Episode 31 | 5 Ways to Monetize Your Product
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[00:00] Rob: This is Startups for the Rest of Us, episode 31.
[00:12] Rob: Welcome to Startups for the Rest of Us, the podcast that helps developers be awesome at launching software products, whether you’ve built your first product or are just thinking about it. I’m Rob.
[00:20] Mike: And I’m Mike.
[00:21] Rob: And we’re here to share our experiences to help you avoid the same mistakes we’ve made. What’s going on this week Mike?
[00:28] Mike: Oh, you know, the usual. I was thinking about our podcast the other day, right after episode 30, or after we recorded it. And I find it amazing at this point that we’re up to 15 hours worth of podcasts that people are listening to on a continuous basis. [laughs]
[00:43] Rob: What are you thinking if you are listening to us for 15…I can’t even listen to us for 15-20 hours!
[00:47] Mike: My wife tunes out after three or four minutes, so…[laughs]
[00:51] Rob: I know. I’ve had several friends…you know, anyone who’s a non-techie, like, they just can’t listen to this. I’ve heard comments like, “Yeah, I don’t really understand what you’re saying.” And I’m like, “Oh, the audio quality is bad?” And they’re like, “No, you use words that don’t make any sense to me.”
[01:04] Mike: [laughs]
[01:04] Rob: I feel like we just have a casual conversation. But I think when we break out like freemium and monetization, and just things that really feel natural to us and our audience, that if you’re not in this audience, you totally just don’t get it. So I think you get lost pretty easily.
[01:21] Mike: Hmm. Interesting.
[01:23] Rob : Cool. Well for me, I have a couple updates. One is I received several emails after the episode when you and I discussed whether or not I should record an audio version of “Start Small, Stay Small”. And I’ve received several emails since then of people saying, “You know what?” Basically, you looked at it from a monetization perspective. They were saying like, “If you can make more money, then you are going to do it. But maybe just think about kind of extending your engagement. You know, like you blog and you don’t make direct money from it, so maybe just think about doing it even if you don’t make more money.”
[01:54] And then a few other people were kind of like, “I think you will make more money. I think you will sell copies to people who just otherwise wouldn’t buy.” And I had two people email me and say that, like, “I won’t buy the book because I’m not going to read it. But if you record an audio version, I’ll buy it.”
[02:06] So kind of interesting perspectives all around. So I’ve made the commitment and I actually started recording chapter one today. I’m about halfway through. And it is painfully slow. I mean you remember doing the audio for a lot of the text in the Academy, and those were…what were they, 2,000, 2,500 word things? And this 50,000 words or something. So already I’m feeling exhausted! I figure it will take me a couple weeks at least, because I’m not going to do it all at one time.
[02:33] Mike: Yeah, I could imagine it’s going to take a while.
[02:36] Rob: You mentioned you had spent some time working on some databases? What’s going on with that?
[02:43] Mike: Oh yeah. So the past week or so I’ve been spending a huge amount of time designing some databases for the product that I’ve been kind of alluding to here and there. And it’s a SaaS offering, or at least it’s a hybrid SaaS offering where there is going to be some code and software that is installed at the customer site, and then there’s basically a cloud database as well that, you know, the two will talk to one another and I’ll be running a lot of things out of the cloud solution.
[03:10] But some things from the cloud have to be pushed down to the customer database and vice versa, because there’s just too much data to realistically…or too many lookups going on to make them all in the cloud. It’s just not going to work if I were to try and do that.
[03:26] So I’ve had to design those databases. And these two databases are basically huge, because they serve different purposes, but because of the data synchronization, there’s a lot of things that overlap between them which aren’t necessarily core to each of the databases, but collectively they are.
[03:41] So I’ve done a lot of work on it and I’m getting close to being done. When I get done with the database design, I’m going to consider that kind of a major milestone towards getting everything completed. But I’ve still got a lot of work to do after that.
[03:54] Rob: Now, you have a lot of code written for this app, right?
[03:58] Rob: But you’re just now working on the databases? Is the code independent? There’s a lot of code that’s independent from the database, I imagine.
