If you’re a software developer with a brand new application, we know just how much blood, sweat and tears must have gone into it. The fruit of your hard work may be a beautifully designed product, but if you can’t monetize it properly then all of that effort may have been for nothing.
In this article we define what software monetization is, introduce 12 monetization models, describe some examples of different monetization solutions, and offer some initial starting points for putting together your software monetization strategy.
What Is Software Monetization?
Software Monetization is the process of generating as much revenue as possible from a software product.
There are three key aspects to software monetization:
Effective software monetization enables software companies to simultaneously protect their applications from unauthorized copying, distribution and usage, while at the same time capturing new revenue, which enables the business to grow and evolve.
Click the button below to download our whitepaper, which goes into detail about how you can monetize your software in 2023.
How Do You Monetize Your Software Product More Efficiently?
The answer to this question depends on your specific requirements and situation, such as the type of your application, your target audience, and whether you’re an indie developer selling one simple photo editing app or an established software business selling a mixed suite of desktop, mobile and web applications for 3D modelling with $30M annual revenue.
There are a few areas in software monetization that you can focus on to evaluate where you can improve. We will briefly discuss these areas and then move on to the various monetization models.
Software IP Protection (but it’s not enough..)
Software constitutes a significant part of a software publisher or device vendor’s intellectual property (IP) and, as such, it requires strong security and protection. Software piracy is a problem that costs the global software industry almost $50 billion annually and it is in the best interests of software companies and device vendors to take the necessary measures to protect their code.
You can learn more about how to best protect your software IP on our dedicated blog about the topic.
However, software IP protection alone is not enough to pay staff, keep the lights on and expand and evolve into a global software business. Software publishers need to ensure payment for their products in order to generate revenue. Sounds obvious, but the reality isn’t that simple.
Pricing - Flexibility is Key
You need to make sure that your pricing makes sense for both yourself so that you are making a profit, but also for your customer to keep them happy. Pricing should be the first step in your software monetization strategy, from which everything else will follow.
Pricing is hard and we can’t offer a one-size-fits-all solution for you. But having worked with some of the fastest-growing software vendors in the world, we do know that flexibility is key for any pricing strategy.
You need flexibility in your strategy so that you can change and adjust your pricing if needed, for example if you need to introduce new business models.
But you also need flexibility in your business systems that run in the background.
Business Systems and Tools
The main question to ask yourself is “do my current business systems allow me to change my monetization strategy?”
In order to enable revenue growth, you need to have business systems in place that allow for that. Collecting payments in a way that is easy for the customer is the baseline.
But it’s not enough that you’re just getting paid. You also need your business systems to be flexible enough so that you can implement those new business models, test them and adjust them on the fly.
And the more products and purchasing options you offer, the more important it becomes that your business systems are flexible enough to accommodate for the increased complexity.
These business systems vary from payment providers like Stripe to e-commerce and subscription management solutions like FastSpring. You can also include CRM and ERP solutions in the list.
But that’s not all, there’s one more often overlooked business system that is absolutely critical for certain businesses… More on that in the next chapter about monetization models!
Revenue Leakage
Revenue leakage means the loss of revenue that goes unnoticed. This could be due to simple mistakes like incorrect invoicing, but in a software business context in the 2020s, it’s more likely to be due to business processes and systems being unable to capitalise on revenue opportunities.
For example, if a software business gives access to their product to one person, but has no way of knowing whether or not multiple people are using the product with the same credentials, it is entirely possible that the end customer is abusing the terms of service by paying for access for only one person when in reality several people use the product.
What's worse, you might have no way of finding out!
That’s a textbook example of revenue leaking out. But in order to fix this problem, you need to have business systems in place that enable you to know your customers and control what they have access to.
