Print media’s hay day was when you they made money on both sides of the equation. Readers subscribed to the paper, and advertisers paid to advertise in it. Then, Google came along. Print media was the original industry to monetize B2C and B2B.
The free + ads model is pervasive in today’s world. Facebook and Google took share from news and created a new paradigm. “We’ll give you more, for free, and in exchange, you’ll see some teeny tiny ads.”
All of social media became supported by the model. Google, Pinterest, Facebook, Instagram, Twitter, Snap, TikTok, and YouTube are free + ads. In fact, you can’t pay for these services. They don’t allow you to.((Snap is flirting with a paid program, but the core functionality is free.))
Even in the midst of election controversy (Facebook and Google and Twitter), geopolitical controversy (TikTok), and antitrust threats (Facebook and Google), ad-free models were not abandoned in favor of paid subscriptions.
Why is that?
A new wave of apps became big in the early-to-mid-2010s. Uber, Calm, Headspace, Netflix, and Hulu. All consumer software-as-a-service (SaaS). All receiving tons of hype in the press, venture funding, and unicorn or decacorn status.
At the time of their IPO, most (if not all, not all have released their financials) were unprofitable. Some still are.
In the late 2010s and early 2020s, Disney+, Mint, and Preply came along as new B2C SaaS platforms.
All of them now monetize B2B in one form or another. I think there are a few reasons why:
- B2C relies on consumers spending their discretionary money on your service. Because of that, the amount charged per month or per transaction must be relatively low.
- It’s much harder to convince 100,000 people to use your service than it is to find 10 companies to sign up 10,000 users each.
- Assuming you find 100,000 users to use your service, at least 25% will use it once and never again, and a very very small percentage will pay for it. In B2B world, seats are pre-purchased and users are different than checkwriters.
- In B2C SaaS, different groups of users could have tons of different optimization functions, whereas in B2C, the optimization function can be pre-defined and, oftentimes, simpler.
Social Media (Facebook, Twitter, TikTok, Pinterest, Snap, Instagram) sells ads. The users are the product, and the advertisers are the clients.((Yes, Snap just launched a subscription service, but it’s < 5% of revenue)).
Netflix, Disney+, Peacock, HBO Max, Paramount+, and Hulu all already have or are launching subscription tiers. In fact, Hulu makes more money off it’s lower-cost, ad-supported subscription tier than its premium, ad-free tier.((https://www.businessofapps.com/data/hulu-statistics/)) I expect others to be the same.
Spotify, Duolingo, and LinkedIn all have most users free + ads.((I would argue all of LinkedIn is B2B, even for individual users.))
In the fintech world, it’s the same.
Mint, the budgeting app, monetizes through paid subscriptions at the premium tier, but ads and referral deals in the free tier. There’s minimal difference in functionality between the free tier and the subscription tier, so the subscription tier is clearly doing well.
Calm and Headspace, the meditation apps, have free plans and subscription plans that are available B2C. They both monetize heavily through corporate sales.
Uber has launched ads inside of the Uber app.
Even Tinder shows ads.
I’ve developed a few core tenants of pure-play, consumer SaaS. The core idea is that all consumer pure-play SaaS monetizes B2B when it wants to become profitable.
The key words in “pure-play, consumer SaaS” are not “consumer” or “SaaS” but “pure-play.” The rules change when there’s a proprietary item that exists in the physical world that also has an app or service associated with it.
These tenants are primarily for people making business to consumer apps or services. When I was starting out, I thought that you build an app, launch it, market it on social media, and people come. If you charge $5.00 or $10.00 per month to enough people, then at some point you’ll have a business with near-zero marginal cost.
I tried this strategy and it failed. I’ve seen others try this strategy dozens of times. It’s never worked.
These tenants are what I wish I would’ve known.
Core Tenant #1: In B2C SaaS, the lower the cost per use, the stronger its B2B angle
The easiest example is one everyone knows: social media. Free for users, but businesses pay-to-play with ads.((Yes, you can create a Facebook business account, but talk to any business owner and ask if they get reach. They’ll tell you they did, but they haven’t since before the pandemic.))
