Monetisation: How a Business Actually Charges

Monetisation is the form in which a business collects money: per unit sold, by subscription, as a share of what passes through, from advertising, by licensing, or by measured usage. The same value, delivered to the same people, can be collected in several of these forms. The choice changes who pays, when they pay and how steady the money is. How much is collected is a separate question, and the form does not decide it.

How a business turns activity into profit, and the fact that a platform has two sides rather than one, are both already established. Monetisation is a narrower question than either of those, and a more practical one. Once a business has built something people want, it still has to decide how the money is to come in. Not how much. How. The decision about form is made after the offering exists, and it can be changed without touching the offering. Two companies can do identical work and report revenue lines that look nothing alike, with nothing between them but that decision.

Why is how a business charges a different question from how much?

Start on a street rather than in a statement. A tea stall outside a factory gate sells one glass at a time and takes the coins as each glass goes out. A cook two doors down feeds the same workers, but she takes a fixed amount at the start of every month and then feeds whoever turns up, every working day, without counting. Both of them are selling food to the same people at the same gate. One collects per glass and one collects per month. The difference between the two is a difference of form.

Now ask a completely different question about the same two. Is the tea dear or cheap? Could the cook put her monthly amount up by a fifth without losing anybody? Would the workers walk to another gate if she did? Every one of those is a question about level, and none of them has anything to do with whether the money comes in per glass or per month. How a business charges and how much it charges are two separate questions, and only the first one is a question about form.

The separation matters because the two get confused constantly, and the confusion is expensive. Somebody who says a business should move to a subscription is usually making a claim about timing and steadiness. Somebody who says the same business should charge more is making a claim about what customers will bear. The two claims are different arguments, settled by different evidence, and a meeting that runs them together reaches no conclusion at all. Level, pricing power and whether a charge could be raised without losing the customer belong to the notes on revenue and pricing.

What forms can a business collect money in?

There are six that cover almost everything encountered in practice, and each one is best held in mind by the event that sets the charge off rather than by its name. Asking what has to happen before any money is due sorts the six out.

A form is defined by the event that triggers the charge, and nothing else about the business needs to change for that event to be redefined. Per unit means a unit has to change hands: a vegetable seller weighs what the customer took and nothing at all is owed until the weighing happens, and the paper record of what changed hands is the invoiceThe document a seller raises setting out what was supplied and what is now owed for it. Reading one, and what it does to the accounts, is built in the notes on financial accounting.. Subscription means a period has begun: the newspaper arrives at the door every morning of the month and the amount is the same whether anybody in the house opens it. A subscription also has a moment of renewalThe point at which a customer decides whether to continue into the next period. Nothing is automatic about it, and whether customers stay is a subject of its own. where the whole arrangement can end.

A share of what passes through means something has moved and the charge is a slice of it. A commission agent standing in a produce market does not buy the tomatoes and does not sell them; he arranges the sale and keeps a slice, so his income rises and falls with a market he does not control. Advertising means somebody wants attention that the business has already gathered. A listings sheet outside a market can be free to every reader and still pay for itself out of what the shops pay for the space. Licensing means permission is granted for a period without anything being handed over for good: a tailor who has drawn a good paper pattern lets other tailors work from it for a season and still has the pattern at the end of it. Usage based means a measured quantity has been consumed, which is what an auto rickshaw meter measures. A bill of that kind closes at the end of a billing cycleThe fixed stretch of time a supplier measures before sending out a bill, commonly a month. The cycle decides when a bill lands, not what is on it. rather than at the moment of use.

Something has not been said. Not one of those six is better than the others, and none of them fixes how much a business collects. A business can run on one form or on several at once, and moving between them is a decision somebody makes rather than a fact about the industry it is in.

Can the same value be collected in more than one way?

The same value can be collected in more than one way, and the cleanest way to see that is to take one business, freeze everything about it, and collect for it three different ways. Setu Bazaar, an invented marketplace, buys nothing and sells nothing. The marketplace brings 2,000 merchants and 50,000 buyers into one place, and Rs 5,00,00,00,000/- of goods, which is Rs 500 crore, passes between them in the year. The quantity of goods passing between them, the gross merchandise valueEverything that changes hands across a marketplace in a year, added together. A marketplace does not keep that amount, and what it does keep is measured separately., is the thing every one of the three routes below is measured against.

