Business Model Guide : YC Startup Library | Y Combinator:
Here are the nine most common business models we see in startups:
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
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
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
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
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
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)
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
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)
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
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