Here’s another example, one that is perhaps a bit more about missed revenue opportunities:
A SaaS business might have lots of potential customers who never convert, because their subscription pricing isn’t flexible enough to answer the demands of a cost-conscious market. In a case like this, the SaaS vendor could implement a pay-as-you-go model, or offer a lower subscription tier that includes only certain basic-level features of the product.
But again, in order to do that, the SaaS company must have systems in place that allow for a more flexible, pay-as-you-go model, but also to have more granular control over what features customers can access.
Key takeaways, so far
Software Monetization Models
In this chapter we will list all the various software monetization models.
Please note that some of them overlap to some extent, and some of them can actually be used simultaneously.
1. Selling licenses to software applications
The most obvious way of distributing a software application is to sell a license to it - also known as software licensing.
Software licensing is a critical, yet often overlooked part of your business that, when done well, will unlock revenue growth.
It is about controlling access to a software product so that only those who have paid for it can use it. Sometimes referred to as software activation, the end goal is to monetize your software product as effectively as possible.
When you sell your software product, you’re not actually selling the software itself - you are only selling the right to use it. In other words, you’re selling a license, even if you’ve never thought about it quite like that. You sell the customer a copy of your product, but the ownership of the product remains with you, the software publisher.
It is then your job as the software business to ensure that the terms laid out in the license agreement are followed by the end user. For this, you need to have a software licensing mechanism in place, because you can’t simply hope that end-users will comply with the license agreement.
Software licensing is the method in which a software vendor grants or prevents access to its product, based on whether or not the user holds a valid license. Unless you’re able to block access for users who do not hold a valid license, you’re not monetizing your product as effectively as you could, and you’re missing out on revenue.
There are many software licensing models to choose from depending on your use case:
Perpetual
Perpetual license means that the customer will pay for the product only once and then has the right to use it forever. This used to be the most common model to monetize software products, but the downside is that the upfront cost for the customer is high and it only gives the software business one revenue hit.
Subscription
Enter the subscription license model, which tackles the problem of the perpetual model. Entry cost is low, and the software business gets a recurring revenue stream. These days it is probably the most common model to monetize a software product. More on this model in just a bit.
Floating
The floating model means that a predetermined number of users can access the product simultaneously, but no more than that. This allows for flexibility and is often used in a B2B context where a team of specialists need access to the same product, while the software provider has control over the usage of their product.
Usage-based
In the usage-based license model the software business charges based on the usage (or “consumption”) of the product. This usage could be use time, the number of times a certain action is completed, or how much data is transferred. Basically anything that can be measured, or metered.
10Duke is a specialist in software licensing
We are your one-stop shop for software monetization with our best-in-class software licensing technology that allows you to maximise revenue from your software product.
Click here to learn more about our licensing solution 10Duke Enterprise.
10Duke Enterprise can help you with everything we’ve mentioned so far: software IP protection, flexible pricing and reducing revenue leakage.
It also integrates seamlessly with other business systems like e-commerce and CRMs, and you can implement any monetization model with it.
As you have already seen, and as you’ll see later in this guide, how you control access to your software product is critical for software monetization and reducing revenue leakage, which is why software licensing is absolutely essential for certain companies.
2. Subscription model
In this software monetization model the end-user pays a recurring fee indefinitely, unless the subscription is cancelled. This provides the software publisher with a steady stream of revenue which can help you forecast and plan more accurately.
For the end-user, the subscription model is often preferable as the barrier to entry is lower due to the lower entry cost. It also allows the end-user to try out the product with little commitment and money spent.
The subscription model is super popular these days and for good reason. Despite some criticism (for example subscriptions often end up being more expensive for the customer in the long run), on the whole the subscription model offers a good balance between the needs of the customer and the business. The customer doesn’t have to commit with a big upfront cost and has the ability to cancel anytime (if so agreed), and the business gets to make more money in the long run.
To learn more about the pros and cons of the subscription model from the software company’s perspective, have a look at our more extensive guide.