Spotify is a great example. Their ad-free subscription is $10.00 per month. Every song someone listens to costs Spotify around $0.01. If someone listens to 20 hours of music per month (in the car, working out, etc), Spotify needs to pay out $3.24 to the music creators. Then, Spotify has costs to run and maintain the app and its services. Assume that’s $2.00 per user per month (for argument’s sake). It’s really hard to build a great business making $5.00 per month in gross profit.
Or, you could treat your listeners as a product, sell ads to businesses, and not have a per-user, per-month revenue cap. Amazon Music is the same way.
Similar rules that apply to Spotify apply to the big streaming services like HBO Max, Disney+, Netflix, Showtime, etc. Pay for content (either through licensing or outright-buying the programs), then resell it on a monthly subscription that’s used several times per week.
Mint is similar. People check their balances all the time. The price of a Mint subscription is less than I spend on one Uber ride to dinner.
As usage decreases, the cost per use goes up, and likelihood of the app being a B2B service goes down.
Uber, for example, which is introducing ads into its app now, isn’t quite B2B yet. It’s still a B2C, two-sided marketplace app. I estimate I spend $20 per ride on Uber. Far more than I spend on any individual service above, but I only use it once or twice per week, max. The same rules apply for Uber Eats, Doordash, and the like.
The biggest cost-per-use for me is Airbnb. A pure-play marketplace SaaS, there’s minimal B2B component at all. It’s almost direct B2C, but for each use, I pay quite a large fee.
Core Tenant #2: B2B is an easier equivalent sell than B2C
It’s easier to sell $100,000 in a B2B setting than it is to do so in a B2C setting.
In B2B, there are essentially 3 optimizations that any business will buy:
- Help me find and retain my best people
- Help me find and retain my clients
- Help my business be more efficient and/or save money
Any business monetizing ads is actually a lead generation business.
Headspace and Calm are in the business of helping retain the best people. The unit economics on Calm and Headspace are simple.
Assume it costs $10,000 to hire and train an employee.
Now assume that corporate pricing for a meditation app is $5.00 per month, and a company has 10,000 employees, so a total expense of $50,000 per month for the company. If that benefit keeps just five people out of ten thousand in the business instead of taking a new job each month, the app pays for itself. That doesn’t include the productivity gains that come from having employees with better mental health.
The average annual employee turnover rate in the United States is 47.2%.(( https://www.creditdonkey.com/average-turnover-rate.html)) A meditation app subscription doesn’t need to be too successful to be ROI positive for a company.
A meditation app needs to be magical to be ROI positive for those same 10,000 users in the real world.
When individuals are paying out of their own personal money, there aren’t 3 optimizations, there are hundreds or thousands. It could be to be happier (and each user defines that differently), more peaceful, healthier, help with a relationship with a significant other, help with a breakup, help with a relationship with kids, parents, or siblings. It could be because the user wants to “be someone who meditates.” Maybe it’s meditation as a sleep aid. Meditation to reduce stress or anxiety. Meditation to find their purpose. The list goes on and on and on.
How do you optimize for that? The easiest way is to decide to make a very narrow difference, say, only help people who want to use meditation as a sleep aid, and expand into other areas over time.
But then you’re stuck trying to find 10,000 people who only want to use it as a sleep aid. Customer acquisition cost balloons, and unit economics become challenging.
That’s not even including churn! Nearly 25% of people use the app for precisely one day.(( Nearly 1 in 4 people abandon mobile apps after only one use | TechCrunch))
In the B2C world, SaaS apps are competing for a very small amount of discretionary income with a great number of optimization functions. The challenges scale exponentially.
In the B2B world, the client (the company buying the app) doesn’t care if Bill in accounting never uses the app. They care that a few people in their 10,000 person organization use it, see the value in it, and stay with the company longer, in whole or in part, because of it.
Core Tenant #3: Businesses are better creative partners in your success than consumers
The reason why is in the name of the customer group. Consumers… consume.
