What is software monetization, and 9 ways to do it

For any startup on the rise, creating an outstanding solution is just the beginning: 

The real challenge comes when you’re trying to turn your growing waitlist or design partners into paying customers.

Despite your best-laid plans and projections, getting to that stage can be more complex and demanding than you initially anticipated. 

That’s why choosing the right software monetization strategy is an absolute must. 

But worry not, we’ve got you covered.

In this primer, we’ll go over:

• What is software monetization?
• Things to consider when choosing monetization models
• Pros and cons, and some examples of popular software monetization models
• Tips for implementing and optimizing monetization
• How to start your software monetization journey 

Let’s jump right into it. 

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What is software monetization?

Software monetization isn't just about making money from your software — it's about getting smart with how you do it. Think of it as matching what your software can do with what people are willing to pay. Here’s what software monetization entails:

• It's not just about the price on it. We're talking about iterating and fine-tuning pricing models. You might go with a subscription model to optimize for steady cash flow, or maybe a freemium model where the basics are free, and the extras cost a bit. 
• There’s the when and how of payments. Monthly fees, annual subscriptions, or pay-as-you-go models can make your solution appealing to different types of users.
• It can make your software more appealing to certain users. Since there are so many monetization strategies to choose from, you’ll always find one (or more) that resonates with your solution’s core audience. 

This is a great time to explain the key difference between pricing and monetization:

• Pricing is about setting a cost for your software. It's the tag you put on what you're selling. This involves figuring out how much customers are willing to pay and setting a price that matches the value they perceive.
• Monetization is the bigger picture. It’s all about how you make money from your product. It encompasses not just the pricing strategy but also the various revenue models and methods a company employs to generate income. 

Things to consider when choosing monetization models

There’s more to monetization than just understanding your target customers and the type of software you’re trying to monetize. If you want to choose a monetization model that truly scales and supports your business, you’ll want to: 

• Understand market trends: The digital landscape is always changing. Monetization strategies that work in one type of market may flounder in others.
  
  For example, subscription models thrive in areas like SaaS, where ongoing updates are expected. However, in markets where users prefer one-off buys, like specific software tools, this approach might not fly. 

• Keep your customer base norms in mind: B2B clients may appreciate subscription models that offer in-depth analytics, whereas B2C audiences might lean towards simple, cost-effective freemium models. Understanding these preferences is paramount. 

• Protect your intellectual property (IP): Your software's uniqueness is the foundation of its value. Safeguarding this through copyright, trademarks, and NDAs isn't just about legal security — it influences which monetization strategies are viable for you.
  
  For instance, having legal protection for your software's unique features or technology can enable you to license it, opening up revenue streams like licensing fees or royalties.

• Leverage customer feedback. Customers spend the most time applying your solution to different use cases. Listening to their feedback can give you insights into how they derive value from your solution, helping you choose the right monetization model.

• Adjust your monetization as needed: Always track your revenue closely. If growth stalls, be ready to shift strategies without fear. Taking this proactive approach will help you maximize ROI and keep your numbers out of the red if things go south. 

• Consider pricing changes: Pricing is the cornerstone of your monetization strategy. It will determine which new customers choose your software and which ones renew their trust in your business by sticking with your solution for the long haul. 
  
  So, understanding how and when you need to adjust pricing will help you choose a model that works for your type of solution.

• Ensure your monetization strategy covers your costs: This is crucial if your software relies on heavy computing power, AI tokens, or API calls. The last thing you want is to end up losing money just to keep your solution up and running. 

Software monetization models

#1 Perpetual (pay once / lifetime deal)

This monetization model involves a one-time payment that grants users perpetual access to your solution. It's especially appealing for software that requires minimal updates or users who prefer to avoid making a big investment upfront. 