[04:05] Mike: Yeah. Yep. I mean what I did was I basically…I wanted to build more of a prototype first that was mostly a proof of concept to make sure that what I was trying to do would work. And so what I have now runs all off of XML files. But once I get into the point where I’m actually trying to save and aggregate the data and be able to build reports and stuff on it, I have to save the output. And I have to continuously save that output every time it executes, basically to give it a log of everything that’s gone on in the past.
[04:38] So I’ve probably put in about 500 hours of development and engineering effort so far. I’m thinking I’ll come close to doubling that by the time I’m done and before I actually launch. So a long time ago I knew that this was going to be a massive undertaking, so I code named the whole project Redwood. It’s just an enormous undertaking, and there’s just a lot of different moving parts and a lot of different technologies. It’s cross platform. It’s kinda crazy.
[05:03] Rob: So you’re going against our rule of 400-600 hours. Are you sure you’re going to make it? Are you going to stick with it?
[05:09] Mike: Oh yeah, definitely. I mean I’ve already talked to a number of people who have expressed interest in it. And probably four or five weeks ago I went and talked to a couple of prospective customers that are probably the people that I’m targeting with this.
[05:22] And I sat down and had some conversations with them. I just said, “Look, I’m not trying to sell something to you. I just want to know is this something that sounds useful to you? And if so, is it something you would pay money for?”
[05:32] And one of them was very standoffish and said, “Well, I don’t make the decisions, but it sounds like you’ve got a good idea.” I think she just didn’t want to commit, because even though I was saying, “I’m not selling you anything”, I think she felt like I probably kinda was.
[05:46] And the other person I spoke with said, “Will it be ready by December 31st? Because I need that and I need it now.” So it was kind of validation of the market. But everyone I’ve talked to so far seems to think that it’s a good idea, at least anyone that I’ve given more of the details to.
[06:01] Rob: Yeah, it certainly is easier to see something like this through once you’ve talked to real customers and realize the value it can provide them. It’s not like you’re coding in the basement with no one knowing about it. I think that would be tough to make it through a thousand hours of development.
[06:16] But I think you also have an advantage of you aren’t working the standard upstart micropreneur might get five or 10 hours of work a weekend on it. You’re obviously able to put in quite a bit more just because you’re self-employed, essentially. So you can call your shots a little more.
[06:31] Mike: Yep.
[06:32] Rob: That’s nice. I actually had two other things I wanted to mention. One is I’m doing this experimental marketing campaign. And I’m actually bringing this one up because I really don’t think it’s going to work, but I just wanted to throw it out there because I don’t think I talk about enough specifics of certain things that I try. And I kinda wanted to do this. This is like a personal challenge for me to present something that I’m trying that I think is going to fail.
[06:54] And I don’t tend to want to do that. I tend to want to talk publicly about things that succeed. So anyways, this one was a low time investment because I had my virtual assistant do it. That’s why I think it’s going to fail, because I don’t have a problem with it failing.
[07:07] And it’s for Wedding Toolbox. It’s a wedding website that allows engaged couples to build their own wedding website, like with WYSIWYG controls and stuff. It makes it really easy.
[07:16] When I had talked to the previous owner, he said he had quite a bit of success using coupon websites. I don’t know, there’s like Coupon Junction, coupon this and coupon that. And basically, if you just go to Google and search for “insert website name here coupons” or “coupon codes”, you pull these guys up in Google results. That’s how most people find them.
[07:37] And what he had said is that when he went and threw a bunch of Wedding Toolbox coupon codes into these codes that people started finding them, because they were like on the new release coupon list because certain people subscribed to these pages, and so they were getting notified of this stuff, and this was the same demographic. It’s a pretty broad demographic, but it tends to somehow overlap with people who need to build wedding websites.
[07:59] So anyways, that’s what I did last week, is I had my VA create about 20 different unique coupon codes, one for each of these coupon sites. She went out to Google and found them and then inserted the unique codes. So I’m going to be watching over the next couple of weeks and take a peek to see what’s going to happen.