If you’re looking to implement a subscription business model, 10Duke can help you. Essentially the subscription model means that you offer your product to customers with a subscription license, meaning you need to be able to enforce that license and control access to the product.
3. Freemium model
The freemium model encourages customers to sign up for a limited version of your software, free of charge, before potentially purchasing a premium version with more features.
Freemium model is more of a customer acquisition model in that it focuses on acquiring customers rather than monetizing them, as the model is designed to turn these users into paying users in the future.
Example of the freemium model:
Canva is a graphic design platform that offers three tiers, including a free tier that includes a ton of features that are probably more than enough for a large portion of their user base, especially if the user only needs Canva for one quick design task.
Essentially, Canva is banking on the idea that if people find Canva useful once, they will come back the next time they need it (or when a friend asks for recommendations) and over time, this user growth will turn into profit.
For those users who need a bit more, Canva offers a reasonably priced paid tier that includes 200x more cloud storage, 24/7 support, and even a social media scheduling tool.
Overall, Canva has embraced the freemium model and they do it by offering a lot for free and also including a lot in their lower-cost tier. This is a great example of how to acquire users by giving them a lot upfront, with the hope that over time enough users will turn into paying customers.
It’s no wonder that the freemium model is very popular among SaaS businesses. The beauty of SaaS is that it scales, meaning onboarding a lot of users is easy as they can self-serve while you only need to provide one product.
This allows the company to focus more efforts into attracting more users, and if you’re able to do that, you only need a fraction of them to be paying customers. And the better your product is, the more likely it is that users will keep coming back and eventually convert.
4. In-app purchases
In-app purchases is a software monetization model that is often utilised in smartphone apps or console games. The basic idea is that the user can get additional content, new features, services or in-game currency in exchange for additional payments from the user.
For example, a mobile phone game could require the expenditure of ‘gems’ or ‘coins’ to purchase additional content within the game and this would require the user to pay for access to this in-game currency.
This monetization model could work in tandem with the freemium model.
5. Pay As You Go
The pay as you go model is a software monetization model where the idea is that the user only pays for what they need.
This model is focused on the needs of the customer and can be very useful if your customer base is more cost-conscious.
For example, the customer is given precise options to choose from in terms of how much they pay and how much they get. From the software company’s perspective, it might make more sense to keep the customer even if they’re making a smaller profit (or even no profit at all) rather than lose them due to inflexible pricing.
From the customer’s perspective this model is great because the barrier to entry is low and it doesn’t involve a lot of commitment.
A great example of the pay-as-you-go model is a cloud storage provider that allows you to pay only for the storage space that you need. Instead of enforcing rigid tiers of service where perhaps the lowest tier doesn’t offer enough storage but the second-lowest tier is too costly, they allow you to pay a smaller fee per every extra gigabyte of storage space.
There are countless examples of the pay-as-you-go model from cloud storage providers to email platforms to broadband providers. What they all have in common is a product offering that can easily be quantified, whether it’s gigabytes of data, number of emails sent, or the speed of data transfer.
Pay as you go is also referred to as the consumption-based or usage-based model.
6. User as a product
In many cases with online services, if you’re not paying for it, it is likely that the provider of the application is monetizing you. You are the product.
The main example of this is Google and the numerous free services it provides to consumers such as Gmail, Google Search, Google Maps and YouTube. Each of these applications is tracking you as the user (a capability enabled by your Google Account, in effect one of the three main planks to Google’s incredible monetization capability).
Google then uses the data that it holds on you to sell ads to advertisers who, in turn, pay Google in order to target you with advertisements. These ads are targeted to you specifically and therefore more likely (or so the advertiser hopes) to elicit a response from you.
7. Advertisements
Embedding advertisements into your software is another tried and tested method of monetizing your app.
This software monetization model works well in conjunction with in-app purchasing and subscriptions. One method may be to offer your app on two payment tiers - the first being free with compulsory advertisements and the second ad-free but with a subscription payment.
