Monetization Strategy

Question 1

What is growth monetization?

Answer 1

Growth Monetization refers to the strategies and tactics for acquiring leverage by causing the trajectory of revenues and profits to inflect upwards.

Question 2

Monetization

Answer 2

Monetization refers to how a business earns its revenues

Question 3

FIVE Goals

Answer 3

1. Pay cost of transaction
2. Afford customer acquisition
3. Grow profitably by reducing payback period
4. Grow competitively by outbidding while acquiring more customers
5. Grow faster by offsetting churn

Question 4

Revenue

Answer 4

Revenue is the income from the sale of goods and services to customers.

Question 5

Recurring Revenue

Answer 5

Recurring revenue is the part of a company’s income that they expect to earn on a regular basis into the future.
Recurring revenue provides a predictable stream of cash flow to the business. For subscription-based businesses (e.g SaaS), the primary focus of a monetization strategy is on the recurring components of revenue.

Question 6

Cost of Goods Sold (CoGS)

Answer 6

Also known as the Cost of Transaction, these costs are expenses incurred in the sale of a single unit of the product or service.

Question 7

Cross Profit

Answer 7

Revenue - CoGS

Question 8

Gross Margin

Answer 8

Gross profit expressed as a percentage of Revenue

Question 9

What is a strong monetization strategy?

Answer 9

All expenses within a transaction are not part of CoGS. Only those incurred because of the transaction taking place are part of CoGS.

Question 10

Goal 1: Pay cost of transaction

Answer 10

Revenue more than COGS or at the very least equal to COGS

A strong monetization strategy aims to increase gross margins and provide capital for growth.

Gross margins can improve either by increasing revenue per unit or lowering CoGS

Question 11

Cost per Acquisition CpA

Answer 11

CpA is the cost of acquiring a lead. It is also known as the Cost per Lead (CpL).

A lead is a prospective customer who may either be a non-paying user of the product or has expressed intent to use the product as part of some marketing campaign by the company. CpA, or CpL, includes costs associated with all stages of the journey right up to becoming a lead. It excludes costs incurred by the business after becoming a lead up to becoming a paid customer. That component is included in the next cost - CAC.

Question 12

Customer Acquisition Cost CAC

Answer 12

CAC is the cost of acquiring a paying customer. It includes costs associated with all stages of the journey right up to paid conversion.

Question 13

Why should you track CpA and CAC separately?

Answer 13

It is important to track CpA and CAC separately because failure to convert leads and non-paying users into paying customers can inhibit the growth of the business.

Question 14

Operating Expenses

Answer 14

Operating expenses include the cost of customer acquisition and the cost of supporting paid customers. Customer acquisition costs also include the cost of supporting leads, aka free users that eventually become paid customers.

Operating Expense = CpA + Cost of Supporting Leads + Cost of Supporting Paid Customers

Question 15

Operating profit

Answer 15

Operating profit is the profit remaining after subtracting operating expenses from gross profit.

Operating Profit = Gross Profit - CAC

Question 16

Operating margin

Answer 16

Is operating profit expressed as a percentage of top line revenue. It is another good measure of a company’s efficiency in delivering products and services.

Operating Margin % = Operating Profit / Revenue

Put another way, if the operating margin is 10% then for every $1 in sales there will be $0.10 in earnings after paying for the cost of transaction (CoGS) and customer acquisition (CAC).

Question 17

Goal 2: Afford customer Acquisition

Answer 17

A strong monetization strategy increases operating margins and fuels growth.

Operating margins can be improved either by increasing revenue per unit or lowering CAC.

CAC contains expenses associated with all stages of the journey right up to paid conversion.

Expenses associated with the stages leading up to becoming a user or a lead are referred to as CpA.

Question 18

Field-of-Dreams marketing

Answer 18

If I build it, they will come!

Question 19

Small business failure rates

Answer 19

30 percent of all new businesses fail within two years and 50 percent fail within five years.

