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Software Monetization: 6 strategies

05.09.23 15 min to read
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Today, new software products appear every day in a wide variety of areas. Some of them are the planned improvement of information technologies developed under large global companies’ auspices. The other part is created and distributed by enthusiasts who are convinced that their software can meet the needs of their potential audience and fill the vacuum of yet unrealized solutions.

Unfortunately, not all efforts justify the hopes. There are many more cases when a worthy application could not find a response from the audience than a real triumph on the market. At the same time, a critical look at the problem of software failures often shows that the fault was not the technical flaws of the developers but a misunderstanding of their possible place in the market and right ways to monetize their product.

In this article, we’re going to get into the specifics of a software monetization strategy so you can get a clear idea of which models would work best for you.

What is Software Monetization

Software monetization is the process of optimizing revenue generation from a software product. It encompasses the following three key elements:

  1. Sale or renting software applications to customers for earnings.
  2. Providing value-added services, such as support and enhancements, to complement the core software offering and get additional income.
  3. Protection against unauthorized usage, preventing non-licensed copying, distribution, and use of the software to minimize profit leakage.

 

An efficient approach implies the presence of a well-thought-out business strategy that most effectively combines software monetization models suitable for the product. In addition, it allows software companies to safeguard their intellectual property while capturing new revenue streams, enabling growth and evolution.

What is software monetization daily practice? It is the achievement of specific profitability goals the developer company sets through customer satisfaction with its product’s quality, functionality and maintenance, pricing flexibility, and organization of accounting and security processes. A high-quality and helpful application that can eliminate potential customers’ pain points pays off quickly enough, as our customers were pleased to see. You may find examples of their business success on the portfolio page of Academy Smart.

custom software development portfolio of academy smart
The portfolio of Academy Smart

6 Software Monetization strategies

A monetization strategy is a structured plan devised by a development company to get earnings from its software products or services. It involves decisions on how to price, package, and distribute the software to maximize income while considering customer value and market dynamics. Companies use various software monetization strategies depending on the application type and its target audience. Let’s get to know the best of them.

1. Tiered offering

This well-known software monetization strategy entails providing multiple tiers or versions of a software product, each offering different features and benefits. It allows you to cater to a diverse user base with varying needs and budgets. By providing different tiers, you can capture a broader audience to stand out in a competitive market.

Users can choose the tier that aligns with their needs, allowing them to pay for the features they value most. That enhances perceived value and customer satisfaction. Moreover, users who start with the primary tier may choose to upgrade as their needs grow or as they see the value in the premium features. It presents upselling opportunities and potential revenue growth. By accommodating different customer segments, you can build customer loyalty as users are less likely to switch to competing products that may not offer the same tiered options.

Here’s how it typically works:

  • The basic tier is often a free or low-cost software version with limited primary features. It serves as an entry point, attracting a broad user base. The goal is to introduce users to the software’s core functionality.
  • The standard tier is designed for the majority of your target customers. It offers more comprehensive features and capabilities than the basic tier and is priced moderately. It provides a balanced offering suitable for most users.
  • The premium tier is positioned as a high-end or enterprise-level software set. It includes advanced features, customization options, and personalized support. This tier commands a higher price, targeting businesses or advanced users willing to pay for additional value.

2. Value-based pricing

This strategy centers on determining prices based on the software’s perceived value to the customer. To implement value-based pricing, it’s crucial to thoroughly understand your customers’ pain points, needs, and the specific problems your software solves for them. In this case, the price is set based on how much the customer believes the software benefits them or their business. That’s why the approach allows for higher pricing because it emphasizes the software’s substantial advantages. Customers are willing to pay more when they recognize the value they receive.

This strategy aims to capture the full potential of your software’s value. By pricing that way, you can often maintain healthier profit margins than a purely cost-based pricing approach. It allows you to charge premium prices when your software provides significant benefits, resulting in higher earnings. Moreover, this monetization strategy can set your software apart from competitors, mainly if it addresses unique pain points or offers superior features.

