Ways to monetize your tech

Subscription, consumption, take rates and more

Welcome to the 591 new Operators, VCs, and FinStratOps legends who joined the metrics rodeo since last Tuesday. Pumped to have you here!

Before we jump in - you’ll be happy to know my wife began referring to Mostly metrics as “your book report thing”.

So there’s that.

Now let’s get into it.

Mostly Metrics shoe box diorama

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TL;DR: There’s been a quiet revolution in tech over the past ten years when it comes to monetization strategies. Gone are the days of “perpetual licensing” where you pay once and own that shit for life. The most common monetization models at work today include:

• Subscription (Recurring)

• Consumption (Usage Based)

• Hybrid (Mix and Match)

• Transaction Based (Take Rate)

• Advertising (Views)

If you’re like me, this list is fine and dandy in theory, but some namedrops and examples would be helpful. So in this post we’ll do just that. Put your fun pants on; we’re going 10K diving.

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Subscription

How It Works: You pay the same amount on a recurring basis, usually monthly or annually.

Examples: Zoom, Miro, Datadog, Notion, Adobe, Figma, QuickBooks

Flavors: Per seat, per feature, per team

Unit of Measure / License: Person, developer, member, host, team

Best Fit: Software you need regularly

Metrics to Monitor: ARR or MRR (New, Expansion), Churn / Shrink / Downsell, Average Revenue per User (ARPU), Net Retention, Gross Retention, Renewal Rate, Multi Product Attach Rate, CAC Payback Period, Lifetime Value, Accounts by ARR Band

10K Excerpt:

We generate revenue from the sale of subscriptions to our unified communications platform. Subscription revenue is driven primarily by the number of paid hosts … A host is any user of our unified communications platform who initiates a Zoom Meeting and invites one or more participants to join that meeting.

Zoom 10K

Pricing Page Snapshot:

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Consumption:

How It Works: You pay based on how much you use.

Examples: Snowflake, Twilio, AWS, Digital Ocean, Message Bird

Flavors: Metered pay as you go (monthly or annual), Prepaid (like loading a gift card to get better rates)

Unit of Measure / License: Text, Call, Gigabyte, Terabyte, Bandwidth, Compute, Queries

Best Fit: Plumbing and infrastructure businesses rely on; anything linked to data expansion

Metrics to Monitor: Usage, Product Revenue, Remaining Performance Obligation, Billings, Net Retention, Active Customers, Gross Margin, Accounts by Revenue Band

10K Excerpt:

We generate the substantial majority of our revenue from fees charged to our customers based on the storage, compute, and data transfer resources consumed on our platform as a single, integrated offering. For storage resources, consumption fees are based on the average terabytes per month of all of the customer’s data stored in our platform. For compute resources, consumption fees are based on the type of compute resource used and the duration of use or, for some features, the volume of data processed. For data transfer resources, consumption fees are based on terabytes of data transferred, the public cloud provider used, and the region to and from which the transfer is executed.

-Snowflake

Pricing Page Snapshot:

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Hybrid:

How It Works: Pay a subscription for access plus a per item charge or implementation fee

Examples: Peloton, Zoominfo, Workday

Flavors: Subscription + One time fee, Subscription + Pay as you go, Subscription + Overage, Subscription + Professional Services Installation Fee

Unit of Measure / License: Any of the subscription and consumption metrics above, Implementation Hours, Set Up Fees, Overage Fees

Best Fits: Database companies allowing customers to export information

Metrics to Monitor: ARPU, Subscription Revenue, Professional Services Revenue, One Time Product Revenue, CAC, LTV, Active Users, Churned Users, Gross Margin

10K Excerpt:

We derive our revenues from subscription services and professional services. Subscription services revenues primarily consist of fees that give our customers access to our cloud applications, which include related customer support. Professional services revenues include fees for deployment services, optimization services, and training.

Workday 10K

Pricing Page Snapshot:

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Per Transaction:

How It Works: Pay a rate on each transaction

Examples: Stripe, Adyen, Airbnb, Uber, Substack, OpenSea, Coinbase, Patreon

Flavors: Fixed, Variable, Fixed + Variable, Volume Tiered

Unit of Measure / License: Transaction volume, Transaction size

Best Fits: Payment Businesses, Marketplaces, Platforms

Metrics to Monitor: Gross Merchandise Volume (GMV), Average Take Rate, Growth in Transaction Volume, Average Transaction Value, Growth in Transaction Value

10K Excerpt:

The revenues that the Group generated related to processing fees, settlement fees and fees for other services in connection with processed payments. For this purpose, the Company agreed with customers to charge rates per transaction and by type of activity.

-Adyen

Pricing Page Snapshot:

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Advertising:

How It Works: Pay based on eyeballs

Examples: Snapchat, Indeed, Linkedin

Flavors: CPC (cost per click), CPM (cost per thousand), Cost per Action, Cost per Listing

Unit of Measure / License: Per advertisement, Per search

Best Fit: Social Networks, Media, Consumer Applications, Search engines

Metrics to Monitor: User Engagement, User Time, Clicks, Shares, CAC, CAC Payback Period, LTV, LTV:CAC, Gross Margin

10K Excerpt:

“We generate substantially all of our revenue from advertising”

Snapchat 10K

Pricing Page Snapshot:

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Potentially Reliable Stuff I Read at 2AM (Sources):

Types of Business Models - Lenny’s Newsletter

Chargify

Hybrid Pricing - Billing Platform

What I’ve Been Reading Lately:

Alex Banks offers a treasure trove of insights on management philosophy and decision making. He focuses on three pillars of business: startups, community and capital. I have a lot of respect for people who can a.) filter signal from noise and b.) distill complex topics into a-ha moments. You get both when reading Through the Noise.

Quote that Hit Me Hard:

“Knowing your customer ‘on average’ offers little insight. Worse, under the guise of a ‘statistical fact,’ a generalized average often paints a misleading picture. The average American, if you rely on averages, has one testicle.”

Daniel Schreiber, CEO of Lemonade