Setu Bazaar collects a 4.00 per cent share of everything that passes through. Four per cent of Rs 500 crore is Rs 20,00,00,000/-, or Rs 20 crore. Take rate measures that share properly. Divide it across the 50,000 buyers and each buyer is bringing Rs 4,000/- of revenue on the Rs 1,00,000/- of goods that buyer takes. Divide it across the merchants instead and each of the 2,000 merchants is carrying Rs 25,00,000/- of goods and leaving Rs 1,00,000/- with the marketplace, keeping Rs 24,00,000/- for itself. Every one of those figures is published so that all of them can be rebuilt from Rs 500 crore, 50,000 and 2,000.

Now hold the business completely still. Same merchants, same buyers, same goods, same warehouses, same people answering the telephone, same everything. Collect the same Rs 20,00,00,000/- two other ways. Route two: charge each of the 50,000 buyers a flat Rs 4,000/- for the year, payable when they join, and collect nothing on any individual sale. Route three: charge each of the 2,000 merchants Rs 1,00,000/- a year for a listing, payable at the start, and again collect nothing on any individual sale. All three routes collect exactly Rs 20,00,00,000/- and the business does identical work under all three, so the form of the charge is a choice made on top of the business rather than a consequence of it.

So far the three routes look interchangeable, and at the published flow they are. The moment the world moves, they stop being. Suppose the goods passing through fall by a fifth, from Rs 500 crore to Rs 400 crore, and every one of the 50,000 buyers stays; each of them is simply buying less than before. Under the share of what passes through, 4.00 per cent of Rs 400 crore is Rs 16,00,00,000/-, so the marketplace has lost Rs 4,00,00,000/- without anybody deciding anything. Under the flat charge on each buyer, 50,000 people are still paying Rs 4,000/- each, so Rs 20,00,00,000/- arrives exactly as before. The listing charge collects Rs 20,00,00,000/- as well, from 2,000 merchants still paying Rs 1,00,000/- each.

The comparison bears reading carefully, and it is the whole reason form is worth treating on its own. Nothing about the business changed. The same merchants sold to the same buyers through the same marketplace. One version of it lost a fifth of its revenue and two versions of it lost nothing, and the only difference between the three versions was the sentence in the contract that says what sets the charge off. A form that tracks the customer falls when the customer falls. A form that does not track the customer does not fall, and the two halves are one statement read from either end.

What does the form of the charge actually change?

Three things, and it is worth naming them separately because they are constantly rolled into one another. The form changes who hands the money over. The form changes when the money arrives relative to when the work is done. And the form changes how steady the amount is from one period to the next. The list ends there.

Of the three, who pays is the least obvious, so take it first. A charge does not have to land on the person who benefits, and on a business with more than one kind of customer it often does not. A school photographer charges the school and not the parents, or the parents and not the school, and the photographs are identical either way. Take when second. Money collected at the start of a period arrives before any of the work behind it has been done. A business that collects that way is holding somebody else's money for a while and has to show it as deferred revenueAn amount collected before the work it pays for has been done. Until the work is done it sits as an obligation rather than as revenue. The accounting treatment is built in the notes on financial accounting. until the work catches up. Money collected at each sale arrives alongside the work. Money collected on an invoice arrives long after it.

Take steadiness third. A flat charge for a period is the same amount next period unless somebody leaves. A share of what passes through is whatever the customer did, so a business collecting that way has handed the shape of its own revenue to somebody else. Handing that shape over is not a weakness and it is not a strength; it is a description. A marketplace whose merchants have a wonderful year collects more without doing anything, and a marketplace whose merchants have a poor one collects less without doing anything wrong.

Who, when and how steady move independently. A form that improves one of them can easily worsen another, and no single form is best on all three at once. A subscription pulls the money forward and makes it steady, and in exchange it asks the customer to commit before they have seen the value, which narrows who is willing to pay at all. A share of what passes through asks for no commitment and can be accepted by a customer with nothing to spare, and in exchange it makes the revenue move with somebody else's fortunes. Notice that neither of those arrangements is a recommendation. Each one is a trade, and the trades point in different directions.

On a platform, which side actually pays?

The form question gets genuinely interesting on a business with two sides, where the common intuition runs upside down. A business with two sides has to decide which of them it charges. The business can charge one side, or the other, or both, and the two sides are usually charged in completely different forms. The structure of the two sides is built up under platform businesses; the narrower question here is where the charge is put.

Look at Setu Bazaar as published. The buyers pay Setu Bazaar nothing at all. Buyers join for nothing, they browse for nothing, and the Rs 1,00,000/- each of them spends in the year goes to the merchant selling the goods, not to the marketplace. The merchants pay all of it: Rs 1,00,000/- each across 2,000 of them makes the whole of the Rs 20,00,00,000/-. So one side pays everything and the other side pays nothing, and both sides are getting something they want, otherwise neither would be there.

