Models for monetizing startups where the user pays is mandatory

The easiest to execute monetization model: you produce a product and sell it. A variation of this model is markup, or resale, where you buy something from a manufacturer and resell it at a markup.

Wholesaling is another variation of the sales model. This model was originally used by b2b businesses, acting as suppliers to other business customers. Now this model is available for the b2c market as well: wholesale purchases of food, pet food, and household goods. The wholesale model often comes with membership fees: companies impose an annual fee in exchange for access to wholesale goods.

Monetization occurs in this way: the user takes a conditional product for time and pays for its use (per minutes, hours, days). This monetization model is used by carshare services, truck rental services, household appliances, and parking lots. Unlike subscriptions, this monetization model does not imply a fixed monthly/annual fee; the user pays strictly for the time of using the product.

This monetization model is suitable for startups whose product has unique technological/creative advantages. If you have created a product that can be used by others for profit, sell a license to use it. Typically, license deals are either at a flat rate or on a sliding scale, depending on how many times the product/service has been sold using your component. The uniqueness of the product and the ability to replicate it is important to use this monetization model. This model is used by software developers (Adobe, Microsoft), producers of different types of content (photo, video, text, music).

This way of monetizing a startup is also known as Lock-in. With this model, the main product is very cheap – for example, a printer, a razor (hence the name!), but the subsequent goods for it are significantly expensive (cartridges, nozzles for the machines). The threat to this revenue model – competition, so it is important that the product meets the needs of customers, do not cheat their expectations.

Startup monetization models where the user pays, but not always

This monetization model is often used by online music and video services (Netflix) and software developers. The advantage of subscription is the relatively easy predictability of income. In addition, some customers may not cancel a subscription due to forgetfulness – even if they no longer use the product.

A variation of a subscription is the Freemium monetization model: the basic version of the product is free, but you have to pay for the extended versions.

Another variation of subscription is the tiered pricing model. This method of monetization allows you to diversify the levels of service for different customer segments: develop several pricing plans with different features and different prices. As a rule, the higher the price, the more features. The tiered pricing model is used by various online business services and software vendors.

Monetization occurs through charging a fee for using the platform and making transactions. This can be a payment system (PayPal), marketplace (AliExpress, Amazon), aggregator sites for discounts, services, some, etc. The platform creates the conditions for a transaction between the seller and the buyer, and receives a commission for each transaction.

The brokerage model is one type of transactional model. If your startup is working to create a platform that brings together two sides of the market that have difficulty reaching out to each other in normal circumstances, and allows them to interact effectively with each other, then this monetization model can bring you good profits. This model is used by Airbnb, helping both hosts of empty apartments and travelers; WeWork, providing office space for negotiations. You can make money by charging a commission for using the platform.

Lead generation is a variation of the transactional monetization model in which leads (contacts of potential customers) are collected and sold to interested companies. This is done through the collection of applications, pre-contracts, and mailings. Monetization is that there is a payment for each lead. As a rule, leads are collected by aggregator resources, where information of interest is presented in a user-friendly form (exchange rates in different bank branches; information about discounts, etc.).

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You won’t get it right the first time. Only a persistent series of attempts and tests of hypotheses approaching infinity. Do not believe the nice stories about “you sat down, wrote the code in 24 hours, and tomorrow you will be rich”. If it happens, it’s by chance and luck. And if you plan to build your startup on luck, you will quickly fall apart. This topic is worthy of a separate article.

Don’t be afraid to not pay a salary / offer to work for free.

There are plenty of young (and not so young) people around who spend their free time away from their main job on bullshit. They better spend it on your bullshit you call a startup. All you have to do is convince them of that. Paying your friends and relatives is really fucked up. At some point you can start paying a little bit, but do it right, taking into account the value per hour spent. This, too, is a topic for a separate text.

Don’t be afraid to offer to buy a product to customers and get rejected.

The most effective way to figure out if a product is useful to someone you make is to try to sell it. People buy crap every day, transfer money to scammers, and trust MLM schemes. There will always be someone who will buy the very thing your startup produces. 100 rejections and one sale will give you more value than “constantly sawing the product” to some kind.

Don’t be afraid of reversals (“pivots”).

A startup should become a business, and business is about money. The product has to be flexible and adapt so that it brings in more revenue, even if it changes it beyond recognition. If the market forces you to start making smart masturbators instead of a smart home system, that’s the way to do it. And you have to treat this product like a child, present it as if you’ve been sick of it all your life and it’s your destiny. If you’re not ready for that – go to work for hire, don’t waste your life fulfilling false dreams. Money should make money, only infobusinessmen, who just make money on you, put other faith in your heads.

Don’t be afraid to admit your mistakes.

Budding startups think it’s important to always be successful and not show your mistakes. The smart ones know that admitting mistakes and conclusions sell you better to investors, just do it right. But the most important thing is to admit mistakes to yourself and to your team. The sooner the better. This teaches you to avoid them in the future and to avoid misunderstandings and the collapse of the project. Many startups fall apart because the founders couldn’t agree, and the culprit is an unwillingness to give in and admit that you’re the bottom.

Don’t be afraid to optimize.

Most likely there will come a situation where money will not be enough. Your habitual way of life may be in jeopardy, and that may be a reason to drop everything. It’s worse when founders are entrusted with this as a fatal setback and an indicator of their incompetence. It’s not. Shit happens. And you have no idea how budget friendly a person can be for a while. Be smart about optimizing your spending – it’s also an investment in your future. It might even teach you more financial literacy.

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