There is no doubt we live in uncertain times. We are facing wave after wave of disruption. The only thing is that is for sure now is that the next five years will be even more disruptive, dynamic, and challenging. What does that mean for pricing teams?
- Deliver more with less: Do not expect large increases in headcount or large and increasing budgets. The focus is on productivity and delivering more outcome based on tight priorities. That means fully utilizing the power of current pricing systems and adding functionalities that boost profit.
- Support diversification out of pure product-centric business models: Products are important for many companies and are the core source of profit. The reality is that profit also comes from services, software, and data. Pricing teams will have to be good at managing these and extracting value from markets. For that, they need to work closely with innovation and marketing.
- Diversify pricing and revenue models: Pricing teams need to be fluent in SaaS pricing, subscription-based pricing, and usage-based pricing. These new revenue and pricing models are emerging as a force in the SaaS and non-SaaS worlds. The digital and innovation teams are counting on the pricing teams for expertise and speed.
- Accelerate the transition from free to fee: Generally speaking, businesses do not realize what they give away for free. Oftentimes, customers are asking to get more for less and concessions are given. Once given, they are rarely reversed. Moving from free to fee implies identifying the value of what is given and delivered to the customers for free (services, product samples, support, etc.) and deciding which conditions stay for free and which ones are monetized and charged.
- Respond to a stronger focus on impact and ROI: Everything that is done must bring value to customers and/or support the need for greater ROI internally. Selected investments, identified priorities, and strategic programs must bring payback internally and deliver superior value to customers. Pricing teams must work closely with finance teams at calculating the impact of value and pricing initiatives. It is a requirement as part of their role.
- Reduce the amount of revenue leakage: Pricing teams play a pivotal role in the areas of payments, payment terms, credit management, incoterms, customer debts, etc. These are at the frontier between accounting, finance, and pricing. But a lot of these conditions might be included in strategic or global pricing agreements. Additionally, when moving to pay-per-use or outcome-based pricing, pricing teams need to make sure the billing systems can accommodate the complexity of the pricing model to avoid non-payment or not capturing the full usage value.
- Manage an expanded functional scope: As organizations go through reorganization and refocusing, the mission-critical pricing organization will be asked to help the company adapt and evolve. Given its collaborative role between finance, sales, sales operations, and marketing, this can mean greater participation in any or all those areas where customer-centric analysis and critical thinking can contribute.
So, you read these areas of focus and you wonder: should the function be called pricing or monetization? Is the word “pricing” wide enough to include all the additional components of revenue models, revenue operations, payments, billing, and deal management?
We posit that the term “pricing” does not do justice to the nature and extent of the work done by professional pricing teams. It is time to rethink the word and expand it to formally include value management and other peripheral activities which are increasingly becoming part of the functional scope. We propose a transition to monetization titles or a change of the title to include both words.
What does the term monetization mean and where does it come from?
Monetization is, broadly speaking, the process of converting something into money. The term comes from the banking sector and refers to the process of converting or establishing something into legal tender or to the coining of currency. In the last five years, in some industry sectors such as high technology, marketing, or pricing, monetization has become a buzzword for adapting non-revenue-generating assets to generate revenue. The term asset here is key. An asset could be a tangible one such as a product, equipment, or packaging for example. Assets could also be intangible such as patents, features, services, brands, etc.
Another definition of monetization comes from Investopedia: “Monetizing refers to the process of turning a non-revenue-generating item into cash. In many cases, monetization looks to novel methods of creating income from new sources.” This definition is close to the previous one, but it differs a bit by focusing on novel methods of generating income from novel sources. That is the challenge of monetization. You must think outside the traditional box, and you must challenge yourself and look deeply at what you do for your customers. Where is the value of what I am providing located, how am I able to quantify the monetary value of what I am doing, and how can I turn this into a source of income.
Right now, though, with the increased level of uncertainty and a recession looming, top executives must consider how much money they leave on the table and how they can uncover sources of growth while facing a potential market slowdown. When thinking about the definition of monetization, there are many questions that these executives must ask themselves to get started:
- Is our current product, service, and packaging strategy excluding pockets of customers due to its complexity or simplicity?
- Are we leveraging the potential of our entire portfolio of products, features, and add-ons?
- Are we able to understand the features that bring terrific value or no value to customers?
- Are we giving away too much for free from the get-go and for too long?
- Could we convert some of the customer benefits we give away for free into a recurring fee?
- Have we developed a path to cross-sell and up-sell for our existing customers?
- Are we limited by our current ERP and billing system and not able to fully monetize our ambitious product and pricing strategy?
- Do we have data issues that create revenue leakage during the billing process and prevent us from providing accurate bills?
- Are we able to increase our share of wallet during existing contracts by upgrading and expanding the contracts without creating additional headaches?
- Are we focusing enough on customer adoption of our solution and on specific actions to boost consumption rates?
- Has the current environment made elements of our solution or offerings more valuable?
- Are there customers we should no longer serve? Can we reallocate resources to better serve high-value customers?
These are great discussions to have in the C-suite but also with the go-to-market leadership team. All leaders in the organization must understand what monetization means and how it can boost short-term financial results. They also need to realize that the pricing team is best positioned to take over this role and deliver the desired outcomes.