Offering your product free but with ads can increase the volume of downloads and will still allow you to continue extracting revenue. However, an ad-based monetization model depends primarily on the volume of traffic that you can generate to your application.
As Facebook and YouTube have proven, this can be lucrative, but it was a monetization strategy that they developed over time before it bore fruit. The only way to make this model really work is by focusing on getting lots of volume.
8. Open-source plus
A number of software vendors choose to offer their software under an open source software license in order to encourage take up and use of what they have developed.
As there is no financial cost to using an open-source software tool, it can be a means of encouraging usage. Some creators of open-source software do it simply because they enjoy creating a product and want others to use and benefit from it.
Others do it in order to encourage take-up and then look to monetize software on the back of the open-source product by providing a variety of value-enhancing services such as support, integration services or value-add software modules that complement and enhance the value of the underlying, open-source product. WordPress, RedHat and Canonical (Ubuntu) are great examples of this approach.
9. Affiliate marketing & referral links
Affiliate marketing is where a company uses third parties like YouTube channels, bloggers, podcasters and other content creators to market their product to the audiences of said creators.
The idea is that the affiliate will get a small commission every time someone uses their affiliate link or referral code before buying the company’s product. This way it's a win-win situation between the company and the affiliate.
The affiliate is incentivized to generate awareness and website traffic for the company and their product, which in turn helps the company sell more. Affiliate marketing only works if the affiliate’s niche is related to the product or service that the company provides, otherwise the marketing pitch won’t resonate with the affiliate’s audience.
The benefit of gaining promotion from a third party affiliate is that the company can focus on other aspects of the business, and it can be very powerful for the company if the affiliate has a big following that matches with the company’s target audience.
In addition, affiliate marketing is great from the company’s perspective, because there is typically no upfront cost. The affiliate only gets paid when a purchase is made, which makes budgeting really straightforward.
10. Voluntary contribution
Championed by some media brands today - The Guardian being the main innovator - some apps urge their users to voluntarily contribute to their business to allow them to continue providing a professional service.
Users are not forced to pay a subscription cost, but they can monthly if they wish or even pay a one-off payment. This software monetization model requires a very loyal following to generate enough revenue and requires the content to be of a high-quality.
11. Trial model
The trial model allows customers to try out a free version of your product for a limited amount of time, for example 30 days. The trial model aims to convince customers to purchase the full version of your product after the trial period is over.
The benefit of the trial model is that it allows customers to learn the benefits of your product, and develop trust towards your business.
The trial model helps you prove yourself to potential customers, and convince them that your product is the right choice for them, before committing.
However, the trial model doesn’t really solve the monetization problem, it just gives the users a chance to try out the product, similar to the freemium model but with a time limit. You could say that the trial model is more a strategy than a monetization model.
12. Premium model
Similarly, the premium model isn’t really a monetization model per se, rather it is a strategy. Positioning the product as a high quality premium product could attract certain types of customers. A software product with a higher price can be seen as high quality.
Customers are often prone to be persuaded by products and services that are cheaper. However, charging a higher price than your competitors may attract customers that are looking for quality and are willing to pay more to get it.
Obviously, the premium model can only work if your product actually is of premium quality. Be prepared to prove that your product offers true value for money.
However, you still need to solve the monetization problem, as the premium model is mostly a strategy choice. More on that next.
Strategy - Four Starting Points For Monetizing Software
When deciding which software monetization strategies suits your business best, it might be helpful to start with these four questions:
1) What Is Your Product?
It may sound simple, but what is your product and what value does it provide to the end user?
Your product should be the paramount consideration before you decide on a means of monetizing it. Certain products work better with certain software monetization strategies and the two should dovetail seamlessly for the overall monetization strategy to be effective.
Gaming apps and in-app purchases combine well together to create a positive experience for the user. The user does not have to spend money initially, but can if they’d like to access additional content. By making this additional content attractive enough, it is possible to extract a considerable amount of revenue from in-app purchases.
