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What are the most common mistakes companies make when it comes to monetizing their software?
If your company is built around a software product, you need to find a way to monetize it. Monetizing your software means finding a way to generate revenue from it — which sounds much more straightforward than it actually is.
Most entrepreneurs and product managers struggle to find exactly the right way to monetize their software product. Even if the product is amazing, a poor monetization strategy can render it practically useless for the sustenance of your business.
So what do companies get wrong about software monetization? And what steps can you take to avoid these pitfalls?
Related: How to Determine How Much to Charge for Your Software
Monetization comes in many forms. You could monetize your software by charging a flat rate for access or by charging a subscription fee to use it on a monthly basis. You could subsidize the business by featuring advertising in your software. You could offer the software for free but charge for extras, like upgrades or premium features. You could even offer the product for free but harvest data from your users and sell that data to other buyers.
One of the biggest mistakes entrepreneurs make is limiting themselves to only one form of monetization. They see this as a binary and permanent choice and that the choice they make is going to establish the destiny of the product.
But this isn’t necessarily the case. In fact, some of the most successful software products on the market rose to where they are because they were willing to monetize their product in multiple ways.
Obviously, you’ll need to consider what your target user can tolerate and what they’re willing to pay, so you’re not going to get away with strictly charging more. Still, you also shouldn’t limit yourself to only one potential income stream.
Related: Why a SaaS Business Model Could be Your Ticket to Massive Success
Even in today’s world of data availability (and, some might say, data oversaturation), some business owners choose to make decisions based on their gut feelings rather than the available information. They assume they know what their users prefer rather than conducting experiments to prove what they prefer.
For example, you may have the mentality that because you and most of the people you know hate advertisements, advertising would be an unacceptable method of monetization. But how do you know for sure unless you’re conducting a real experiment with real users? Do your market research, hold focus groups and conduct surveys to get better answers.
You don’t have to make monetization decisions entirely on your own. In fact, it’s often better if you make these decisions with the help of outside experts, who can offer you different datasets and new perspectives.
For example, if you hire the right software development company, they may have suggestions for how to monetize this product. After all, they’ve probably built products like this in the past. You may also choose to hire a marketing firm or a sales consultant to help you determine effective pricing and messaging related to your monetization strategy.
Related: How to Develop Software That Sells Itself
Monetization strategies are sometimes rendered less effective because the solution itself is overengineered. There’s nothing wrong with wanting to offer your customers more features and higher quality services, but if you spend too much time and money on products or features that your customers don’t actively use, your profitability equation is going to suffer. Effective monetization isn’t just about generating more money total — It’s about generating more money relative to your ongoing costs.
Many software companies, especially in the earliest stages of development, see effective monetization and growth as adversarial or incompatible concepts. In the extreme form, some software companies forgo monetization altogether in the early stages, focusing entirely on building a more robust user base. Only once their desired growth has been achieved do they introduce monetization strategies.
This isn’t necessarily a bad approach and could work for many different types of businesses. But it’s important that you don’t see growth and monetization as adversarial. In fact, most businesses benefit from pursuing better monetization and ongoing growth simultaneously.
Related: The Reason Software Companies Are Better Companies
Acquiring a new customer costs far more money than keeping an existing customer. Whatever monetization strategies you have in place, you’re going to be much better off focusing on retention as your top priority.
Software monetization is a complex concept and not a challenge that can be overcome simply by reading one article at the right time. But hopefully, the descriptions of common mistakes listed in this article can help you see your software monetization from a new perspective. Remain open-minded and flexible as you explore various monetization options, and don’t be afraid to take risks.
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