Now ask why it is arranged that way round rather than the other, and notice that the answer has nothing to do with which side benefits. The charge lands where the business can afford to put it rather than where the benefit is, so the side that pays is often not the side that gets the most value. A marketplace with 50,000 buyers and no merchants is worth nothing to anybody. A marketplace with 2,000 merchants and no buyers is worth nothing either. Charging the harder side is what makes that side leave, and once it has left the other side has no reason to stay. Whichever of the two is harder to attract is therefore the side that gets charged less. The economics of exactly this decision were set out by Rochet and Tirole in 2003, who showed that a two sided business is shaped by how the charge is split between its sides and not only by how large the total is, and by Parker and Van Alstyne in 2005, who worked through the case where one side is charged nothing at all.

Put it in a form that can be felt. The couple can walk down the road and the caterer cannot easily find another hall that evening, so a wedding hall gives the couple a room to look at for nothing and charges the caterer for the right to work there. Shoppers who are charged at the door do not come, and shops with no shoppers do not stay, so a shopping arcade lets shoppers in free and charges the shops. In both cases the side that walks away most easily is the side that is asked for least, and the arrangement is a statement about how hard each side is to attract rather than a judgment about who deserves to pay.

How can the form a business uses be identified?

There is one question that does the work of a whole definition, and a lender, an analyst or anybody reading a set of accounts for the first time can ask it in four seconds. When does the money arrive relative to when the work is done? Answer that and the form falls out. Every form set out above sits at a different point on that one line.

Money before the work is a subscription or a licence: the customer has paid for a period that has not happened yet, and the business is carrying an obligation until it does. Money at the same instant as the work is a share of what passes through, or a cash sale: the event that does the work is the event that collects. Money after the work is per unit on credit, or usage based: something has been supplied or consumed and the bill follows it. Reading the timing separates the forms faster than any list of names.

Anjani Stationers Private Limited, an invented manufacturer of notebooks and stationery, sits at the last of those three. The company charges per unit and collects only when goods ship. One published delivery was Rs 2,40,000/- for 4,000 notebooks, or Rs 60/- a notebook, and nothing at all was owed on that order until the notebooks left the building. Its whole year reads as follows, rung by rung, with every figure as the notes on financial accounting record it.

Now apply the practitioner question to that revenue line. Rs 2,70,00,000/- of it was recorded when notebooks left the building, and its trade receivablesAmounts a business is owed by customers it has already supplied. Receivables sit as an asset until the customer pays, and how long they take is measured in the notes on financial accounting. stood at Rs 95,00,000/- at the year end, which is 128.4 days of sales. So the shape of that revenue line is set by delivery and the shape of the cash behind it is set by delivery plus four months. A subscription business doing identical work would have had the money four months before the work rather than four months after it, and its statements would look nothing like these. Same work, same customers, a completely different picture, and nothing between them but the sentence that says what sets the charge off.

What does choosing a form not decide?

Three things, and each of them is worth stating plainly because the form question is so easy to over claim. Choosing a form does not decide how much money arrives. Setu Bazaar collected exactly Rs 20,00,00,000/- under all three routes at the published flow, and it could have collected a fifth of that or five times that under any one of them by moving the amount rather than the shape. A form is a container and not an amount, and pouring the same water into a different vessel has not made more water.

The form does not decide whether customers will accept the arrangement, either. A form that a customer refuses collects nothing, however elegant it looks written down, and whether a particular customer will accept a particular charge, at a particular level, is a question about willingness that the notes on revenue and pricing take up properly. Nor does it decide whether the business is profitable. The money that arrives has to cover what the work costs, and nothing in the shape of a charge guarantees that it will. A marketplace collecting Rs 20,00,00,000/- with a contributionWhat is left of the money a customer brings after the costs that move with that customer are taken out. Whether the total of it covers the costs that do not move is a subject of its own. that does not cover its fixed spending is a loss making business under every one of the three routes equally, and the notes on unit economics are where that gets settled.

One last boundary worth putting a name to. Businesses routinely charge in more than one form at once, and putting several offerings behind a single charge is called bundlingSelling several things for one combined charge rather than separately. Whether that combined charge should be higher or lower than the parts is a question about level and belongs elsewhere.. Bundling is a real and common arrangement, and everything about how big the combined charge should be is a level question rather than a form one. The form question stops at describing which events set which charges off, and says nothing at all about the size of any of them.