[08:14] He said he had success with it. There’s just something in the back of my mind that’s like, “There’s no way this is going to work. There’s too much noise on these sites and in this space for these to possibly drive traffic.” But I don’t know. I guess if it drives just a couple of signups, you know, the websites run between $40 and $80. So even if it drives one or two, I think I paid my VA a total of like maybe $9, because it probably took her three hours to find everything and do the whole process.
[08:40] So it might not be a smashing success, but I guess if I only get one or two, or even if I get one or two signups, it’s still a financial success, and maybe I can find a way to expand on it.
[08:50] Mike: Got it. So you’re getting something of a kickback from these coupon codes.
[08:54] Rob: Well, basically, all the coupon code is, it’s a discount on Wedding Toolbox. So like if you find this coupon code, you get 15% off if you use it. And so the idea is that 10,000 people will probably see this because there’s all these mailing lists and stuff, and if just one person uses it and signs up for Wedding Toolbox, the website I own, then I will get money from that signup, right? They’ve signed up for a website, just at a small discount. That make sense?
[09:18] Mike: I see.
[09:18] Rob: It’s really just lead generation is all it is. It’s kind of like free advertising. I give a coupon code and it gets exposed to these coupon code websites’ audiences. So remind me on the next podcast, or maybe in two weeks, because I’d like to report back on this.
[09:32] I just think it has interesting ramifications even for software, for finding niche apps, if you could find niche coupon code sites or find certain categories of coupon codes. Each of the coupon code websites has different categories, so some of them were wedding, and some were wedding websites. And I’ll be curious to see which convert. And then, of course, other people could try it with their stuff as well.
[09:51] And then the last thing I had was more of an update for you, but I felt like it might be interesting to listeners as well, because it’s kind of automation. Basically, I have not yet created that screencast for our editor. You know how we were talking about having our editor starting to post our podcast episodes?
[10:07] So basically, a little bit of background. Mike and I were talking about kind of just the pain it is to put together the show notes and get everything posted. It just takes 20 minutes or 30 minutes. We realized like, “Why are we doing this? We have a more than capable virtual assistant who edits the stuff and who could totally do this for us.” So I’m going to create the screencast, I just haven’t done it yet. That’s both my update to you and announcement to everyone that we are going to start automating that process for us.
[10:38] Mike: What’s on the agenda for today? What are we talking about?
[10:40] Rob: The title of today’s show is “Five Ways to Monetize your Product”. This whole episode is actually based on a question from someone named Tim Reichmann [sp].
[10:50] He says, “Hi guys. Thanks a lot for doing your podcast. I find your material refreshingly different; less non-applicable theory and more live, hands-on examples. Keep up the good work. Here’s my question/topic suggestion. What are the ways to monetize your website/software other than to charge for it? For example, if you have X amount of visitors for your freemium website, you can make Y amount of money on advertising. Ballpark numbers would be great!”
[11:15] So I took his question and I actually want to address both not charging for software and charging for software, because I feel like we probably have quite a bit to say on both subjects. So like I said, the title is “Five Ways to Monetize,” and number one is charge for your product. And then the other four are non-direct charges.
[11:35] Now I want to give a shoutout before we start to istockninja.com. Everyone should check that website out. It’s by Portman Wills, who did a lightning talk at Business of Software 2010. He did a talk called “11 Ways to Monetize your Web App”, and it was a really, really good talk, and it was quite funny.
[11:55] So istockninja.com, that’s the website he used in his examples. If you go to that website, you can download his talk in PDF and PowerPoint. So give that site a visit if you give a chance. And I think we’re going to get started with our “Five Ways to Monetize your Product”.
[12:12] So, as I mentioned, the first way is to charge for your software. Whether it’s a web application, or a downloadable app, or an iPhone app, or a game, perhaps the easiest and most straightforward way is to just have someone pay you for the software that they use.
[12:27] Now, but there are a lot of different dimensions to this. So the first piece is whether you should charge a onetime fee, whether you should charge a recurring fee, or whether you should charge a usage-based fee.