At the same time, pricing that aligns with the perceived value enhances customer satisfaction. Customers feel they are getting a fair deal when they see a direct correlation between what they pay and the value they receive. Customers who see essential value in your software are more likely to become loyal, long-term users and advocates for your product.

3. Usage-based pricing

Usage-based pricing is a strategy where customers are charged based on their actual software usage. It offers cost-efficiency, scalability, and a direct link between pricing and value, making it an attractive option for software providers, especially in cloud-based and resource-intensive environments. In industries where usage volume can vary significantly, usage-based pricing can be a competitive advantage, offering flexibility that flat-rate pricing models cannot match.

This software monetization model closely aligns the cost with the value customers receive. They pay in proportion to how much they use the applications and the benefits they derive from them. No doubt, this approach is flexible and scalable. It can attract cost-conscious clients and reduce the barrier to entry. In addition, it encourages resource optimization as users are incentivized to use resources efficiently, leading to potential cost savings.

4. Market segmentation

Market segmentation involves tailoring software pricing and features to specific customer groups based on criteria relevant to their needs and purchasing behavior and optimizing revenue by addressing diverse needs.

The strategy aims to maximize income by capturing the unique value proposition for each client segment, allowing the software provider to optimize pricing and features accordingly. It offers a targeted approach, market expansion, competitive differentiation, and improved customer satisfaction.

5. Bundling and upselling

Such a software monetization strategy involves offering multiple software products or features as bundled or providing additional features and services as upsells.

When creating a bundle, software providers package several applications or features together as a single offering, often at a discounted price compared to purchasing each component separately. Bundling enhances the perceived value of the offering, as customers receive a more comprehensive solution at a lower cost. It encourages customers to opt for the bundled package, potentially expanding their use of the software suite. Besides, bundles often include complementary products or features, creating opportunities for cross-selling within your software niche.

Upselling utilizes extra features, services, or premium software versions as add-ons to the main product to generate additional income. It adds value to the customer’s experience, allowing them to enhance their use of the software, and keeps existing customers engaged and invested in your software, reducing churn rates.

6. Partnership and integration

This complex strategy centers on integrating your software with complementary products or services offered by partners. Partnerships can provide cost-effective access to new customer segments or markets that may be challenging to reach independently. Moreover, integrating with partners offers additional revenue streams beyond direct software sales or subscriptions. To use it effectively, you should identify products or services that complement your software and have their customer base and integrate them technically with your solution to provide a seamless experience for the audience of both products.

In such a partnership, you can generate profit through revenue-sharing agreements, where you and your partner share a portion of the income generated from joint customers. Also, you may earn referral fees when a partner’s software is recommended to your audience, leading to his conversions. It’s not excluded to use the staff of technical employees who can carry out particular operations for partners on the terms of outstaffing or complete outsourcing of specific services. In any case, integrating with complementary products enhances the value proposition of your software, making it more attractive to users.

As you can see, software monetization strategies are varied, as are the cases where they can be effectively applied. However, whatever your financial goals, a key element of success is your software product and the value it provides to the consumer. Excellent solutions are possible in any niche – the applications from our video presentation confirm it.

Software Monetization models

Monetization models are specific ways you get earnings from your software application. App creators often combine several models to expand market coverage, enter new niches, and develop new income channels as part of everyday sales efforts. Good knowledge of the needs of the target audience and the advantages of your product allows you to choose the best set of software monetization techniques, which can even make money for applications distributed for free. Let’s get acquainted with the variety of models that are practiced daily.

Licenses

Software licensing is a fundamental aspect of monetization strategy. It involves controlling access to a software product and granting usage rights to customers based on a licensing agreement. When an application is sold, it is not the software itself that is transferred but rather the right to use it in most cases. The software publisher retains ownership, and the license agreement outlines the terms and conditions of use.

Software license types are varied in terms of the duration of the action, the regularity of the purchase, the volume of features and services provided, etc.

