetization strategy — all in an attempt to attract fresh investments by projecting an investor friendly image.
What went wrong? How did firms built on mission and purpose with the ideals of customer centricity so deeply rooted in their DNAs, end up in a such a mess.
In this article, I share my perspective of why firms that are working on solving real user problems fail to look at monetization, revenue, and profitability to fund their growth. I also explore ways to bring the virtuous cycle of ‘purpose driven profitability’ through monetization strategy.
First let us look at why monetization gets sidelined in firms. We will talk about three aspects — Customer Understanding, Product Understanding, Leadership and Organization Structure — where misconceptions or inefficiencies lead to the problem.
Customer Understanding
All customers are equal: I understand that no one claims that all customers are equal. But ‘Customer’ is often used in broad strokes to refer to all users interacting with the product. Generalization of users in this way is more common than we can imagine. But you would ask, aren’t personas suppose to help correct this? True, but well defined, analytics supported persona is often a challenge. As a result, many a times personas get limited to an all hands slide deck.
Going through the various phases of user personas, testing hypothesis with them and refining target personas will help understand various levers (pricing, monetization) to add value and evenly distribute value between the customer and the firm.
Growth is about humility that we do not understand our users. It is about curiosity that we intend to spend every single minute understanding them.
Users will never pay for this feature/product: Startups have very little data to perform studies such as elasticity of demand. When data is missing, many a times the alternative is to rely on opinions and gut feelings. In such a case, it is easy to assume without any qualitative or user study that users never want to pay for a feature. This also includes the classical fallacy of assuming all users are alike. Not all pain points are the same neither is the sensitivity of pain to all the users the same.
Why do your users use the product, what problems does it solve for them, what happens if the product does not exist? What are the substitutes, how easy it is to compare the substitutes etc. Understanding these helps understand the maximum willingness to pay (WTP) from the users. This when added with the understanding that not all customers are created equal, help develop the right pricing and monetization strategy.
Monetization is a friction to user experience: Monetization experiments are considered a local maxima problem. This happens mostly because monetization is considered a short term lever to meet quarter revenue goal rather a cohesive and consistent strategy that acts as a foundation of the user acquisition and product development.
Monetization is rarely a lever to meet short term goal — It is a strategy and like any strategy, it needs to be developed holistically.
When we do not think through the entire user experience — any step that furthers the firm’s goal but does not help achieve the user goal rightly manifests as friction.
Failing to value what the product delivers to the customer: Most startups / firms do surveys to understand users but rarely do we run surveys to understand how much $ value the product delivers to the users. I have often been surprised when I have run such surveys. Users quoted figures that I never even imagined possible.
Since startups know what it takes to build a feature or a product, they grossly underestimate the value that it delivers to their users and highly overestimate other players to come up with similar offerings.
Product undervaluation starts much before it reaches users — it starts from the ones who are developing the product.
Our external communication — marketing collaterals, sales pitches, media strategy all hinges on our confidence of how much value the product brings to the users. Instead of just focusing on how many users are delighted with our product — breadth, understanding the depth — how much delight our product delivers, creates stickiness that is much more valuable than that from network effect alone.
Product Understanding
Growth or monetization: Growth and monetization are often considered at the other end of spectrum as if there is a trade-off. In such a case, growth takes a precedence over monetization. This notion is changing as more startups are waking to the reality of times when VCs are looking to invest in firms who have proven their ability to stand on their own.
Unsustainable growth focuses solely on users, while monetization focuses on customers. Neglecting customers at the expense of growing user base is disservice to engaged customers — they are the true investors in the company as they chose to invest the most important asset one can have- time.
Difficult to understand: There is a plethora of articles, videos, books, and content on growth, conversion rate optimizations, product market fit etc but very few courses talk about monetization strategy. Pricing, even when it is taught in business schools, is rarely tied to the whole monetization strategy. This is a key reason why most design and product teams rarely make monetization a focus.
Since, developing the strategy requires deep understanding of the product, user psychology, and financial acumen, a DRI for the function is not chosen until much further into product development cycle.
Difficult to measure: Conventional A/B test that works for most of the growth improvements many a times fail at monetization experiments. Designing experimentation is an interesting challenge but only if we develop and invest in the right tool kits such as Quasi experimentation. I will discuss this topic in detail in another article.
Singular focus on core product: Core product are many a times a loss leader — eg. In a printer cartridge business model, printer is most often the loss leader.
A loss leader is a pricing strategy where a product is sold at a price below its market cost to stimulate other sales of more profitable goods or services.
Grocery store has been using the psychology of Loss leaders for many years now. One such example is Milk, which is considered a loss leader. Stores keep Milk at the back of the store. Shoppers who are going to go so far to pick up milk will take a cart and once they pick a cart they will buy other products along the way.
Finding the complementary product also called attachments that can fuel the virtuous cycle of monetizable growth requires a deeper understanding of users. However, when growth is seen in vacuum, it is very easy to miss signals from the users and dismiss feedback as either — not the right time or it is just one user asking for a feature.
We all remember the debate (that still continues) about Facebook ever being able to monetize Whatsapp. Most prominent naysayers either talk about monetizing the usage or the ads, which both adds friction-however looking outside that spectrum creates real value for the user and the business.
Leadership & Organizational structure
The notion that focusing on profit is akin to looking away from the customer: Tech startups are built by people who are purpose driven, eager to solve meaningful problems. Monetization early on, many a times, is perceived a disservice to the purpose. This inevitably leads to a paradox that pitches business side of the company, who are responsible for P&L, against the side that considers themselves customer advocates such as product, design, and engineering. To serve the customer that truly benefits from the product, we would need the firms to ‘align mission with monetization’.
As they say there are two kind of businesses — Those who want to change the world and those who want to be viable. This is a false dichotomy — You don’t have to choose one, you can have both.
This is where visionary leadership is truly effective at aligning investors, employees, and customers with the purpose and vision to orient the whole company towards developing a self-sustainable viable growth that furthers the mission.
Let us wait for economies of scale to set in: Many firms argue that unit economics will turn around once we achieve scale. While many a times it is true, if the biggest cost is variable cost, then scale will only help accelerate the death. Case in point Homejoy.
Competitors don’t ask users to pay for this feature so we should not: When leadership looks at competitor rather than their customers/users, it inevitably leaves the industry leadership position for another player. Looking at a competitor without being able to draw the context in which a decision was made leads teams towards the death cycle.
Organizational structure
Monetization is rarely owned by someone until the firm has grown up a lot or matured. In matured organizations, the function is often put under finance or reporting to the Chief Revenue Officer. Product , in such a structure, is accountable for user growth and finance for the profit — at times they find these goals competing with each other, leading to friction. An organizational structure that identifies the complementary nature of the two goals avoids the artificial friction and enables sustainable growth.
If you are not monetizing, you are not creating value yet! It took a pandemic to remind startups to focus on core value drivers. Treating monetization as an enabler of growth helps create business models that are far less susceptible to unsystematic risks. To delve deeper into how to develop monetization strategy in your company, do read my other articles.
Readings
[1]: R. Edward Freeman (April 2014) Is profit the purpose of business? https://ideas.darden.virginia.edu/is-profit-the-purpose-of-business
[2]: Bruce Bartlett (May 2015) Is the only purpose of a Corporation to Maximize Profit? https://ritholtz.com/2015/05/corp-purpose-maximize-profit/
[3]: Bryan Smith, Art Kleiner (May 2015) Is there more to corporations than maximizing profits? https://thesystemsthinker.com/is-there-more-to-corporations-than-maximizing-profits/
