First published in 2020
The success of any digital product depends on monetization. Every business leader and entrepreneur defines this differently depending on the product, short-to-long-term goals, and the industry. Monetization can mean profitability, revenue, cost savings, or simply lowering risk. For this article, we define monetization narrowly to mean direct revenue generation from end-users.
Two main factors for generating revenue
Based on our experience and research, we have determined that two main factors increase the chance of generating revenue from your digital product:
Intermediate milestones that position the product for monetization
Repeating the process so that with each cycle, you move toward sustainability
When choosing a product monetization model, we prefer the Flywheel framework to elaborate on these two points noted above.
The Flywheel approach
A flywheel representation is an excellent tool for leaders to ensure every stakeholder is in sync and focused on the right steps. Whether you are starting from scratch, pivoting, or in growth mode, this framework can help you reach monetization faster.
Flywheel Framework: Jim Collins first introduced this concept in his book Good to Great. He describes the Flywheel Effect as a process that “resembles relentlessly pushing a giant, heavy flywheel, turn upon turn, building momentum until a point of breakthrough, and beyond.” An excellent introduction to this framework can be found in the Flywheel of Growth article by Jesse Nieminen.
Intermediate milestones
The “if you build it, they will come” approach is too risky for building a digital product. Before generating any new or additional revenue, it is essential to realize that there are stepping stones and intermediate milestones to achieve. Start by building a product that end-users understand and can use. Then work hard on product-market fit so that some end-users like the product enough to pay for it. The Flywheel diagram below outlines the various stepping stones.
Here is one sample framework for intermediate milestones:
It all starts with an idea for a new product, a pivot, or an improvement. Just an idea does not move the needle. You must initiate the work to build out the idea.
The initial software product (beta) is ready. Now you improve upon the product based on end-user feedback.
The minimum viable product (MVP) version of the product is ready. The end-users understand what the product does and how to use it. The focus moves toward improving the end-user experience.
The product build is ready. End-users like the product, but it does not mean they may not be willing to pay for it. Begin work on product-market fit.
The product is ready for launch. Now the marketing and sales efforts can monetize the product. Work begins on what to do for the next spin/idea/feature/benefit.
Several spins are needed before monetization is meaningful
Monetization does not come by following a process once. It comes with repeating the process and generating more value and growth with each cycle.
With each “spin” (one cycle is called a spin in the Flywheel framework), you create more value. The first spin can be the hardest, as you are starting with zero momentum. Sometimes when you have some momentum, a business pivot is needed, in which case, the subsequent spin can be even more challenging.
The example below is for the product Bookflow, which allows end-users to use writing for storytelling, self-improvement, wellness, and professional development. Bookflow’s first spin positioned them for value-added services. (Note: In Bookflow’s case, they decided not to grow value-added services but instead focus on the recurring revenue option during the second spin.) And the second spin resulted in paid subscribers. These two cycles took Bookflow eighteen months.
Case Study: Fintech Product for Middle-Market Investments
Thomson Reuters developed BDC Collateral, a B2B fintech tool for financial analysts employed by institutional investors researching middle-market investment opportunities. The diagrams below show the first three spins, which took approximately three years.
First Spin: Start Revenue Generation
For the first spin, the goal was to gain a small number of paid users, and revenue generation was not a primary concern. Because the first spin lacks inertia, it is essential to find end-users who care enough about your base product, and they will provide you with feedback to improve it.
Second Spin: Grow Revenue
In the second spin, Thomson Reuters enhanced the product by providing data that was challenging to obtain and calculate such as all-in-yield values, tickerization of assets, originations, and disposals associated with each quarterly earnings report.
The user base is increasing, and a more significant amount of feedback enables further improvements.
Third Spin: Scale Revenue
In the third spin, they enhanced the product by providing intelligence (such as overlap analysis and slicing & dicing data capabilities) and focusing on data governance. The product is now in a position to scale and to reach a much larger group of end-users.
Wrap up
In both of these examples, the clients could leverage the PixelEdge platform for rapid software development and focus on their core strengths to accelerate their flywheels. Bookflow was able to capitalize on their deep customer empathy and direct-to-consumer distribution to pivot their business model. In doing so, deciding to double-down on delighting their end-users with the core platform rather than pursuing value-add features. Thomson Reuters has market-leading distribution and data access fueling their flywheel. Rapidly iterating on end-user feedback generates a ‘must-have’ product among their client base, increasing the number of customers, the platform’s value, and eventually Thomson Reuters’ pricing power.
Glossary of Terms
B2C | Business-to-consumer |
Beta | The release used by select end-users only |
End-User | A person who is a current or potential user of the product |
Flywheel Effect | "The process resembles relentlessly pushing a giant, heavy flywheel, turn upon turn, building momentum until a point of breakthrough, and beyond" (Jim Collins in his book Good to Great) |
Monetization | Generating revenue and eventually making money from the product |
MVP | Minimum viable product with features to be useful to the end-users but lacking other elements necessary for broader adoption of the product |
Product-Market Fit | The degree to which the product satisfies demand in a given market |
Spin | One complete cycle, or turn, of a flywheel |
Are there any questions you have regarding the Flywheel framework? Something unclear? We would love to hear your feedback.
Written by the PixelEdge team.
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