Is your Monetization Thriving?
Planting Data-Driven Monetization for Successful Growth
August 2013 — Many companies are well on their way to what I call “Monetization Nirvana”. Google, Apple and Amazon come to mind. But LinkedIn, above all others, is arguably the best example of a player that is within arm’s reach of the finish line.
Since its founding by Reid Hoffman and founding team members from PayPal and Socialnet.com in 2002, the web and mobile network for professionals has developed a synergistic relationship between the individual user or so-called “knowledge workers” and the enterprise. So strong is its hold on the market that it is seemingly impossible for competitors to push into the arena. The numbers speak for themselves: 238 million users — many of whom pay fees for premium services; and roughly 19,000 customers who pay for its “talent solutions”. All told, LinkedIn will generate an expected $1.5 billion in revenue this year and this is really just the beginning. How did the networking utility juggernaut get there? I’ll explain.
First, let’s look at the consumer dimension (B2C) of the business. As an entrepreneur, you want to give the user the “highest perceived relevance” with your service (and/or the service with which you integrate); and take the user’s time and eventually money to further innovate and allow for growth and profitability. Second, let’s examine the enterprise (B2B) dimension of the business. You must give accountability and top percentile productivity gain (e.g. Return on Investment or ROI of recruiting & retaining talent)” with your service; and take the buyers capacity, attention and money to further innovate and allow for growth and profitability.
Winners and Losers
What exactly is “Monetization Nirvana” and how is it achieved in a multi-sided market? Let’s focus on the consumer (B2C) and the Chief Marketing Officer — or the marketing discipline — as the overall sponsor of the B2B sided buyer (you can plug any other enterprise decision maker or buyer here). There is a quick and simple way to assess where you stand with your initiative, and forecast your likelihood of success.
Five Degrees of Perceived Consumer Relevance or Irrelevance
1. Use and Abandon. The user test drives your service, hates it and abandons. She most likely will never come back and worse, she might pass on negative reviews regarding your service to colleagues and friends.
2. Use and Flip. The user tries your service, likes your service but flips to a competitor opting for their features, design, friendliness or anything in between. Your service seems irrelevant to the consumer.
3. Use and Stick. The user tries and sticks with your service. Sergio Monsalve, a partner with Norwest Venture Partners, makes a good case for “sticking” in order to make a name for oneself. You need to spark interest in way that leads to positive addiction and repeat use by the right set of users that help with valuable product feedback and spreading the word. Things are much easier if you are not already in a crowded market and define something truly new and valuable that kills a real pain point. Reid Hoffman explains in a fantastic post that great businesses usually start off being a little contrarian but they have to be right.
4. Use, Stick and Refer. Congratulations! You just added the viral factor. Your user loves you and becomes a net-promoter of your service by referring her friends. Your product has integrated features that drive viral adoption and ongoing marketing. At this stage, you must optimize two concepts on a continuous basis. First, cycle time(or the time it takes for a user to be exposed to your experience the first time and invite others to join). Second, the viral coefficient that you manage to be larger than one (the percent of invites sent out by your new users that end up converting into new users).
5. Use, Stick, Refer and Pay. You mastered the game of relevancy and added its most important proxy — charging money for your service (most likely through a smart line up of the freemium model). Take LinkedIn as an example: Many users regularly use and refer friends to LinkedIn. Of those, thousands upgrade, paying $20 per month or more for premium services. What’s more, users are by default free content producers and managers — constantly updating their profiles in order to get the highest value out of the service. Brilliant! There are a few great examples in the consumerized enterprise space as well such as Splunk and App Annie. Both companies crafted a scalable and disciplined path for users to discover value first before they have to pay anything.
Appealing to the business buyer:
3 Key Levels of ROI and Outcome Accountability
1. No or immaterial ROI and/or no outcome accountability. You don’t deliver results that matter and/or you fail to take accountability in the manner by which you charge for your service or product. In advertising, think of the pricing model related to percentage of media spend which is not tied to a relevant ROI. Worse yet, percentage of media spend gives you an incentive to waste money and a disincentive to measure success. (While there is a clear trend to performance based pricing and compensation, much of the advertising industry still works without either. But it’s just a matter of time until accountability is a given across the board.)
2. Material ROI and/or partial outcome accountability. You gain some success as you provide material ROI but you are still not fully providing outcome accountability reflected in your pricing model. In digital marketing, think of the CPC (cost per click) or CPL (cost per lead) pricing model that charges for each click or each lead but not really for the true desired outcome down the marketing funnel to conversion and eventually customer loyalty.
3. Top Percentile ROI + full outcome accountability. You drive significant and top percentile ROI, take full accountability for results and charge only for your services or product if you deliver outcomes that matter to your buyer. By definition, Cost per Desired Outcome (CPDO) is the highest standard of outcome accountability you could implement with your business buyers. You realize that this pricing model requires a high degree of confidence that you can deliver against commitments. As an added bonus, it is an unbeatable message, which aligns your buyers’ and your interests.
Five Routes to Fortune or Misfortune
1. Lost Land. Stop doing what you are doing. Simply stated: you have no chance of success.
2. Accelerated Extinction. You are wasting the user’s time with something that does not matter to them in general or in the way you deliver it. You might deliver results but the results come at a steep price that might dilute or damage your business partners’ brand assets over the mid- and long run. You experiment and rapidly iterate to find consumer relevancy. Failing to do so will damage your reputation by maligning your customers‘ assets. (Most banner ads or any other intrusive or distractive form of advertising are a good example of an asset’s diluting liability.)
