Startup Business Models and Pricing

Executive Summary:

  • The 9 main business models that build billion-dollar companies are: SaaS, Transactional, Marketplaces, Hard-set, Usage-based, Enterprise, Advertising, E-commerce, and Bio.
  • SaaS (31%), Transactional (22%), and Marketplaces (14%) make up 67% of the YC top 100 companies, with Marketplaces and Transactional businesses creating the most value.
  • Key pricing insights: charge to learn customer value, price based on value not cost, most startups undercharge, pricing can increase over time, and keep pricing simple.

Meeting Notes:

Business Models of Billion Dollar Companies

  • There are 9 main business models that build billion-dollar companies:
    • 1. Software as a Service (SaaS): Cloud-based subscription software where customers pay monthly or annually to access the software.
    • 2. Transactional: Facilitate transactions and take a cut (often fintech companies).
    • 3. Marketplaces: Two-sided marketplaces that facilitate transactions between buyers and sellers.
    • 4. Hard-set: No details provided.
    • 5. Usage-based: No details provided.
    • 6. Enterprise: No details provided.
    • 7. Advertising: Make money through advertisements.
    • 8. E-commerce: No details provided.
    • 9. Bio: No details provided.
  • A detailed guide covering metrics, examples, and key takeaways for each model will be provided.

Insights from the YC Top 100 Companies

  • SaaS (31%), transactional (22%), and marketplaces (14%) make up 67% of the YC top 100 companies.
  • Marketplaces create 30% of the value despite being only 14% of the list, as they tend to become dominant winners with strong network effects once they get huge.
    • Examples: Airbnb, Instacart, DoorDash, OpenSea, ShareThere
  • Transactional businesses create 29% of the value despite being 22% of the list, as they are directly in the flow of funds making it easy to take a cut.
    • Examples: Stripe, Coinbase, Brex
  • SaaS businesses have consistent recurring revenue which allows predictability and compounding growth.
  • Very few advertising businesses (3%) become big winners unless they catch lightning in a bottle with organic virality to become a top hub/platform with network effects.
    • Examples: Reddit, Twitch
  • Key Takeaways:
    • No services, consulting, affiliate, hardware, or platform-dependent businesses in the top 100 due to issues like low margins, scaling challenges, and platform risks.
    • Recurring revenue with strong retention is consistently a winner if you keep delivering value.
    • Network effects, lock-in, technical innovation, higher margins, and organic virality can build strong defensible moats.

Pricing Insights from Top YC Companies

  • 1. You should charge to learn who wants your product, how much they value it, and affordable customer acquisition channels.
    • Example: Stripe charged 5% per transaction (higher than 3% competitors) to test value.
  • 2. Price based on value, not cost. Charge based on the perceived value to customers, not just your cost of delivery.
    • Get customers to articulate the value and problems you solve (make money, reduce costs, move faster, avoid risk).
    • Raise prices incrementally until you get pushback but customers still pay.
  • 3. Most startups undercharge. Lower prices are not a sustainable advantage as larger competitors can underprice you.
    • Higher prices signal higher value and allow higher customer acquisition spend to outcompete others.
  • 4. Pricing isn't permanent. You can increase over time as you build more value.
    • Exclude existing customers or give advance notice for increases.
    • Example: Netflix regularly increases prices on 221M subscribers.
  • 5. Keep pricing simple and straightforward, avoid adding unnecessary friction.
    • Example of good, clear pricing: GitLab
  • Example Story: Segment started free, then $120/year. Raised to $15,000/year after an advisor recommended $120,000/year for their enterprise product. This allowed them to capture more value and get acquired for over $3 billion.