[YC Startup School] Startup Business Models and Pricing

My notes on Startup Business Models and Pricing with YC Group Partner Aaron Epstein

Startup Business Models and Pricing | Startup School

YC Group Partner Aaron Epstein talks about different startup business models, how to monetize, and how to price your product. Pricing and monetization is one of the most common questions from founders, and this talk outlines 9 business models as well as highlighting business model lessons from the top YC companies. Business Model Guide: https://www.ycombinator.com/library/Gh-business-model-guide Apply to Y Combinator: https://www.ycombinator.com/apply/ Work at a startup: https://www.ycombinator.com/jobs Chapters (Powered by https://bit.ly/chapterme-yc) - 00:00 - Introduction 00:13 - Outline 00:42 - 9 business models that build billion-dollar companies 02:28 - Business model lessons from the top 100 YC companies 09:42 - Overall lessons 16:06 - 5 pricing insights from top YC companies 29:15 - Story of Segment - How to charge for your product 32:00 - Wrap-up - Key pricing insights #startup #tech #entrepreneur

https://www.youtube.com/watch?v=oWZbWzAyHAE&list=PLQ-uHSnFig5M9fW16o2l35jrfdsxGknNB&index=5

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9 business models of (nearly) every billion-dollar company

SaaS (Software as a Service)

• 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

• 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

• 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

• 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

• 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

• 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

• 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

• 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

• 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

• 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

• 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)

• 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

• Monthly Revenue: Total sales

• Growth Rate: Measured weekly or monthly

• Gross Margin/Unit Economics: Revenue - Cost of Goods Sold (COGS)

• CAC

• 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

• 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)

• 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

• Milestones: Progress towards the long-term vision

• Signed contracts

• Letters of Intent (LOIs): Non-binding contracts indicating interest to purchase

• 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

Business model lessons from top 100 YC companies

Y Combinator Top Companies List | Y Combinator

The top Y Combinator companies of all time by valuation.

https://www.ycombinator.com/topcompanies

Interesting points

What’s not in the top 100

Recurring revenue consistently creates winners

• High predictability

• Higher customer Life Time Values (LTVs)

• Lower Customer Acquisition Costs (CACs)

Biggest winners built with moats

• Network effects

• Lock-in or high switching costs

• Technical innovations: Cruise with self-driving cars

• Higher margins or better unit economics

• Organic distribution through virality or word-of-mouth

Characteristics of the best businesses

1. Generate recurring revenue

2. High retention rate

3. Build defensible moats

4. Close to the transaction

5. Scale with software, not people

6. Proven and business models that are familiar to customers

Startup pricing insights

What pricing can teach you:

1. Who wants your product

2. How much they want it

3. How much value your product provides

4. Which channels you can use to acquire customers

You should charge for your product or service!

Price on perceived value, not costs

How to find your value?

Pricing implies value

When it is okay to give a lower price

Keep your pricing page simple!

References:

Business Model Guide : YC Startup Library | Y Combinator

The nine most common business models we see in startups with primary metrics to focus on and key takeaways for each.

https://www.ycombinator.com/library/Gh-business-model-guide