3. Product Success. You find a consumer proposition that earns high praise and therefore usage and growth with a great product-market fit. Your proposition is so strong that you can charge premium pricing and build a strong brand. You are successful even without a multi-sided market. A great example is Rolex – and other Swiss time pieces – a product that sells globally merely by its association to a well-known, respected brand. There are plenty of recent success stories in the B2B arena such as Box, Dropbox, Github, Asana, but also established leaders such as Salesforce.com, Netsuite, and Workday among others. You also increasingly see prominent consumer start-ups such as Dave Morin’s Path going this path charging users subscriptions fees as its key revenue stream (at least for now). With many of these companies there is potential for multi-sided markets in the future.
4. Monetization Transition Land. As long as you are positioned somewhere in the region of a multi-sided market — where most of today’s leaders in the digital space stake a claim — you have a real chance to reach “Monetization Nirvana”, as you further strengthen, optimize and grow your business and performance. The most prevalent examples are LinkedIn and Apple but there are others on their tails. Apple and its successful iPod, iPhone and iPad mobile devices bolster a significant multi-sided market with consumers, developers, marketers, recording companies and others. Without apps constantly kept relevant thanks to a vast ecosystem of developers (the 5th billion app was recently installed), Apple products would not have the traction they enjoy today.
5. Monetization Nirvana. Congratulations! You are virtually unbeatable with a highly regarded user experience. You deliver top ROI metrics, for example to your paying brands, and take full accountability for results with pricing models such as CPDO. You have world-class data science capabilities to help you deliver on your promise. It is a journey to get to this point. It requires vision, a disciplined mindset and world-class talent.
The Monetization Nirvana framework can be applied from multiple perspectives including that of a Chief Marketing Officer seeking to achieve highest relevant user experience as well as marketing ROI by deployed technologies and systems. In this case, the framework becomes a powerful checklist for ad tech vendor selection. You’ve diversified your revenue streams in a way that drives additional growth, reduces risks (due to varying buyer species) and is sourced from the same core platform in order to optimize for development and operational costs.
Going Native
There is a budding movement around native marketing and advertising that fits greatly with the integrated thinking between relevance (to user) and ROI (to e.g. a brand). Nicely laid out by Dan Greenberg, Josh Guttman and others, native marketing is nothing new but given the explosion of devices and media formats it creates a pool of new opportunity. Ensuring user relevance can be enhanced with five ingredients, which – if done correctly – bolster ROI for buyers and open up new, innovative ways to monetize.
- Non-interruptive. Doesn’t interrupt the user flow and fits seamlessly into the experience.
- In stream and contextual. Complements, rather than competes with, the content that it surrounds.
- Preserves trust. Engenders trust by delivering value as opposed to employing deceptive marketing tricks.
- Maintains brand integrity. Takes the long view to craft and communicate a brand’s story authentically.
- Adds value. Supplements the experience by entertaining, informing or engaging.
Closed Loop Re-Enforcement
What makes those thriving in Monetization Nirvana seemingly immune from extinction? The fact that two or more different customers (i.e. consumer and enterprise) are not only buying their engagement and usage, the platform also re-enforces each other’s value proposition in a closed loop environment. Once again, think LinkedIn. Recruiters and consumers alike pay equally well for the service. At the same time, both provide content for free. Recruiters are eager to put forth an attractive and updated company profile, as do knowledge workers. LinkedIn profiles, by design, are likely to be better, more up-to-date and precise than a conventional resume. Similarly, company profiles on LinkedIn are oftentimes a cut above — featuring proprietary content, noteworthy statistics and benchmarks — than those on a company’s official website.
In order to enable a velocity of relevance for all stakeholders of the multi-sided market, the optimal state to achieve is one where customers are attracted to a service because of other customers and, in turn, all stakeholders make the service more valuable and relevant through the engagement they have with the service. Companies in the coveted word-of-mouth zone are difficult to replace as network effects keep others at bay. You can also scale in a way that drives cost advantages and your growth, renewal and retention rates will be attractive as your value proposition drives significant value to its buyers.
Closed Loop Re-enforcement is crucial. But how do you determine what matters and how can you iterate and learn quickly enough so that you can push innovation and accurately price your product (e.g. CPDO)?
Data Science That Won’t Break the Bank
Picture LinkedIn a few years out as “an integral part of the global economy” as Jeff Weiner, LinkedIn’s CEO explains it. As it stands, LinkedIn charges recruiters a subscription fee without any accountability for outcome. Instead, the company could charge business customers for “acquired talent” or even “retained talent”. LinkedIn could very well reach into varying types of new services including helping sales executives turning a cold call into a warm prospect or connecting experts through collaboration platforms.
With its rich database, LinkedIn will be able to predict whether or not a particular candidate will succeed within a given timeframe for a particular employer. In that case, the network could take a more outcome-oriented path to monetization that is hard to match by its competitors given its data advantage. The same is true for pricing on the consumer side and other customer types such as marketers.
Pushing the accountability lever requires a high degree of confidence in the data you use to define success based pricing models. Without it, any outcome related monetization model and customer deal is flawed as it most likely misrepresents risk for either party in a given deal. However, if data science allows for predictive analytics of high quality, pricing models that move into the direction of CPDO can be a strong foundation for competitive advantage and a productive relationship. CPDO might be an aspirational goal for many but having it as a mindset can set you apart, completely transforming the way you discuss, sell and communicate with your business buyers.