Question 20

Primary reason for High failure rates of small businesses

Answer 20

the primary cause is usually a misunderstanding of marketing and a failure to budget the necessary marketing dollars.

Question 21

Payback Period

Answer 21

This is the amount of time it takes for the profits to pay back the cost of acquiring customers.

Payback period = Customer Acquisition Cost / Gross Profit

Individual customer: divide a customer’s CAC by the total revenue they contribute in one year (their monthly subscription rate multiplied by 12).

The cost of acquiring each customer is an investment over a time horizon that should first break even by profits earned and then create positive cash flows going forward.

Question 22

Why should you not deploy capital before the Payback period has elapsed

Answer 22

Prematurely deploying capital before the payback period has elapsed will force borrowing against future cash flows and significantly compound losses after a few cycles.

Question 23

Why do you think the formula for Payback Period is based on Gross Profit instead of Operating Profit?

Answer 23

“Gross Profit helps pay for CAC, whereas Operating Profit is generated after CAC has been paid.”

Question 24

Goal 3: Grow Profitably by reducing payback period

Answer 24

A shorter payback period provides capital for growth sooner and avoids borrowing against future cash flows → profitable growth.

either increase revenue or decrease CAC

Question 25

CAC ratio

Answer 25

The amount of CAC spend recuperated within a one year period

Question 26

What can Payback period tell us about customers?

Answer 26

Identifies which customers or products we should focus on (those with a shorter payback period)

Question 27

Why is Payback period important?

Answer 27

Payback period shows you the efficiency of your acquisition strategies. The shorter your payback period, the more financially efficient your acquisition methods. You need to understand acquisition efficiency to understand how acquiring different types of customers affects your finances and how sustainable your current strategies are in the long term. Keeping a consistently growing cash inflow should be your target from the start: the more accurate your payback method is, the quicker you’ll have money to start reinvesting.

Longer-than-ideal payback periods will tell you that you need to make improvements in the areas that affect payback period.

Question 28

What are the factors that determines the length of the payback period?

Answer 28

Customer acquisition costs: Subscription-based companies assume the risk of paying CAC upfront and replenishing that spend as the customer pays ratably over time. The greater the upfront CAC, the longer it will take to pay it back bit by bit over time.

Customer monetization: The size of the increments in which customers pay back their CAC each month (or each year) depends on how you monetize your customers. You may charge them one flat rate, create individualized plans, or scale their pricing according to usage on a value metric. The payment plans that you create for your customers influences the length of the payback period.

Question 29

What is the average SaaS payback period?

Answer 29

SaaS startups average a 5-12 month CAC payback period. Efficient companies are closer to 5 months (or less), while companies lower-performing companies are closer to the 12 month timeframe for payback.

Question 30

Life time value LTV

Answer 30

lifetime value or LTV, is the cumulative profits generated by a customer over their lifetime, net of expenses such as CoGS and CAC.

Question 31

LTV:CAC Ratio

Answer 31

The ratio of LTV to CAC informs the ease with which a company can acquire customers while remaining profitable.

If the ratio is 1:1, it is impossible to be profitable – you have barely broken even.

If the ratio is slightly better than 1:1, it is hard to be profitable especially as you grow.

For SaaS businesses, a ratio of 3:1 is generally recommended.

Question 32

Goal 4: Grow competitively by outbidding while acquiring more customers

Answer 32

Improving CAC:LTV ratio allows a company to dominate the customer acquisition channels

• By increasing the market-wide CAC of paid marketing channels by raising their own bids (pushing competitors out of the channel)
• Explore expensive new channels that competitors avoid due to cost

Question 33

Contraction Revenue

Answer 33

Contraction Revenue
This is also referred to as dollar churn. It is the revenue lost due to existing paying customers reducing their spend e.g downgrade plan, downgrade term, removing recurring add-ons.

Contraction Revenue (T) = Amount of revenue lost due to paying customers in period T-1 reducing their spend in period T

For businesses that earn recurring revenue (e.g SaaS, subscription-based products), only the removal of a recurring add-on is used to calculate recurring contraction revenue. Add-ons that are not charged on a recurring basis do not get counted while calculating recurring contraction revenue.