[12:41] So I think onetime fee and recurring are pretty self-explanatory. Onetime is typically if you have a downloadable app, something like invoicing software or maybe photo editing software. Recurring is typically reserved for Software as a Service type stuff, but of course you can have services that integrate with software, and you can be creative with that.
[13:02] And then the last kind is usage based. And that’s more like…well, it can be like Amazon EC2, where it’s truly 15 cents per computing hour, whatever the price is. Now, you can also do, of course, recurring can cross over with usage-based so that you have recurring software, but you have three or four tiers of it, and depending on your usage it bumps up and down.
[13:24] Now, I think that trying to shoot for a recurring model is the best if you are a small software company like a micropreneur type model. Onetime fees are great, but you start every month at zero, zero dollars in sales. And I’ve personally seen kind of the devastation that happens during a recession when your sales drop 90% in a month. And recurring apps won’t tend to have that problem.
[13:51] Usage-based, I don’t like that for small kinda micropreneur ideas, because you need such a volume in order to make that work. I’m thinking about low priced usage-based stuff like an Amazon service. And I think as a small company you need kind of a recurring income, rather than someone comes and uses it and then they leave, and then you don’t have any income.
[14:14] Mike: No, I mean I think you’re right. The one thing I find interesting is as you were talking about the fact that you’ve got the onetime fee versus recurring versus usage-based. And I almost feel like Microsoft, for certain products, is doing all three of them.
[14:28] Rob: How interesting. Yeah.
[14:29] Mike: But I almost wonder if you could basically put out three different pricing models for the same product and make them work. I think it’s more of a hypothetical than anything else. I’m sure that there are examples.
[14:40] Rob: I’m glad you brought this up. That actually strikes an example in my mind. You know those subscription management services? There’s CheddarGetter, Chargify, Recurly. One of them, it might be Chargify, they do both. It’s usage-based or it’s like a monthly recurring fee.
[14:56] Mike: Oh yeah, and so whichever is more or something like that.
[14:59] Rob: Yep. And actually MailChimp does it too. If you get 1,000 subscribers, you can either pay per email sent or you can just do monthly fee. So I’m glad you brought that up. I hadn’t thought about allowing someone to choose.
[15:11] So I like the idea of allowing someone to choose. If you have no competition, I don’t know that you need to do that. Both of those companies are in heavily competitive markets. And they are obviously leaving money on the table by doing it that way, right, by allowing them to choose. Yes it’s best for the customer, but upfront, if you had a unique service, I would consider not allowing customers to choose their pricing model, if for only one reason that it is really hard to get your pricing and revenue model together and to kinda make it work. So to try to get two of them down pat and make it work and allow a customer to choose from, to me, is extremely complicated upfront until you know your business really well.
[15:53] Mike: So the second way to monetize your product is to use ads. And there are a number of different ways to use ads within your product. There’s pay-per-click ads, there are cost per action ads, there is reverse CPA or Cost Per Action, there are cost per impression ads, and then there is text link ads. And each of these different type of ads has its own benefits and its own drawbacks, and you go to different vendors for them.
[16:18] And we’ll put it in the show notes which you can use for each of these different types of ads. But basically what you’re doing is you are relying on essentially an advertising network to display those ads for you within your product. And every time they get displayed or clicked on, depending on the ad model that you’ve chosen, you will get paid for that, whether it’s getting paid on the click or getting paid when a certain number of impressions get shown up.
[16:42] And this is something you have to be very careful about, because not all types of software are really conducive to displaying ads in them. So for example, I would think that most banking applications would probably not be a good place for you to start showing advertisements for various things.
[16:59] One of the places where this type of thing works really well is in the micro application environment. And specifically, I mean mobile applications. So if you are on the iPhone, or Android, or Blackberry, any of these places, each of them tends to have their own type of ad network. I think Apple just recently came out with this entire platform around serving up ads within the mobile market on iPhones. And if you can leverage those, if you can get enough impressions into your application because you’ve got enough people using the application, you can certainly recoup your costs and them some from all the advertisements that come in.
