Business Models

& Pricing
What we’re going to cover
● The 9 business models of nearly every $B company
● Business model lessons from the YC Top 100 Companies
● Startup pricing insights
 Business Models
That Build Winners
 💰
How you make money.
Why this is important
● Founders get frustrated that investors won’t fund them, and
their business won’t grow
● Often because they’re not using a proven business model
● There are only a handful of business models responsible for
nearly all $B companies
● You should copy them
 Nearly every $B company is one of these
SaaS Transactional Marketplaces
Cloud-based subscription Facilitate transactions and take a Facilitate transactions between
software cut buyers and sellers

Hard-tech Usage-based Enterprise

Lots of technical risk and long Pay-as-you-go based on Sell large contracts to huge
time horizons consumption companies (5k+ employees)

Advertising E-commerce Bio

Sell ads to monetize free users Sell products online Science-based tech companies
We’ll share a Business Model Guide:
● The metrics that matter most
● Key takeaways for each model
● Other similar companies you can learn from
What can we learn from the
Top 100 YC Companies?
ycombinator.com/topcompanies
Top 100 YC Companies by Model
 50% of the overall value
of Top 100 YC Companies
comes from the Top 10.
 Top 10 YC Companies
1. Airbnb: Marketplace 6. Cruise: Hard-tech

2. Stripe: Transactional 7. OpenSea: Marketplace

3. Instacart: Marketplace 8. Faire: Marketplace

4. Coinbase: Transactional 9. Brex: Transactional

5. DoorDash: Marketplace 10. Reddit: Advertising

5 of the YC Top 10 are Marketplaces

1. Airbnb: Marketplace 7. OpenSea: Marketplace

3. Instacart: Marketplace 8. Faire: Marketplace

5. DoorDash: Marketplace
 Marketplaces are
most likely to build winner-
take-all companies.
Marketplace takeaways
● 14% of the Top 100 Companies are Marketplaces, but they
create 30% of the overall value
● Tough to get off the ground, chicken & egg problem
● Massive network effects when they work (Airbnb, OpenSea)
3 of the YC Top 10 are Transactional

2. Stripe: Transactional

4. Coinbase: Transactional

9. Brex: Transactional
 Transactional businesses
outperform because they’re
in the flow of funds.
Transactional takeaways
● 22% of the Top 100 Companies are Transactional, and they
create 29% of the overall value
● As close to the transaction as possible (Stripe, Coinbase, Brex)
● Often critical infrastructure for other companies, solving a top 3
problem for them
SaaS businesses most likely to
make the Top 100.
SaaS takeaways
● 31% of the Top 100 Companies are SaaS
● Recurring revenue makes them great businesses
 Very few Advertising
businesses become winners.
Advertising takeaways
● Only 3% of the Top 100 Companies are Advertising
● Need organic virality to win, and when that happens they get
strong network effects (Reddit, Twitch)
● Don’t sell ads unless you will be a top 10 site on the internet
Overall Lessons
What’s not in the Top 100 list
● Services/consulting businesses
○ Non-recurring revenue, scale with people, low margin
● Affiliate businesses
○ Too far away from the transaction
● Hardware businesses
○ Require lots of capital, have low margins
● Businesses built on other platforms
○ Don’t rely on platforms/partners for the business to work
Recurring revenue consistently creates
winners
● Highly predictable
● Higher customer lifetime values (LTVs) vs one-off transactions
● Lower CACs, don’t have to keep reacquiring customers
But only works with strong retention
● Product needs to keep delivering value, or customers will churn
● Can’t scale a leaky bucket:
○ 95% monthly retention = 54% annual retention
○ 90% monthly retention = 28% annual retention
○ Just 5% difference in monthly retention is the difference
between life and death!
Biggest winners built with moats
● Network effects (Marketplaces)
● Lock-in/high switching costs (Transactional, SaaS, Enterprise)
● Technical innovation (Hard-tech, Bio)
● Higher margins/better unit economics (DoorDash, Instacart)
● Organic distribution: virality, word of mouth (all)
The best businesses…
● Generate recurring revenue
● Have high retention
● Build defensible moats
● Are close to the transaction
● Scale with software, not people
● Are proven, and familiar to customers
● …so innovate on your product, and copy your business
model
Pricing
Pricing is a tool to help you learn faster
● Who wants your product
● How much they want it
● How much value your product provides
● Which channels you can use to acquire customers
Pricing Insights from
Top YC Companies
1. Charge!
● Most common mistake: founders afraid to charge
● Charging is the most effective way to learn:
○ Are users willing to pay or not?
○ Which users are most willing to pay?
○ How much are they willing to pay?
○ Even if everyone refuses to pay, that is valuable.
So where to begin?
● Don’t overthink it
● Find the right “order of magnitude”
● Pricing isn’t permanent, takes years to iterate to capture full
value
2. Price on value, not cost

$$$ Value
Your opportunity

Price
Your margin

$ Cost
How to find your value?
1. Talk to your users: ask about the problem you solve, get them
to articulate the value to you
a. Make more money
b. Reduce costs
c. Move faster
d. Avoid risk
2. Keep raising prices until you get pushback
 The ideal price:
when customers complain,
but still pay.
3. Most startups are undercharging!
● Lower prices are not a sustainable advantage
● Charge more → higher margins → bigger moat!
● Pricing implies value
Raising prices is the easiest
way to grow revenue.
 If users won’t pay more,
build more value or solve a
bigger problem.
Or, give a lower price in exchange for…
● Your first user
● A valuable logo
● If you get lock-in
● Renew at a higher price
4. Pricing isn’t permanent
● Founders afraid they need to nail it the first time
● Can exclude existing customers, or give advanced notice

221M paid subscribers

https://www.theverge.com/2022/3/24/22993562/netflix-price-increase-us-plans-2022
5. Keep it simple
5. Keep it simple
“...then I quit as your sales advisor!”
Pricing insights
1. Charge!
2. Price on value, not cost
3. Most startups are undercharging
4. Pricing isn’t permanent
5. Keep it simple
Thank You!
Q&A
Business Model Guide
SaaS (Software as a Service)
Cloud-based subscription software

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
SaaS (Software as a Service)
Cloud-based subscription software

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
Transactional
Facilitate transactions and 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 make a purchase in month 2, etc
● CAC
Transactional
Facilitate transactions and take a cut

TAKEAWAYS:
● Usually fintech and payments 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
Marketplaces
Facilitate transactions between buyers and 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 make a purchase in month 2, etc
Marketplaces
Facilitate transactions between buyers and sellers

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
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 make a purchase in month 2, etc
● CAC
Subscription
Product or service sold on a recurring basis, usually to consumers

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
Enterprise
Sell large fixed-term contracts to big companies (5k+ employees)

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
Enterprise
Sell large fixed-term contracts to big companies (5k+ employees)

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
Usage-based
Pay-as-you-go based on consumption in a given period

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)
Usage-based
Pay-as-you-go based on consumption in a given period

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
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
E-commerce
Sell products online

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
Advertising
Sell ads to monetize free users

PRIMARY METRICS:
● Daily Active Users (DAU): Unique users active in a 24 hour period
● Monthly Active Users (MAU): Unique users active in a 28 day period
● User Retention: % of active users on D1/7/30/etc
● CPM (Cost Per Thousand) or CPC (Cost Per Click)
Advertising
Sell ads to monetize free users

TAKEAWAYS:
● Typically consumer social products with huge scale
● 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
Hardtech/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
Hardtech/Bio/Moonshots
Nearly impossible businesses with long time horizons

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