Monetization Law Number #8

How you charge is often more important than what you charge. Your choice of value metric is important

Choose a value metric that grows with your customer’s success.

Choosing the right metric for value pricing is important in order to maximise monetization.

This chapter is about value metrics and their role in supercharging your expansion monetization revenue.

The Rule provides a quick monetization heuristic i.e. a rule of thumb in operation, a kind of —do this— and you’ll be 80% of the way there.

Rationale explains why the rule works with deeper insights and its use in practice.

Rabbit hole provides more in-depth resources and recommendations for anyone wanting to spend more hours researching each topic.

⓵ Rule 📖

⓶ Rationale 🧠

⓷ Rabbit Hole 🐇

⓵ Rule: Monetization Law #8 📖

Choosing the right metric for value pricing is important in order to maximise monetization.

⓶ Rationale: Monetization Law #8 🧠

Value alignment; Which metric?

10X monetization

Successful value metrics have the ability to grow your monetization exponentially - one of the key tactics in the growth of service-based SaaS revenues.

The importance of choosing the right metric

The choice of metric is crucial to successful monetization. The equilibrium concept explains why.

The value metric should be the metric that best scales your monetization in line with your customer's success.

Both upsides should be in equilibrium, in that, if they scale, they use more of your product and pay more, but if they don't, the price paid represents a fair exchange.

How to choose a value metric

The core principles of choosing a metric require that it should;

1. Be easy to understand - achieved by the 3P's of marketing - Positioning, Packaging, and Pricing.
   
   The Positioning should align your product to the relevant buyer persona and segments that you're targeting.
   
   The Packaging is the bundle of feature sets headlined by your differentiable USP feature that drives adoption.
   
   And Pricing represents the optimal price of the value metric within each positioning package.

2. Align with your customer’s needs - this can be achieved by fully understanding what the customer values. It sounds like a circular argument so let’s split it into two questions;
   
   firstly, what does the customer use as a metric for their revenue growth i.e., what would they comment on in their financial results? Is it monthly active users, number of email contacts, number of flights/passengers/cargo weight?
   
   Secondly, what activity drives this growth, is it the number of contacts, flying time, on-road minutes/hours?
   

3. Grow with your customer - monetization - in a value pricing construct - has two core components.
   
   Base unit cost and usage. The usage is perfectly aligned to grow with your customer; however, to supercharge your monetization, the base unit costs also needs to grow.
   
   As such, segment threshold management is a crucial factor. Set the threshold between segments too wide, and no one will upgrade, set them too low, and you risk segmentation confusion.

⓷ Rabbit Hole: Monetization Law #8 🐇

Value metric innovation

Value metric innovation is an excellent way to create competitive value without changing your product.

Industry hasn’t been far behind the software world in developing new ways to align monetization to customer goals. 

Rolls Royce is a perfect example of value alignment monetization. From a traditional model of charging per engine sold, they have innovated their model to an ‘Engine as a Service’ model akin to the SaaS model.

The critical value metric employed by their Total Care package is engine flying time, which aligns perfectly with airline value growth. Essentially, the goal of the package - Power by the hour is to maximize flying time potential.

Michelin had a similarly innovative approach to monetization when they created a new, longer-lasting tyre. They decided that charging by the tyre mileage would maximise monetization - rather than the traditional number of tyres sold.

Thus trucking companies would only pay for performance on a flexible cost basis. Tyre as a Service perfectly aligned with the customer goal of maximized road time.

Example Value Metrics

Volume - email companies charge per number of contacts

Service - level of call response or access to service desk 24/7 

Experience - Concerts offer different experiences based on level of access. Backstage, VIP, meet the band.

Time Period - festival Passes such as Glastonbury offer packages for early access and day or week access 

Delivery Slot: differential parcel pricing based on time slot choice

Speed - Amazon offers prime and other delivery packages based on speed and cost

Energy - differential pricing based on freely floating, 1,2 or 3-year lock-in options

🐇 Additional Research 🐇

ProfitWell is a leading light in the value metric arena and always an excellent use of your time if you need to go down the rabbit hole.

Wes Bush approaches value metrics from a product angle and is leading the Product-Led-Growth movement emerging in the SaaS go-to-market strategy space. His book is an excellent read and connects the product to pricing to positioning in a unique and interesting way.