[17:36] Rob: Yeah, and I think you bring up an interesting point. I had thought that mobile apps, trying to monetize them with ads would just be useless. Because frankly, trying to monetize a web application is very, very difficult unless you have a lot of users.
[17:51] But I was actually emailing with a guy. I was reading his blog. And he has a couple of iPhone apps that are kind of just those basic apps. I think he paid a couple grand each for them; hired a developer to build them. And they are just kind of those free giveaway apps. Since they rank pretty well, they get downloaded several thousand times a month, and there’s enough volume that he just has the Google pay-per-click ads in there. He makes a couple grand a month from these things in clicks. And I was shocked by that.
[18:18] So essentially, with an investment of under five grand, he has between two and three thousand dollars a month in ad revenue from these mobile apps. Now obviously, these could be an anomaly. You know, it could just be the old “I’m only hearing about the ones that are successful” type thing, but that was a surprising thing to hear.
[18:36] Because I think the comeback earlier, you know, you were talking about pay-per-click, cost per action, and all the other types, pay-per-click ads, to give people a rough idea, basically, this is stuff like having AdSense on your website, or Yahoo has its own publisher network. And these usually run somewhere between $3 and $10 per 1,000 page view. OK, so while you do get paid per click, you get paid per time someone clicks on a link on your page, they give you a number in terms of CPM, which is cost per thousand impressions.
[19:07] And so that comes out to around $3-$10 per 1,000 page views. So in other words, if you have a web application and you want to monetize the freemium side of it, and you slap AdSense in there, then for every 1,000 page views, you are pretty likely going to make between $3 and $5 is a good estimate, $3-$10 if you are in maybe a little better market.
[19:28] Now, you can get up into the $40-$60 range, but it’s pretty specialized. That tends to be legal terms, credit cards, mortgages, financial. It’s kind of these things, you have to seek them out. You don’t just stumble upon them. It’d be pretty lucky if you did.
[19:43] So that gives you an idea of why it’s so freakin’ hard to monetize a web app with ads, especially with AdSense. Because let’s say you have 5,000 page views a month within the app. You are going to make $25-$50 a month. And, you know, it’s almost not worth having them up there.
[19:59] Now, there are some other kind of ad networks. The cost per action ads from places like NeverBlue and MaxBounty, those can work a little more because you actually get paid a lot more when someone clicks through. And if you have relevant traffic, you can make quite a bit. I think you can make like $25 if someone signs up to Netflix, as an example.
[20:17] So if you have an audience that would be likely to sign up for Netflix, if they click through and sign up, that’s the action they have to perform, then you can make, like I said, $25.
[20:25] Boy, the others, reverse CPA is crazy, but it’s this company called Trial Pay. Let’s say I’m selling a photo editing app for $20. On my checkout page, someone can either just pay me $20, or there’s this offer next to that, and that offer is through Trial Pay.
[20:42] It will say, “If you already might want to order flowers for your mother, click here, order flowers from 1800Flowers.com and you get the software for free.” So it’s this bizarre cost per action thing where the money actually comes directly back to me as the guy selling the app. So it’s like a substitute. The person does the thing and I get paid enough for it that they actually get my app for free.
[21:07] And then text link ads are things that Google frowns on. And if they catch you doing them, they’ll get mad at you and penalize you. But a lot of websites, a lot of blogs do this. And you can buy and sell text link ads for monthly fees or for onetime placement.
[21:22] Text link adds are actually one of the better ways to monetize your app, because people just pay a lot more money, frankly. They aren’t just paying for a link to get traffic, they’re actually paying for SEO juice.
[21:33] The third way to monetize a product is using micropayments. This is actually one that I’ve never tried. I know that PayPal has recently released their micropayment plan, so you can get really low rates on smaller payments. But you can use this to monetize content, and that’s what newspapers are starting to look at is trying to say, you know, you pay a fraction of a penny to view this one page, or you pay two cents to view certain pages. And the other place I’ve seen this is like with stock photos. Sometimes they will sell stock photos for 10 cents or 20 cents. So you typically have to log in and buy $10 in credit.
