Software Monetization and Two Sided Markets

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Steve Blank is the entrepreneur’s entrepreneur and has a very useful blog. One of his posts contained a video that used Google as a case study of a “two-sided” market with two different segments: users and payers (advertisers). The post used this example as a way to demonstrate the power of the Business Model Canvas, a very powerful technique for putting together your business model.

There are lots of examples of two-sided markets besides Google…In fact, any business whose success requires bringing two sets of people together to complete a transaction are two-sided markets. Any marketplace is a two-sided market eBay (merchandise), Etsy (crafts), Kickstarter (crowdfunding). So is any ad-supported venture – ranging from digital media to mobile apps.

Two Sided Market Lessons Learned

Here are some lessons from two-sided markets as they relate to software monetization…
Freemium works well if you have enough capital to fund operations until you’ve built a sufficient number of paying users.
  • Critical mass of core users is essential. If you want to monetize core users as in the traditional freemium model, first you need to focus on acquiring them and then you need a series of products that will attract some of the core users to upgrade. Having enough core users is also required to attract other segments that may lie outside your core user group.
  • Stabilize your core market. If you want to monetize multiple segments, you’d better have a stable base of core users before trying to serve new types of customers. Try constructing a product offering that can give you an indication of whether you can diversify your base of customers. The Executive Plan in LinkedIn seems clearly aimed at people who are searching for talent or prospecting. Its success would indicate the need for an offering specific to the needs of recruiters.
  • Be financially prepared. In general, outside funding is required when there is a delay between paying for something you need done (e.g. development) and getting paid for the results of the effort. Freemium works well if you have enough capital to fund operations until you’ve built a sufficient number of paying users. A print-media-like deal may require even more capital as you build a mass of one type of user (e.g. subscribers) to attract another type of users (e.g. advertisers, sponsors) either or both of whom may be paying customers.
About the Author

Jim Geisman

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Jim is the founder of Software Pricing Partners. The firm was started in 1982 and, since 1987, has focused solely on software pricing. Jim has helped emerging and established software companies solve some of their toughest pricing problems. He also helps SaaS companies price, structure and negotiate “the big deals”.

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