Generally, software licenses can be divided into perpetual and temporary. In the first case, customers purchase a license upfront that grants them the right to indefinitely use a specific software version. This license often includes updates and support for a limited period, after which customers may need to purchase maintenance or upgrade plans to access new versions or support. In the second case, the user must periodically acquire the right to use the software further. It is the so-called subscription model. At the same time, he gets access to the latest version of the application and the entire package of features and services that were paid for according to the selected subscription plan. Usually, this software monetization model provides a lower entry cost and generates a continuous revenue stream for the software provider.

Often, the software involves starter licenses, which allow you to partially or wholly get acquainted with the application’s functionality for free for a period specified by the license terms. The practice of trial versions of apps with temporary access to full-featured software with the subsequent purchase of a perpetual license or subscription is widespread. Applications that are distributed as shareware and donationware also involve a license fee or contribution if the application is used beyond the evaluation period. Unlike a trial application, they continue to function, as a rule, entirely after it but regularly remind the user that a payment should be made.

Licenses can also be tightly tied to a specific buyer, number of users (concurrent license), and even their hardware (node-locked license). Like concurrent licenses, floating ones allow a certain number of users to access the software simultaneously. However, these licenses are not tied to specific users or devices. Instead, they are managed through a license server, and users can access the software from any authorized device.

A pay-per-use license enables users to be charged based on their software usage, including metrics like the number of transactions done or the amount of data processed. It is a popular way to monetize the rental of massive computing power, like cloud services.

Finally, there are special discounted personal licenses for education or non-profit organizations and comprehensive all-inclusive enterprise-level licenses with centralized management, customizations, and bulk discounts.

Freemium

The freemium model is a software monetization approach that entices users to access a limited version of your application for free, with the option to upgrade to a premium version offering enhanced features. Freemium primarily serves as a customer acquisition strategy to attract a large user base without immediate monetization. The focus is on converting these free users into paying customers over time.

This model is prevalent among Software-as-a-Service (SaaS) businesses due to its scalability. SaaS products allow for self-service onboarding, meaning acquiring a substantial user base is relatively straightforward. The key is to concentrate efforts on attracting as many users as possible. The business can thrive even if only a fraction of them eventually become paying customers. A superior product quality encourages users to return and convert to the premium version.

In-app purchases

In-app purchases are a software monetization model commonly used in smartphone apps and console games. This model allows users to acquire additional content, new features, services, or in-game currency in exchange for supplementary payments. In-app purchases usually complement other monetization approaches, such as the freemium model.

However, it’s crucial to implement in-app purchases thoughtfully to avoid disrupting the user experience and lead generation. Effective practices include:

  • notifying users about the availability of in-app purchases within the software;
  • using push notifications to inform existing users;
  • organizing customer loyalty programs to enhance the overall user experience.

Pay As You Go

This model prioritizes the customer’s needs and allows customers to choose precisely how much they pay based on their required services, offering a flexible pricing structure. The pay-as-you-go model is also known as the consumption-based or usage-based model.

This approach can be beneficial from the software company’s perspective because it can help retain customers even if they generate smaller profits or none, instead of losing them due to inflexible pricing structures.

For customers, the pay-as-you-go model is attractive because it has a low barrier to entry and does not involve long-term commitments. An excellent example of this model is a cloud storage provider charging users only for their storage space. Instead of imposing rigid service tiers, they allow users to pay a smaller fee for each additional gigabyte of required storage space.

Open-source plus

This model is similar to freemium but for open-source applications, whose source code is publicly available and often licensed to allow others to use, modify, and distribute it. However, the software vendor may provide additional value-added features, services, or support unavailable in the open-source version. Users can access the basic functionality for free using the open-source version, but they can upgrade to the “plus” version to gain access to enhanced features or premium support. Here, you may find other perfect ideas to monetize your free apps.

