# YC guide to business models

**Author:** Aaron Epstein
**Type:** Video
**URL:** https://www.ycombinator.com/library/Gh-yc-guide-to-business-models
**YouTube ID:** oWZbWzAyHAE

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Here are the nine most common business models we see in startups:

## **SaaS (Software as a Service)**

Cloud-based subscription software

![uploaded image](/media/?key=user_uploads/206006/86f890f7-5e56-4728-8be8-6c0c05a79bf2&type=article&id=1035)

**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

![uploaded image](/media/?key=user_uploads/206006/6dd2517a-2d38-406d-a2c1-ecffbea67bb4&type=article&id=1035)

**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

![uploaded image](/media/?key=user_uploads/206006/8bed9a4a-32a4-403b-8d25-d345c805ac9c&type=article&id=1035)

**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

![uploaded image](/media/?key=user_uploads/206006/18e9ef1b-c8a2-48b3-a34c-76bfb76c207b&type=article&id=1035)

**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)

![uploaded image](/media/?key=user_uploads/206006/e8109d8b-672a-462e-a6a1-50a659719875&type=article&id=1035)

**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

![uploaded image](/media/?key=user_uploads/206006/ca502452-82bd-4035-9733-1d627fbc66ff&type=article&id=1035)

**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

![uploaded image](/media/?key=user_uploads/206006/3b5bb52e-d664-47a9-9de6-39f07f070b3b&type=article&id=1035)

**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

![uploaded image](/media/?key=user_uploads/206006/9cb48a75-35a4-4436-88a8-67a17aa347f6&type=article&id=1035)

**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

![uploaded image](/media/?key=user_uploads/206006/a3eaf90e-b40c-4e84-a71d-8dea32a76304&type=article&id=1035)

**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