It’s not that they’ve got ill-intent, it’s that they’ve got too many optimization functions. Being a hero to some means ignoring the needs of others.
In the B2B world, since there are so few optimizations, it’s much easier to be a hero to a greater percentage of the customer base.
Mint can work with their ad and referral partners on better ways to optimize in the app. Facebook can release new ad tracking features. Headspace can provide better usage and data analytics to their clients.
In the B2C SaaS world, the driver of user retention is new features. In the B2B world, the driver of user retention is investment. The same feature can be shipped, and it has a wildly different impact on a B2C audience as a B2B audience.
Imagine if a meditation or wellness app shipped a feature that told you, the user, that for the following 2 hours after a 10-minute meditation, your heart rate, on average, was 3 beats per minute less than the same time period but without a meditation. To a general user, this insight is relatively interesting, but not life changing. To a business, this is cause for celebration. They can begin having employees do in-app meditations before important meetings!
Imagine the big streaming providers find a way to deliver one new ad unit that’s proven to have high conversion, that the provider is selling for $20/conversion. They ship the feature, and, being generous with their users, they even lower the cost of the subscription by $1 per month in exchange for that ad unit (this would never happen, but for the sake of the thought exercise). B2C customers think “Cool, my subscription got cheaper.” B2B customers rejoice because their cost of getting a customer was only $20.00.
While these examples are extreme, they point to the fact that the same feature but directed at the wrong audience doesn’t move the needle. Directed at the right audience, and it’s a game-changing innovation.
Core Tenant #4: Early-stage consumer-facing SaaS categories need 5-10 years to mature
Rideshare, grocery delivery, food delivery, fitness subscriptions, ed-tech, health tech. The list goes on and on. Thank goodness for venture capital, which is the primary engine that allows for this to happen.
When the category is being created, there is no B2B play yet. It’s not that the ROI hasn’t been proven out, it’s that the category hasn’t been proven out. Oftentimes, new consumer-facing categories need 5 or 10 years before they can navigate the hurdles that come with enterprise sales. If someone doesn’t understand it, they won’t buy it.
Duolingo is a great example of this. They’ve already branched into the B2B marketplace with ads, but they had 2.5MM((https://www.statista.com/statistics/1248043/duolingo-annual-paid-subscribers/)) subscribers in (not through, some people churned). They’ve already started getting into official language testing.
The space is still being proven out, but I expect school systems will assign homework through Duolingo, businesses will buy subscriptions for their employees, and businesses may even buy subscriptions to it for their employees’ kids.
Core Tenant #5: Loss-leaders and churn-reducers play by different rules
But what about Apple Music? Apple TV+? Prime?
They don’t have ads.((In the case of Prime, the Prime Originals don’t have ads.)) They don’t have any real B2B monetization (businesses can buy a prime membership, but it’s essentially the same as a personal membership).
I’d argue they’re B2B as well, even though they’re not explicitly the profit driver (although, in the case of Amazon, Prime is). They’re services built to reduce customer churn and increase usage of the companies’ other products and services, so they give a ton of value away, possibly at a loss, but make it up on the back end with additional, high-margin sales.
The “customer” of those services is another department inside their own company.
If I have subscriptions to Apple Music and TV+, I’m very likely to buy another iPhone or AirPods. In that case, Apple Music and Apple TV+ are customer retention tools for iPhone and AirPods.
If I have Prime, I’m very likely to buy more stuff on Amazon.
Prime Video and Prime Photos are examples of B2C subscriptions whose purpose is to reduce churn in the number of Prime subscribers. If you’ve got thousands of photos in Prime Photos or your favorite show is Marvelous Mrs. Maisel, there’s a low likelihood that you’ll churn and cancel Prime. If you don’t cancel Prime, there’s a low likelihood you’ll stop buying stuff off Amazon. If you don’t stop buying stuff on Amazon, then Amazon can continue to charge a 35% seller-fee on almost every item sold.
