YC
Startup Business Models and Pricing | Startup School
@ Y Combinator
12/16/22
Takeaways
AE
Aaron Epstein
12/16/22
@ Y Combinator
There are nine business models that nearly every billion-dollar company follows, and it's often more effective to adopt one of these proven models rather than trying to create a new one.
AE
Aaron Epstein
12/16/22
@ Y Combinator
Software as a Service (SaaS) is a cloud-based subscription model where customers pay monthly or annually to access software.
AE
Aaron Epstein
12/16/22
@ Y Combinator
Transactional business models facilitate transactions and take a cut, commonly seen in fintech companies.
AE
Aaron Epstein
12/16/22
@ Y Combinator
Marketplaces connect buyers and sellers, often referred to as two-sided marketplaces, and they can dominate their industries.
AE
Aaron Epstein
12/16/22
@ Y Combinator
SaaS businesses make up 31% of the top 100 YC companies, highlighting their prevalence and success in generating consistent revenue.
AE
Aaron Epstein
12/16/22
@ Y Combinator
Transactional businesses account for 22% of the top 100 YC companies and create 29% of the overall value due to their direct involvement in the flow of funds.
AE
Aaron Epstein
12/16/22
@ Y Combinator
Advertising businesses represent only 3% of the top 100 YC companies, as they require organic virality to succeed, making them less reliable for scaling.
AE
Aaron Epstein
12/16/22
@ Y Combinator
Recurring revenue models are crucial for startup success, as they provide predictable income and higher customer lifetime values.
AE
Aaron Epstein
12/16/22
@ Y Combinator
To build a successful startup, focus on generating recurring revenue, maintaining high retention rates, and creating defensible moats.
AE
Aaron Epstein
12/16/22
@ Y Combinator
Pricing should be viewed as a tool to learn about customer demand and value perception, helping to refine your product offering.
AE
Aaron Epstein
12/16/22
@ Y Combinator
Founders often make the mistake of being afraid to charge for their product, fearing customer rejection. However, charging customers is one of the most effective ways to learn about your business, including whether users are willing to pay and which customer segments are most excited to pay.
AE
Aaron Epstein
12/16/22
@ Y Combinator
If users refuse to pay, it indicates that you haven't built enough value into your product or you're targeting the wrong customer segment.
AE
Aaron Epstein
12/16/22
@ Y Combinator
Stripe set their price at five percent per transaction to test the value of their product, which was nearly double that of their competitors, to prove they had built enough value into their offering.
AE
Aaron Epstein
12/16/22
@ Y Combinator
When starting out, focus on finding the right order of magnitude for your pricing rather than overthinking it with complicated charts and formulas.
AE
Aaron Epstein
12/16/22
@ Y Combinator
If you're charging ten dollars and customers are willing to pay a hundred, you should adjust your price accordingly; however, if they're only willing to pay fifteen or twenty, you're in the right ballpark.
AE
Aaron Epstein
12/16/22
@ Y Combinator
Pricing isn't permanent; it often takes years to capture the full value of your product, so don't worry about maximizing value early on.
AE
Aaron Epstein
12/16/22
@ Y Combinator
You should price based on the perceived value of your product rather than on cost, as many founders mistakenly use cost-plus pricing, which ignores the full value customers see.
AE
Aaron Epstein
12/16/22
@ Y Combinator
If your price is higher than the value customers see in your product, they won't buy from you, so it's crucial to find the right balance.
AE
Aaron Epstein
12/16/22
@ Y Combinator
To find your product's value, talk to your users about the problems your product solves and what value they see in it.
AE
Aaron Epstein
12/16/22
@ Y Combinator
Incrementally raising prices until you receive pushback from users can help you find the ideal price point where customers complain but still pay.
AE
Aaron Epstein
12/16/22
@ Y Combinator
Most startups are undercharging, and relying solely on lower prices as a differentiator is not a sustainable strategy.
AE
Aaron Epstein
12/16/22
@ Y Combinator
When you charge more, you can achieve higher margins, allowing you to invest more in customer acquisition and build a stronger competitive moat.
AE
Aaron Epstein
12/16/22
@ Y Combinator
Pricing implies value; if your price is lower than competitors, customers may perceive your product as less valuable.
AE
Aaron Epstein
12/16/22
@ Y Combinator
Raising prices is often the easiest way to grow revenue, as it can double your income without needing to acquire more customers.
AE
Aaron Epstein
12/16/22
@ Y Combinator
If users won't pay more, it may indicate that you need to enhance your product's value or address a more significant problem.
AE
Aaron Epstein
12/16/22
@ Y Combinator
You can offer lower prices in exchange for initial feedback, recognizable logos for social proof, or to build customer lock-in.
AE
Aaron Epstein
12/16/22
@ Y Combinator
Pricing isn't permanent; you can adjust it over time as you learn more and add value to your product.
AE
Aaron Epstein
12/16/22
@ Y Combinator
Keep your pricing simple to avoid friction that prevents customers from signing up and paying.
AE
Aaron Epstein
12/16/22
@ Y Combinator
The story of Segment illustrates that starting with a low price can signal a lack of value, and they successfully increased their price significantly by asking for more.
AE
Aaron Epstein
12/16/22
@ Y Combinator
To summarize, charge appropriately, price on value, recognize that most startups undercharge, understand that pricing isn't permanent, and keep it simple.