Pros

• Simplifies the sales process with a one-time payment
• Eliminates the need for users to worry about future costs
• Attracts customers looking for a clear, long-term solution
• Strong value-to-cost ratio, making it easier to attract customers

Cons

• No recurring revenue, which makes it hard to build a long-term, sustainable business
• Challenges in funding continuous development and support
• Potentially reduces customer retention over time without regular updates
• Less flexibility in adapting pricing, as it locks providers into a rate that can't easily shift with market or consumer changes.

Example

Affinity Designer by Serif, a photo editing and design software, provides a perpetual license, allowing a one-time payment for lifetime access. This model appeals to those avoiding recurring fees, offering a cost-effective solution with full features and updates out of the box. 

#2 Subscription-based

Subscription models charge a regular fee for access to software, often varying by tiers to offer different feature sets. This model is prevalent among modern SaaS tools, providing a predictable revenue stream while accommodating ongoing development and support.

Pros

• Offers a consistent revenue stream, making it easy to forecast revenue
• Funds continuous product improvement and customer support
• Allows for easy scaling of services and features to meet user demands by regularly updating and tailoring service packages.
• Provides flexible pricing tiers to accommodate the needs of different users

Cons

• The necessity of continuously adding value to prevent subscriber churn
• Finding a pricing level that attracts subscribers while ensuring profitability can be difficult
• Can get overly complicated with too many tiers or options

Example

In 2011, Adobe Creative Cloud switched to subscription plans from perpetual licenses, enabling regular updates and tiered options for various users, ensuring access to the latest features across its software suite.

#3 Usage-based (pay-as-you-go)

With usage-based pricing, costs are directly linked to the user's consumption of resources or features. This model offers unparalleled flexibility, making it ideal for services with significantly fluctuating user demand. 

Pros

• Easily adjusts to user consumption, providing a pricing strategy that's fair for everyone.
• Easier to attract price-sensitive customers who want to avoid high upfront costs
• Encourages efficient resource allocation, reducing costs and attracting price-conscious customers
• Allows businesses to capture value from their highest-usage customers

Cons

• Monthly costs can be unpredictable for both users and providers, which makes it hard to budget ahead of time
• Complicated billing means higher administrative overhead to bill customers properly
• Risk of damaging customer trust if usage calculations are perceived as unclear
• Challenges in forecasting revenue due to variability in user consumption patterns

Example

Amazon Web Services (AWS) offers a usage-based pricing model, charging customers only for the specific cloud resources they consume. This approach allows businesses of all sizes to scale services according to demand and minimize upfront costs.

#4 Per seat/user

Pricing in this model is based on the number of individual users or "seats" that have access to the software. It is commonly used in B2B and enterprise software solutions. It offers straightforward scalability, with costs that match the size of the user base.

Pros

• Clear and predictable pricing structure for both providers and customers
• Scalability, with costs naturally adjusting to the customer's size and usage level
• Encourages adoption within organizations as the value is perceived per user
• Maximizes revenue from unused seats, turning potential underutilization into a financial advantage

Cons

• Might not match the price to the value each user gets, causing some to feel the pricing is unfair
• Potentially less user adoption due to cost concerns
• Users may share a seat, even if against your ToS, leading to less revenue than expected

Example

Slack employs a per-user pricing strategy, billing companies based on active users, which scales with business growth. This model supports Slack’s widespread adoption by offering scalable features and integrations, allowing companies to pay only for the seats they need.

#5 Prepaid

In the prepaid model, users pay upfront for a specified amount of usage or credits, which are depleted as the service is used. This approach secures revenue in advance and reduces the risk of non-payment, appealing to users who prefer to control their spending closely.

Pros

• Secures immediate revenue, improving the provider's financial stability
• Allows users to control their spending and avoid unexpected charges
• Can encourage trial and adoption by lowering the initial commitment required
• Reduces financial risk associated with non-payment or delinquent accounts

Cons

• Users may find it difficult to accurately predict their needs, leading to overbuying or underutilization
• Potential for customer dissatisfaction if unused credits expire or cannot be refunded
• Requires a means for users to monitor their credit balance
• Limits the potential for upselling or cross-selling compared to more flexible models

Example

Skype provides prepaid credits for international calls and SMS, appealing to users with its no-subscription solution. Customers can top up their balance as needed, allowing Skype to gain immediate revenue and giving users the option of paying only for the credits they plan to use. 