Apple Music and Apple TV+ operate as a “loss-leader.”((We don’t know if they’re truly loss-leaders or not, but we know they aren’t huge profit drivers for the company. Services revenue is at all-time highs, but lots of the high-margin revenue comes from the in-app payment fees, ads, and Google’s placement of Search.)) If I really love Apple TV+, then I’m more likely to continue buying an iPhone, iPad, or Mac. If I really love Apple Music, I’m more likely to buy AirPods for the best listening experience.
Loss leaders and churn-reducers have very different incentives than pure-play, make-a-high-profit-margin-business SaaS companies. Loss leaders and churn-reducers are in the business of being “good enough.”
If my competitor’s product is a loss-leader for a different business, I’ve got to have a product that’s at least 10X better because of the concept of “enough.”
If my competitor’s product is “good enough,” then the consumers will always flock to free. In a competition for discretionary income, having a paid product that’s 10% or even 50% better isn’t good enough.
In the case of Prime Video, is it “good enough?” Yes, it is. As a consumer, might it stop you from churning on Prime? Yes, it absolutely might. If you’re a huge Lord of the Rings fan, you’re not likely to cancel Prime as Amazon builds out that universe. If you’re considering building a new streaming platform, you’ve got to have 10X better content than Prime Video to win on merit, because you’re competing with “free.”
What do you do if you’re only B2C?
Start looking for the B2B angle. How are you one of the three big optimizations? How can you be that way?
The truth is, the big money is in B2B. Businesses pay more for less because they need one problem solved to see a 10X return on investment. Consumers pay less for more. It’s of no fault of their own, they each have a different optimization function.
This doesn’t mean don’t build B2C consumer SaaS. It does mean think about the monetization angle differently. It’s easy, as a consumer, to think that the vast majority of apps are B2C (hell, I’m using it, aren’t I?) and the ones I use at work are B2B.
That’s not the case.
Addendum 1:
There are a few notable exceptions to the tenants above. First, non-subscription micropayments. Roblox, Fortnite, and other game-type companies that take small payments in exchange for additional functionality defy these core tenants. Crypto / Web 3 is trying to introduce more micropayments and less of this type of B2B monetization, but the space won’t be proven out to be successful or unsuccessful for another 5-10 years, minimum.
I originally thought YouTube TV and Xbox Game Pass defied the tenants, but, now, I don’t think they do. YouTube TV, a rebundling of cable and also includes ads, so there’s clearly a B2B angle that’s being exploited. The business still isn’t quite mature enough. Over time, my estimation is that the B2B offering will be where the profit lies. Secondly, Xbox Game Pass is not a pure-play SaaS company. It’s easy to forget that you can’t really use the service unless you own an Xbox, which retails, for the lowest-tier hardware, at $297 USD, or $24.99 USD per month. While it’s certainly a SaaS product, it’s not pure-play.
Lastly, sports betting and gambling. They’re B2C-only from what I can tell. One could make the argument they aren’t pure-play, as they’re an extension of sitting in a casino and betting, but I think they fit the qualifications and break the rule. I’ve been flipping back and forth between these apps being SaaS and being entertainment, but I can’t find a B2B angle.
Addendum 2: A non-exhaustive list of seemingly consumer-facing, pure-play SaaS companies that are beefing up their B2B offering.
- Coinbase -> Institutional holdings, AWS for web3.
- Gemini -> Institutional holdings
- Robinhood -> payment for order flow
- DoorDash / GrubHub / Uber Eats, etc -> ads
- Social media companies -> ads
- WhatsApp -> reduce churn for Facebook family of apps
- Venmo -> charges stores fees, invests the money you keep in your account
- Uber -> ads in the Uber app, lead-gen tool (both supply-side with drivers and demand-side with customers) for the higher-margin Uber Eats
- Apple App Store -> ads, 30% fee of all in-app payments
- Google Play Store -> ads, 15% fee of all in-app payments
- Streaming providers -> all are either monetizing off ads or tools to reduce churn or a loss-leader
- Spotify -> ads
- Duolingo -> ads, certification tests. Still too early to tell.
- Tinder, Bumble -> ads
- Mint -> ads, referral fees
Evan Ryan 
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