Startup Business Models and Pricing

Startup Business Models and Pricing | Startup School (opens in a new tab)

The 9 business models of nearly every $B company

A business model is a fancy term for “how you make money”

SaaS

PRIMARY METRICS:

• Monthly Recurring Revenue (MRR) or Annual Recurring Revenue (ARR)
• Growth Rate: Measured weekly or monthly
• Net Revenue Retention: % of recurring revenue retained from a prior period
• CAC: Costs to acquire a new customer

TAKEAWAYS:

• All the benefits of recurring revenue
• Can have non-recurring revenue, but don’t include in ARR/MRR
• Usually sold to businesses, ideally on annual contracts
• Growth can be driven by direct sales, self-serve acquisition channels, or both

Market Place

• Facilitate transactions with buyers & sellers

PRIMARY METRICS:

• Gross Merchandise Value (GMV): Total sales volume transacted
• Net Revenue: Fees charged for transactions (often a % take rate)
• Growth Rate
• User Retention: % of month 1 customers that purchase in month 2, etc

TAKEAWAYS:

• Hard to get off the ground, chicken & egg problem
• Need to scale supply and demand in sync
• Network effects at scale drive exponential growth
• When they work, often become dominant winner-take-all winners

Usage Base

• Pay-as-you-go based on consumption

PRIMARY METRICS:

• Monthly Revenue (not recurring!)
• Growth Rate
• Revenue Retention: % of revenue from last month’s customers in this month
• Gross Margin: Revenue - Cost of Goods Sold (COGS)

TAKEAWAYS:

• Don’t confuse usage-based revenue with recurring revenue
• Charge per API request, # of records, data usage, etc
• Grow as your customers grow
• Product and pricing scale to support tiny startups to large enterprises

Advertising

• Sell ads to monetize free users

PRIMARY METRICS:

• Daily Active Users (DAU): Unique users active in 24 hours
• Monthly Active Users (MAU): Unique users active in 28 days
• User Retention: % of active users on D1/7/30/etc
• CPM (Cost Per Thousand) or CPC (Cost Per Click)

TAKEAWAYS:

• Typically consumer social products with huge scale
• The customer is the advertiser, not the end user
• Users are the product being sold
• Need billions of impressions each month
• Registered Users is a vanity metric

Subscription

• Product or service sold on a recurring basis, usually to consumers

PRIMARY METRICS:

• Monthly Recurring Revenue (MRR) or Annual Recurring Revenue (ARR)
• Growth Rate: Measured weekly or monthly
• User Retention: % of month 1 customers that purchase in month 2, etc
• CAC

TAKEAWAYS:

• Recurring revenue is the most valuable revenue
• Usually sold to consumers, often paying monthly
• Usually lower price points, from a higher volume of customers
• Growth driven by scalable, self-serve acquisition channels

Transactional

Facilitate Transactions & take a cut

PRIMARY METRICS:

• Gross Transaction Value (GTV): Total payment volume transacted
• Net Revenue: Fees charged for transactions (often a %)
• User Retention: % of month 1 customers that purchase in month 2, etc
• CAC

TAKEAWAYS:

• Usually fintech and payment businesses
• One-time transactions rather than recurring
• Often high volume with a low fee (1-3% is common)
• Best transactional businesses have extremely consistent revenue from high repeat usage

Hard tech/Bio/Moonshots

• Hard businesses with lots of technical risk and long time horizons

PRIMARY METRICS:

• Milestones: Progress towards the long-term vision
• Signed contracts
• Letters of Intent (LOIs): Non-binding contracts indicating interest to purchase

TAKEAWAYS:

• Often take years to get to a live product because of technical and/or regulatory risk
• Impressive technical milestones or experimental data can de-risk the tech
• Revenue is often years away, so signed LOIs are usually the best way to show customer interest

Enterprise

• Sell large contracts to huge companies

PRIMARY METRICS:

• Bookings: Total signed contract value (recurring + non-recurring)
• Revenue: Recognized when delivering on the contract
• Annual Contract Value (ACV): Total contract value / # of years
• Pipeline: Top of funnel → Demo → Close

TAKEAWAYS:

• Very few customers, much larger deals ($100k+/year)
• Growth driven by direct sales
• Often begin with paid pilots or LOIs
• Usually long sales cycles, with many gatekeepers
• The buyer is not always the end user
• Lumpy growth: measuring m/m growth rate doesn't make as much sense

E-Commerce

• Sell products online

PRIMARY METRICS:

• Monthly Revenue: Total sales
• Growth Rate: Measured weekly or monthly
• Gross Margin/Unit Economics: Revenue - Cost of Goods Sold (COGS)
• CAC

TAKEAWAYS:

• Includes D2C brands and Shopify stores
• Not marketplaces, so keep 100% of each sale
• Higher COGS = lower margins
• Products often commoditized
• Need to be excellent at user acquisition and operations/unit economics

Overall Lessons

What’s not in the top 100

• Services/Consulting Businesses:
  • Non-recurring revenue, scale with people, low margins
• Affiliate Businesses:
  • Too far away from the transaction
• Hardware Businesses:
  • Require lots of capital, has low margins
• Businesses build on other platforms
  • Too much platform risk

• Highly predictable
• Higher LTVs (Customer Lifetime Value)
• Lower CACs (Customer Acquisition Cost)