#6 Freemium

The freemium model offers core services for free while charging for premium features or upgrades. This approach introduces users to the software's capabilities and sets the stage for a more profitable monetization strategy in the future. 

Pros

• Rapidly builds a user base by offering free access to core features
• Creates opportunities for upselling and cross-selling premium services
• Lowers the entry barrier, encouraging trial and exploration by new users
• Can generate significant word-of-mouth and viral marketing effects

Cons

• Converting free users to paying customers can be challenging and require significant marketing efforts
• Risk of devaluing the perceived worth of the software by offering too much for free
• Balancing the feature set between free and premium versions can be difficult
• Potential for revenue concentration in a small percentage of users, increasing financial vulnerability

Example

Spotify's freemium model combines a free, ad-supported version with premium subscriptions, attracting users and incentivizing upgrades for features like ad-free listening and offline playback. 

Its success stems from smoothly transitioning users from free to paid, building loyalty, and justifying the premium cost with added value.

#7 In-app purchases

This model allows users to buy additional features, content, or services directly within the software. It's highly effective in mobile apps and games.

Pros

• Offers a personalized user experience with optional enhancements
• Encourages ongoing engagement and investment in the software
• Generates additional revenue from within the app
• Allows for flexible monetization strategies targeting different user segments

Cons

• Risk of alienating users if essential features are locked behind purchases
• Management of in-app inventory and pricing can be resource-intensive 
• Potential backlash from users against perceived "nickel-and-diming", especially in the B2C space
• Ensuring a balance between free and paid content requires careful planning

Example

Many mobile games, like Clash of Clans, thrive on in-app purchases, relying on monetization software to offer users the ability to buy gems, coins, or other currency that can be used to accelerate progress, purchase items, or unlock new levels. 

This model capitalizes on user engagement, encouraging players to invest in their gaming experience while providing Supercell with a steady revenue stream.

#8 In-app ads

In-app advertising generates revenue by displaying ads within the software. Just like in-app purchases, this model is particularly common in mobile apps and games. 

Pros

• Enables monetization of free apps, expanding potential user base
• Diversifies revenue streams without requiring direct payments from users
• Can be tailored to user interests, increasing engagement and potential click-through rates
• Offers advertisers targeted access to specific demographics

Cons

• May interrupt or degrade the user experience if not integrated thoughtfully
• Maintaining user engagement while managing ad frequency can be challenging
• Dependence on ad revenue may fluctuate with market rates and advertiser demand
• Potential privacy concerns over user data used to target ads

Example

The Weather Channel app incorporates in-app advertising, displaying weather-related products, local services, and other contextually relevant ads to its users. 

With this strategy, the app remains free for users while generating revenue from advertisers looking to reach a broad, engaged audience.

#9 Affiliate marketing

Affiliate marketing within software involves promoting third-party products or services and earning commissions for referrals or sales. It's a supplementary revenue model that can complement primary monetization strategies.

Pros

• Creates an extra revenue stream with minimal impact on the core user experience
• Can enhance perceived user value by offering relevant products or services
• Relatively low risk as it doesn't require significant investment or changes to the software
• Strengthens partnerships and cross-promotional opportunities with affiliates

Cons

• Success heavily depends on the relevance and quality of the affiliate offerings
• Over-promotion can lead to user trust issues or a perception of the software as “overly salesy” 
• Requires careful management and transparency to maintain user trust and compliance with regulations

Example

Blogging platforms allowing creators to use Amazon affiliate links illustrate this model effectively. Creators earn by recommending valuable products to their audience and gaining commissions. 