Equally, if you're selling a desktop hydrological simulation application to another business, it does not take a genius to realize that in-app purchases may not be a good fit. (Or does it? On this point more later….) Start with the type of application you're creating and understand the value it creates for users.
2) How Do Your Target Customers Buy?
Once you’re clear on the value your product creates, what easily accessible tools are there to help you monetize and that your target market is willing to use?
For example, if you sell to a large business they may not be willing to pay via credit card due to their own internal controls and processes, so it may not make sense to integrate Stripe into your product.
Equally, if you’re monetizing your mobile app via ads you need access to a service that can supply the ads and broker between your audience and the advertisers. Figure out what monetization tools (payment provider, licensing API, CRM, and analytics package) suit your business the best.
The process must be easy to understand and use; it must also protect your intellectual property and require as little management as possible. If you put hurdles in the way of a purchase, the end-user may never bother to get over them.
Depending on the type of app you have, you may choose a different means of monetization, but it should always be simple. More friction means less fun (both for the app vendor and for the customer).
Contrary to popular belief, software pricing and packaging is not a one-time event and despite the hopes of product managers around the world, ‘one size’ is never going to ‘fit all’.
Start-ups and other smaller customers may prefer or even need to make many small payments with no long term commitment. If you don’t have the ability to monetize individual features of your solution, you end up significantly limiting your market applicability or the premium you can charge for your services.
On the other hand, large and complex enterprise organizations may not be able to support monthly payments and would prefer long term, quarterly or annual unlimited usage plans.
Changing consumer behaviour means that solving difficulties around software monetization is now important to maintaining revenue. What’s noteworthy is that B2B users have also become more demanding in terms of the ease of access and payments, largely thanks to how easy B2C cases are these days with, for example, Google’s suite of apps and GPay, or Apple’s AppStore and Apple Pay.
3) What Are Your Competitors Doing?
Learn from your competitors. Check out what they are doing, what tools and strategies they are deploying.
This can save you an immense amount of time experimenting. Proven strategies are valuable to emulate. Equally, if something is not working, learn from the mistakes of others.
4) Marketing
You may have the best product in the world, but if you don’t market it effectively no one will ever hear about it.
Everything from the aesthetic design of the logo and the typeface to the channels of communication can be considered marketing and you’ll need to make sure that everything works together.
If you’re concentrating on in-app purchases, you may consider sending information about discounts or deals directly through push notifications on the app or via text. For a SaaS product it might make more sense to send automated email campaigns.
Depending on what your product is and how you’ve decided to monetize it, you might choose different ways to market it.
Conclusion - What’s Next?
Your software monetization strategy is one of the most important foundations of your business. To monetize software in the most effective way, you need to be able to easily define, configure and control the sale and distribution of your software to the end customer.
Modern software monetization solutions can track product use at a granular level and deliver flexible licensing models that meet changing market demands, all whilst securely protecting the software developer from copyright infringement.
With 10Duke Enterprise, in addition to protecting your IP and revenue streams, you can also easily determine who is using what, when, where, why, and how, as well as know what customers’ preferred features are.
This is not a one time thing. In a world where your relationship with a customer is key, you need to know how to license your software and provide value added services to customers on an ongoing basis in order to maintain a long term relationship with them.
If you wish to effectively monetize your software product, consider 10Duke Enterprise as your licensing engine to help you generate the most revenue.
Feel free to ask questions or schedule a no-obligation product demo, or watch the video below to learn the basics.
Are you a software developer looking to sell more? Learn more from our guides:
Should You Build Or Buy a Licensing System?
How to Monetize Software Products?
Guide to Software Licensing – Basics Explained
Software Licensing Solutions – Buyer’s Guide
Software Licensing Models – Ultimate Guide
What Is Software License Management?
Customer Identity and Access Management – What should a good CIAM solution provide?