Advertisements

Embedding advertisements within your software is a well-established method of software monetization. Today, where users spend extensive time on their devices, in-app advertising has high demand. You may blend ads seamlessly into the user experience, thanks to targeted advertising and the ability to customize when and how ads appear during the in-app journey. In particular, social media and news apps have successfully implemented this monetization method.

This model often complements monetization strategies, such as in-app purchases and subscriptions. One common approach is to offer two payment tiers for your app: a free version with mandatory advertisements and an ad-free version requiring a subscription fee.

Providing a free version with ads can increase the number of downloads and allow you to get earnings. However, the success of an ad-based monetization model heavily depends on the volume of traffic your application can attract. Companies like Facebook and YouTube have demonstrated the potential profitability of this model, but it usually requires substantial user engagement to be lucrative.

Earnings through sharing

Earnings through sharing, often seen as affiliate marketing, is a software monetization model where third-party individuals or entities, such as content creators, bloggers, podcasters, or even software applications, promote a company’s product to their respective audiences.

The fundamental concept behind affiliate marketing is that affiliates earn a commission whenever someone uses their unique affiliate link or referral code to purchase the company’s product. This model creates a mutually beneficial relationship between the company and the affiliate.

Affiliates are incentivized to raise awareness and drive traffic to the company’s product, ultimately boosting its sales. However, the effectiveness of affiliate marketing depends on the alignment between the app’s niche and the product or service the customer offers. To resonate with the affiliate’s audience, the marketed product should be relevant to the application’s content.

Data-driven value

This software monetization approach revolves around collecting and utilizing user data to generate revenue. In this model, users often receive free access to a software product or service, but their data becomes a valuable commodity for the software provider.

One prominent example of data-driven value is seen in companies like Google, which offers various free services such as Gmail, Google Search, Google Maps, and YouTube. These applications collect user data through Google Accounts, forming a core component of Google’s monetization strategy. The process involves tracking user behavior and preferences, allowing Google to compile extensive datasets about individual users. Google then leverages this data to sell targeted advertisements to advertisers. Advertisers pay Google to display ads tailored specifically to users, increasing the likelihood of eliciting a response from them.

In essence, users become the product in this model, as their data is used to fuel the advertising ecosystem. While users gain access to free software and services, their data’s value is monetized through advertising, creating a symbiotic relationship between users, software providers, and advertisers.

Donation

Donation-based monetization relies on voluntary contributions from users to support a software product or service. In this model, users are encouraged but not obliged to make fees to sustain the software’s development and maintenance. The success of this approach relies heavily on cultivating a dedicated and supportive user base.

To generate sufficient revenue through donations, the application or content provided must be of high quality, compelling users to contribute as an expression of their appreciation. This model fosters a sense of community and mutual support between users and software providers, emphasizing the importance of goodwill and user loyalty in maintaining the software’s development and growth.

main software monetization models
Software monetization models

How Academy SMART can help you

Our company has been developing software for enterprise clients for over 13 years. Our business analysts and project managers, as well as leading technical experts, will be glad to help you assess the market prospects of your application and make informed recommendations on the appropriate monetization strategy.

In our IT agency, you will find competent and talented developers and DevOps in outstaffing, with which you can strengthen your development department. Also, our HR department will select the optimal composition of a dedicated development team to build your turnkey software.

Many large companies in Europe, the Middle East, and America are among our clients. Get in touch, and your software will technically be ready to make a profit.

Software Monetization: Frequently Asked Questions

What are the most common app monetization strategies?

The most common are:

  • tiered offering;
  • value-based pricing;
  • usage-based pricing;
  • market segmentation strategy;
  • bundling and upselling;
  • partnership and integration.

What are the best examples of Software Monetization?

The choice of the most efficient monetization model for software products depends on various factors, including the nature of the application, the target audience, and market dynamics. However, some successful and widely adopted examples include subscription-based models like Microsoft Office 365, tiered offerings like Adobe Creative Cloud, and usage-based pricing models in cloud services like Amazon Web Services (AWS).