Question 34

Customer Churn

Answer 34

Customer churn, or more commonly churn, is the rate at which paying customers cancel their subscriptions.

Customer Churn (T) = Number of paying customers in period T-1 that cancel their subscription in period T / Number of paying customers at the end of period T-1

Customer churn is often used to assess historical performance. It is also used as a probability rate when forecasting future revenue and growth projections.

Churn is inevitable for every product but beyond a certain threshold it can kill the company. This warrants a monetization strategy to offset churn.

Question 35

Active User Churn

Answer 35

A similar concept is active user churn which is based on some important in-product action. It is defined as the rate at which active users stop performing the key activity.

Active User Churn (T) = Number of active users in period T-1 that are not active in period T / Number of active users at the end of period T-1

Active users can be defined for both paying and non-paying customers. For example, if an employee does not use a piece of collaboration software purchased by their company but the company continues to pay for it, then the customer (i.e company) has not churned but the employee has churned, month-over-month.

Question 36

Expansion Revenue

Answer 36

Expansion revenue is the revenue gained due to existing paying customers increasing their spend - e.g, upgrade plan, upgrade term, purchase recurring add-ons.

Expansion Revenue (T) = Amount of revenue gained due to paying customers in period T-1 increasing their spend in period T

For businesses that earn recurring revenue (e.g SaaS, subscription products), only the addition of a recurring add-on is considered when calculating recurring expansion revenue. Add-ons that are not charged on a recurring basis do not get counted while calculating recurring expansion revenue.

Question 37

Net Dollar Retention NDR

Answer 37

NDR is the percentage of revenue retained from existing customers after accounting for customer churn, contraction and expansion.

NDR (T) = (Revenue (T-1) + Expansion Revenue (T) - Contraction Revenue (T) - Revenue lost due to Customer Churn (T)) / Revenue (T-1)

Question 38

Interpreting NDR

Answer 38

An NDR of 1.0 or 100% implies that all revenue lost to churn and contraction is made up for by expansion of existing customers’ accounts. At that point, all revenue from new customers is growth for the business.

An NDR > 1.0 accelerates the growth rate, essentially exponential growth.

An NDR < 1.0 slows down the growth rate leading to a tapering growth curve

Question 39

Goal 5: Grow faster by offsetting churn

Answer 39

Churn is inevitable and starts registering immediately. If not harnessed it can become the number 1 killer of a company.

An effective strategy for containing revenue churn is increasing expansion revenue from existing customers.

They grow → You grow. The SaaS model of software delivery is rooted in the idea of customers paying for what they use. Over time a successful SaaS company’s growth depends more on existing customers than new customers. As customers derive more value, the business’ revenues grow.

Question 40

FIVE basic monetization Moves

Answer 40

PACER

Profit: Improve LTV of existing customer base to reinvest in growth

Adopt/Acquire: Acquire new customers

Collect: Charge price commensurate with value delivered

Expand: Earn more revenue from existing customers

Retain: Prevent existing customers from churning

Question 41

FIVE Building Blocks of a Monetization Strategy

Answer 41

1. Buyer targeting
2. Path to purchase
3. Premium value
4. Segments and clusters
5. Pricing

Different segments of buyers follow a path towards acquiring something of value for a certain price.

Question 42

FIVE Scorecards of Monetization

Answer 42

1. Acquisition
2. Unit Economics
3. Customer Accounting
4. Revenue Accounting
5. Growth Ratios

Question 43

Acquisition Model

Answer 43

This model tracks the acquisition of users, prospects, and leads starting from off-product sales and marketing activity all the way to their conversion to paid customer.

Question 44

Unit Economics Model

Answer 44

This model calculates the costs and value of acquired customers.

Question 45

Customer Accounting Model

Answer 45

This model tracks the inflow and outflow of paying customers.

Question 46

Revenue Accounting

Answer 46

This model tracks the inflow and outflow of revenue.