Monetization in the Software Space
Pricing science is evolving with the emergence of new business and revenue models. The past ten years have focused on subscription pricing as a new source of revenue and growth. The focus was to move from a pure ownership model for products, solutions, software, and equipment, to a subscription model where consumers and customers enjoyed the benefits of these offers without the burden of owning them. Today, the subscription world is still growing but reaching saturation levels in some markets. Consumers experience subscription fatigue. The B2B SaaS market is well penetrated, saturated, and highly competitive. As a result, new business models based on usage are now emerging as the next competitive advantage. Over 40% of SaaS companies have already moved to a usage-based business model or a hybrid between subscription and usage. At the same time, modern technology is emerging to manage the unique needs and requirements of advanced consumption-based revenue models, especially in industry verticals where usage is king (telecom, high-tech, banking for example). But it is now inevitable that usage-based business models are going to become the prominent way of doing business in the SaaS world and potentially in the manufacturing world as well.
The transition toward pure or hybrid usage-based business models has profound implications across the board – especially for pricing roles. Traditionally, in the SaaS pricing world, pricing professionals would focus on value management, packaging, price modeling, and structuring the pricing tactics. They might get involved in other critical areas with sales, finance, and revenue ops. With the emergence of pure, and sometimes complex, usage-based business models, the role is changing drastically. Pricing professionals must now function as monetization professionals and manage the 360-degree monetization spectrum. It explains why some companies have already moved away from pricing titles and embraced new monetization titles (Microsoft is a good example of that).
A focus on 360⁰ monetization means the management of the entire workflow chain, which is extremely critical in usage-based pricing and billing. Monetization experts are accountable for each of the four buckets and must interact with the relevant stakeholders to ensure proper design, quoting, billing, and predicting of their revenue models. Of course, pricing remains a big part of the role.
- Price modeling: designing proper usage-based pricing model requires the understanding of value and pricing metrics and the agility to design multi-metric models to focus on monetization optimization. Usage-based pricing requires a deep understanding of the customer operations and what metrics drive their revenue streams. These in turn become the metrics used to align with the customer value metrics. Alignment in the design of pricing models is essential. You grow when the customer grows!
- Contracting: the monetization team must also leverage technology to manage multi-year usage contracts with potential upgrades, upsells, and changes in metrics during the contract duration. That technology must be able to manage these changes without having to scratch original contracts and/or generate lots of manual calculations.
- Billing: complex pricing also means complex billing based on accurate data extraction from the various sources of usage. Traditionally billing has fallen solely under finance. Monetization experts must work together with finance experts to avoid any billing issues. Pricing and billing are joined at the hip in monetization strategies.
- Analysis: finally, usage-based models require the capability to simulate future usage patterns and trends to create P&L projections but also to give visibility to customers under various scenarios. Predictability is often listed as a barrier to the adoption of usage-based business models. With the right skills and tools, that barrier goes away.
Let us not forget that customer success teams play a critical role in monetization. They collaborate with the monetization team and must be highly attuned to usage patterns and the activities of the customer success team to ensure forecasts and full customer potential are being achieved.
Finally, fully monetizing usage-based business models requires elevated levels of data intelligence and advanced data management capabilities to feed the billing engine. That is a must-have to be able to enable 360⁰ monetization and avoid unnecessary manual activities and delays in invoicing. At the end of the day, billing and collecting cash quickly is the name of the game. Without the right monetization engine, usage-based pricing is difficult to execute. The combination of adequate technology empowered by monetization professionals will be the key to success of usage-based business models.
The Power of Monetization is in the Data
As monetization is gaining in popularity, we see unambiguous evidence that some sectors have strongly benefited from it. Over the past ten years though, we have witnessed the emergence of new monetization concepts, new revenue models to increase monetization power in the social media, gaming, and advertising sectors, and a new monetization function that some tech companies have embraced. So, monetization is for sure a growing and hot topic!
Making a commitment to monetize better, investing in monetization professionals, and having a robust monetization strategy is not enough. The efforts might be stopped or slowed down or constrained by outdated and heavy IT systems. In fact, we often hear that billing, ERP systems, and traditional price management software solutions can become a true limitation to sustained growth and lead to revenue leakage and poor customer experience. The combination of great professionals with the proper technology is the ideal response to leveraging a powerful monetization engine.
At the heart of advanced monetization strategies is the ability to find sources of data and connect all the relevant monetization data to bill customers. Creating new sources of monetization can only create new flows of data coming from product and service usage, transactional data, software data, or customer behavior data. This is where most companies’ efforts fail. They have great monetization ambitions but lack the infrastructure and brain power to be able to properly translate the data into monetization opportunities. So, data, combined with the proper ERP, CRM, customer data platform, and billing system, becomes the monetization secret sauce. The reason for this is that you must be able to track, connect, convert, and enrich data so that you can bill properly. Without a bill being sent to customers, there is no monetization. And that bill must be accurate to avoid having to issue credit notes and spend hours reconciling information with upset customers.
Monetization is a mindset that includes various dimensions (product, services, data), workflows (pricing, billing, RevOps), and processes (product development, quote to cash). Every company will have a different definition and scope based on its industry and culture. Monetization is more relevant as companies position themselves for the next ten years. Our definition of monetization integrates a strong data component as the only enabler that can lead to monetization success. The good news again is that pricing teams have strong data management and analytical skills. They are in the best position to manage the data challenge. From our perspective, we propose modifying the definition of the word monetization. It would read: “Monetizing refers to the process of turning the data generated by non-revenue-generating and revenue-generating items into cash. In many cases, monetization looks to novel methods of capturing and mediating data that created income from new sources.” In the end, it is all about data leading to billing and in turn leading to getting paid.