[22:07] But anyways, if you have something that you think people would pay for a on a very small scale…so this is not so much like monetizing an application. It’s more like monetizing content or, as I said, the examples were photos or articles. Then you could look at something like micropayments.
[22:23] Mike: The fourth way to monetize your product is to resort to consulting or product customizations. And essentially what that involves is when customers come look at your product and they’re trying to use it, you can try to…I don’t want to say upsell your product, but you are trying to get them to essentially commit additional dollars to paying you to perform customizations on their behalf. And hopefully those customizations will be directly applicable to the product itself and you can incorporate it into the build in the future and use those customizations for everyone else.
[22:55] Essentially, what that does is the customer is paying you to develop your product and add more features to it, which, at the end of the day, works out for both of you, because the product itself is getting more features, and it’s getting a larger code base, and it’s becoming more appealing to more people. But at the same time, the customer is getting pretty much exactly what they needed from the product to begin with.
[23:17] Now, there are some problems with this. And the first one is that doing consulting of any kind is really a distraction for your product. And there are going to be a lot of times where you are probably going to have to incorporate some things for those customers that you don’t necessarily want to. It’s a very rocky road. I mean it’s very difficult to kind of navigate through a negotiation with a customer who really wants feature X and they can’t live without it, and they absolutely have to have it or they won’t move forward with any of the customizations, because it’s just not worth it if they don’t have that particular feature.
[23:48] So you do have to be careful, because it is a double-edged sword. But the money that you can make from it can be more than worth it as long as you structure it properly and you are able to get the customer to agree that the only changes you’re going to put in there are those ones that are going to be applicable to other customers.
[24:04] Rob: And the fifth way to monetize your product is through donations. And I’ve seen this a lot with WordPress plug-ins. That’s the best example I can think of. If you go to the All in One SEO Plug-in, you’ll notice that they ask for donations at several points during the process. Both when you download it and then after you’ve activated it, they ask again for donations. And frankly, it’s a really good plug-in, and I’ve donated.
[24:27] But you often need a reminder to donate. There’s a lot of plug-ins I’ve downloaded that I would donate to if they reminded me, frankly. I realize that it could get out of hand at some point, but I hope it’s working for some of them. I hope they get some donations and improve the product.
[24:41] I don’t know if I would have paid for it upfront the first time before I used it. But at this point, now that I know the value of it, it’s certainly worth dropping them a few bucks in order to support the development effort.
[24:52] Mike: So I have a plus one that I kinda want to add to this, because number one, charging for software goes a little bit against what the original question from Tim was. So we’ll make this into “Five Plus One Ways to Monetize your Product”.
[25:05] And the last one that I thought of was to charge for support for your product. You don’t charge for the product, you charge for support. There are a lot of corporate customers out there who will pay for support. And most of them will not use, for example, open source products because there is no support behind them. If they are going to put their faith in the hands of these developers who are building the product, they need to know that there is some sort of support on the backend for that product.
[25:28] And I know of customers who, as a general rule, they say, “Corporate policy: We will not use open source software because there is no support.” Well, what if there is support? What if you can get support from people? And I’m not talking just open source software. You don’t necessarily have to open source software to give it away and then charge people for the support.
[25:48] And quite honestly, RedHat makes a pretty good dollar from that exact model. Linux is open source software and they charge for support. They charge for updates and upgrades, and they seem to be doing quite well.
[26:01] Rob: Yeah, I agree. And MySQL is another good example of that. And there’s actually a Java Script library that I implemented for a client, or I used for a client a couple years ago, and they would not accept open source without support. And so they did…it was a free library. But yeah, he paid $1,000 because they wanted the specific license with support.
[26:23] So I agree. I’ve definitely dealt exactly with what you’re talking about.
[26:31] Mike: If you have a question or comment, you can call it into our voicemail number at 1-888-801-9690, or you can email it in mp3 or text format to firstname.lastname@example.org.
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