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Digital Monetization Models

Pay as you wish: Digital Monetization Models

Autor*innen: Yuanyuan Xiao, Angelo Cioffari

In the Digital Age, it is already quite difficult to attract people's attention especially to new launched product or service due to information overload, but convincing them to really pay for it is much more challenging. Because today, People are no longer willing to buy products or services, but buy benefits or the "reasons" behind them, i.e. as they wish. Understanding this logic and philosophy is essential for creating a business model and choosing the appropriate digital monetization models. The question is: "How to turn content into profit?"
As one of the top IT consulting companies in Germany, we are often asked by our customers to provide them with advice on suitable digital monetization solutions. Therefore below is an introduction to some of the most popular digital monetization models at present.

1.Free for scaling up and monetization afterwards
This model has been popular for a long time. In the initial phase of a product/service, it is released for free to promote it and increase its popularity so that users can get compelling value from it. The main purpose of this phase is to attract and accumulate users and cultivate user stickiness, not to monetize users (and usually startups in this phase often attract investment to support their operational costs). Once the number of users reaches a certain level, they are divided into different segments and the corresponding monetization strategy is implemented through different models, such as free basic version + paid advanced version, free training materials/courses + paid customized service like consulting, etc.

2. Freemium model
Similar to, but also different from the free model is the freemium model. This model refers to the provision of options to users for both free and paid offerings for value-added services. It emphasizes that both free and paid offerings are available throughout the business life cycle, unlike the free model mentioned earlier, which focuses on the conversion from free to paid at a later stage. This is because in this model, the free version forms the basis to secure and strengthen the brand and reputation of the company, especially the high viral growth. The most dramatic example is that of Spotify, which offers music and podcasts with advertising and limited control in the free version, while services for additional features, such as offline listening and ad-free listening, are chargeable.

3. Open source model
From the definition and development history of open source software, open source is both a development model and a marketing strategy. This is because from a software development perspective, respecting the developer’s gospel and building a community is key to the acceptance of open source technology. While from a market demand perspective, this allows products to be promoted and distributed quickly and makes it possible to understand buyers and influence them further. The most famous and successful case in this regard is undoubtedly Red Hat (which was acquired by IBM in 2018). As technology has evolved, this model has also changed from the initial model of free software and paid services to the following two currently common models:

  • Open-core model. This means that a powerful core product is free or open source, but proprietary software is provided around this core product that enhances or extends its functions. These add-ons are sold as commercial software, usually bundled with support and services.
  • Cloud-based customer solutions. With the popularization of cloud technology, many open source companies are adopting the SaaS model and offering cloud hosting services for proprietary software components.

Thanks to cloud technology, it is possible to closely monitor information about customer frequency, so the subscription model has become popular.

4. VIP membership subscriptions
Subscriptions have become increasingly popular in recent years in various industries and sectors, such as software, game, E-commerce, video, music, food etc. It seems we are in an age of subscription economy. According to one statistic, from January 1, 2012, to June 30, 2019, subscription business revenues grew about five times faster than S&P 500 company revenues (18.2% vs. 3.6%) and U.S. retail sales (18.2% vs. 3.7%). One of the main reasons this model is favored by companies is that it can generate a relatively continuous and predictable revenue stream. There are two common formats under this model, one is direct subscriptions to the platform or subscriptions to a specific creator. Although they have different risk-reward sales models, they share a common basis – a loyal user base.

5. On-demand by digital platform
The rise of digital platforms can be considered the most important business event in the 21st century. They enable the connection between people and people, people and things, things and things, services and services with unprecedented power, bringing convenience to our daily lives and efficiency to businesses. From the pioneers of the platform model, such as Uber and Airbnb, to the various types of emerging platforms, such as TikTok, this model is changing our consumer behavior and leading society in the direction of intelligence.

6. Digital advertising model
Unlike traditional advertising channels, digital advertising generates a huge amount of data, e.g. information such as demographics, interests, interaction with ads etc. can be made visible and further used for targeted campaigns. Therefore, digital advertising is becoming more and more important, and due to the ongoing trend towards mobile apps, the future development of digital advertising will continuously be characterized by a shift from desktop to mobile. Today, most websites are advertised and even flooded in some way. However, with the rise of the internet celebrity economy in recent years, advertising revenue contributes to the main income of these influencers.

7. Other emerging digital monetization models
In addition to the digital monetization models mentioned above, there are several other emerging models, such as digital goods, which are particularly prevalent in the gaming industry, tipping during livestreams with virtual digital gifts that can be converted into cash, etc. In China, the livestream tipping market is increasingly expanding, and tipping revenues of RMB 100,000 ($16,000) per month are considered normal for top livestreamers (Jing Daily, April 2018).
Each of the above models has its own characteristics. While in practice it is often necessary to combine them. In our view, finding your suitable digital monetization model requires not only practical experience, but above all customer feedback and a good understanding and vision of the markets.