The great thing about this strategy is that it benefits the platform by enabling content monetization and Amazon by boosting sales through trusted recommendations.

9 tips for implementing and optimizing monetization

Successfully monetizing software requires more than just choosing the right model. Here are nine tips for smooth implementation and optimization:

• Integrate monetization early: This way, adding paid features is smoother and speeds up earning from the get-go.

• Personalize offers: Use what you know about users' likes and actions to shape your deals. When they see something that fits just right, they are more likely to buy.

• Simplify payment processes: A frictionless transaction experience can significantly boost conversion rates for paid features or subscriptions.

• Use A/B testing: Conduct these tests on different aspects of your monetization strategy, including pricing, offers, and the presentation of paid features. This will help you identify what resonates best with your customer base.

• Monitor the competitive landscape: Keep an eye on how competitors monetize their software and respond to market changes. This can reveal opportunities to differentiate your offer or adjust your strategy to better meet customer expectations.

• Prioritize value-based pricing: Customers are more willing to pay if they believe the price accurately reflects the utility and benefits they receive. Identify and understand what your customers value most so your pricing aligns with it. 

• Offer multiple payment options: Provide various payment methods and currencies to cater to global audiences. Expanding payment options can open up new markets and reduce barriers for potential customers.

• Keep users in the loop: Regularly inform your users about the benefits of premium features or services. Education can be a powerful tool in moving users along the conversion path, which introduces opportunities for upselling. 

• Monitor and adapt to regulatory changes: Stay informed about regulatory changes that could impact your monetization strategy, especially for global operations. Compliance not only protects your business but also builds trust with your users.

Software monetization FAQs

What is the monetization strategy of SaaS?

SaaS typically uses a subscription-based model, charging customers regularly for access to the software.

How do you monetize an app?

To monetize an app, you can use subscription models, in-app purchases, advertisements, or a freemium version. Selecting the right strategy hinges on your app's audience and functionality.

What is the difference between monetization and commercialization?

Monetization refers specifically to generating revenue from a product or service, while commercialization encompasses the broader process of bringing a product to market, including production, distribution, marketing, and sales.

How do people monetize free apps?

Free apps are monetized by displaying ads, introducing in-app purchases for additional features, and offering premium subscription options.

What's the best software monetization model?

The best software monetization model depends on your product and target audience. Subscription models work well for ongoing services, while in-app purchases and ads suit free apps. Perpetual licenses appeal to users preferring one-time payments. 

Next steps

Now you know all about software monetization and the different models you can implement according to your specific software capabilities. 

But this is just the beginning of your journey. 

One of the first hurdles you might encounter is streamlining your billing process. Thankfully, there’s a reliable and flexible billing platform that can do it for you and go beyond what regular monetization software solutions can do. 

Enter: Orb.
Orb offers a comprehensive suite of tools designed to transform usage data into revenue. Here's how Orb supports your software monetization strategy:

• Detailed usage tracking: Orb meticulously records every user interaction as billable events, essential for accurately monetizing based on customer usage patterns.
• Adaptable pricing configurations: It effortlessly accommodates a variety of pricing strategies — from straightforward subscriptions to complex usage-based or hybrid models — enabling businesses to quickly adapt to evolving customer needs.
• Precision in invoicing: Orb shines in generating crystal-clear invoices, capable of handling even the minutest billing details, such as fractional charges. 
• Streamlined reporting with easy integrations: The platform simplifies financial oversight by integrating with key CRM and accounting systems, automating the reporting process and freeing up valuable resources for other tasks.
• Tailored billing systems: With tools like a Plan Builder and a custom SQL editor, Orb allows businesses to customize their billing systems to fit specific requirements, offering the flexibility to create tailor-made monetization strategies.
• Optimized for developers: Engineered with a focus on the developer experience, Orb ensures that technical teams can integrate and manage the billing system with ease, minimizing the time and resources typically required for such tasks.

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Learn more about how Orb can solve all your billing needs.