- The video discusses business models and pricing
- There are 9 business models that are responsible for nearly all billion-dollar companies, including SaaS, transactional, marketplaces, hard tech, usage-based, enterprise, advertising, e-commerce, and bio
- SaaS businesses make up 31% of the top 100 YC companies, while transactional businesses make up 22% and marketplaces make up 14%
- The top 10 YC companies by value include Airbnb, Stripe, Instacart, Coinbase, DoorDash, and Reddit, with 5 of them being marketplaces and 3 being transactional businesses
- Marketplaces tend to build winner-take-all companies and have massive network effects, while transactional businesses are directly in the flow of funds and become critical infrastructure for other companies
- SaaS businesses are likely to make the top 100 list due to their consistent revenue, while advertising businesses have a low representation in the top 100
- Services and consulting businesses are not present in the top 100 YC companies

- Consulting businesses, affiliate businesses, hardware businesses, and businesses built on other platforms are not venture scale due to various limitations.
- Recurring revenue creates winners in business as it is predictable and results in higher customer lifetime values and lower customer acquisition costs.
- Strong retention is crucial for recurring revenue businesses as churn can hinder growth.
- Building moats through network effects, lock-in, technical innovation, higher margins, and organic distribution can lead to success.
- Pricing is a tool to learn about customer demand, value, and acquisition channels, and founders should not be afraid to charge for their product.
- Pricing should be based on value, not cost, and founders should focus on finding the right order of magnitude for pricing and iterate over time.

- Cost plus pricing is not recommended as it ignores the full value perceived by customers
- Talk to users to understand the problem your product solves and the value they see in it
- Incrementally raise prices until you get pushback from users to find the ideal price
- Most startups undercharge and lower prices are not a sustainable advantage
- Charging more leads to higher margins and a bigger competitive advantage
- Pricing implies value and can influence customer perception of your product's value
- Raising prices is the easiest way to grow revenue without acquiring more customers
- If users won't pay more, either build more value into your product or solve a bigger problem
- Lower prices can be offered in exchange for first users, recognizable logos, lock-in, or future renewals
- Pricing isn't permanent and can be adjusted over time
- Keep pricing simple to avoid friction and increase conversion rates

- Customers responded positively to a higher price, indicating that the low price made them question the value and trustworthiness of the product.
- A sales advisor suggested a price of $120,000 per year, which initially scared the company.
- In a sales meeting, the CEO reluctantly mentioned the price of $120,000, but the customer negotiated it down to $18,000.
- This experience taught the company the importance of asking for higher prices and led to increased deal sizes and eventual acquisition by Twilio for over $3 billion.
- The key pricing insights are: charge for your product, price based on value, most startups undercharge, pricing can be changed over time, and keep pricing simple.

The video discusses various business models and pricing strategies. It highlights the importance of recurring revenue and building moats for success. It emphasizes the need to charge based on value and iterate pricing over time. The summary also mentions a specific example where asking for higher prices led to increased deal sizes and eventual acquisition by Twilio. Overall, the key insights are to charge for your product, price based on value, avoid undercharging, and keep pricing simple.

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://yc.link/SUS-apply
Work at a startup: https://yc.link/SUS-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

I'm a group partner here at Y Combinator.

And in this video, we're going to be talking about business models and pricing.

There's 3 main things that we're gonna cover in this video.

The first is the 9 business models of nearly every billion dollar company.

It turns out there's just a handful of them that build the biggest winners.

Next, we're gonna talk about business model lessons from the YC Top 100 Companies list.

And finally, we're going to cover some startup pricing insights that we've taken from the thousands of companies that have gone through YC.

So first, let's talk about business models that build winners.

If you're not familiar, a business model is a fancy term for how you make money.

And it turns out that business models are important because we see founders that often get frustrated when investors won't fund them and their business won't grow.

And usually this is because they're not using a proven business model.

And there are actually only a handful of business models that are responsible for nearly all billion-dollar companies.

And rather than trying to reinvent the wheel, you should actually just copy 1 of these.

Nearly every billion dollar company is 1 of these 9 business models.

There's SaaS business models, which is software as a service, which is cloud-based subscription software that customers pay either monthly or annually in order to access the software.

There's transactional business models that facilitate transactions and take a cut of those transactions.

And then there's marketplaces, which facilitate transactions between buyers and sellers.

These are often referred to as two-sided marketplaces.

There's enterprise, there's advertising, there's e-commerce, and there's bio.

And so in this video, I'm actually not going to get too deep into the specifics of each of these business models.

Instead, we're going to have a business model guide that I've put together that's going to be linked in the description down below.

This guide is going to cover the metrics that matter most for each business model, key takeaways for each of them, and other similar companies that you can learn from depending on which business model you are using for your company.

In this video, what I want to focus on is things that we can learn from the top 100 YC companies.

The top 100 YC companies is pulled from ycombinator.com slash top companies, which is a list of the most valuable companies that Y Combinator has ever funded.

And so for the purposes of this video, I've gone through this list and I've matched each company up with their primary business model to try to see what interesting insights we can get from them.

Now, some later stage and larger companies actually have multiple business models.

However, for your purposes as an early stage startup, you should just have a single business model that you're focused on.

These are the top 100 YC companies organized by business model.

And there's some interesting things that we see here.

First is that SaaS businesses actually make up 31% of the top 100 YC companies.

Transactional businesses make up 22% of the top 100 YC companies.

So just with these 3 business models, SaaS, transactional, and marketplaces, it makes up 67% of the top 100 YC companies.

On the flip side, with business models like advertising and e-commerce, they barely register on the top 100 YC companies list.

If you're familiar with startup outcomes and venture capital returns, you know that there's a power law effect, which means that the biggest winners far, far outperform all other businesses by orders of magnitude.

And this is true for the YC Top 100 Companies list as well.

Turns out that 50% of the overall value of the top 100 YC companies actually comes from just the top 10.

And so it's interesting to look at what insights we can get from these 10 companies too.

These are the top 10 YC companies by value.

There's Airbnb, There's Stripe, there's Instacart, there's Coinbase, there's DoorDash, there's Reddit.

There's a number of companies here that you're probably very familiar with or use on a regular basis.

And what's especially interesting is that 5 of the YC top 10 are actually marketplaces.

There's Airbnb, there's Instacart, there's DoorDash, there's OpenSea, and there's Fair.

The interesting takeaway here is that marketplaces are most likely to build winner-take-all companies.

They tend to become so big and dominant in their industry that it doesn't leave much room or market share for other competitors once marketplaces actually get huge.

So marketplaces are 14% of the top 100 companies, but they actually create 30% of the overall value because so many are represented here in the top 10.

And while marketplaces are really tough to get off the ground, they have a chicken and egg problem where you can't just build your product and then sell it to customers.

You actually need to solve for both sides of the marketplace, the supply and the demand at the same time in order to get customers.

However, once they hit the inflection point and they start to work, they get massive network effects where each new user of the platform increases the value for everybody else.

So you can think of companies like Airbnb.

If you were looking to rent out a place short term to stay, then chances are you would go to Airbnb because that's where all the inventory is.

Similarly, if you wanted to buy or sell NFTs, you would probably go to OpenSea because that's where everyone is.

It also turns out that 3 of the YC top 10 are transactional businesses too.

So these are companies like Stripe, Coinbase, and Brex.

And the main takeaway here is that transactional businesses far outperform because they're directly in the flow of funds.

This means that they are the platform that money flows through, making it very easy for them to just take their cut.

And so transactional companies are 22% of the top 100 YC companies, but they actually create 29% of the overall value.

And this is because they're as close to the transaction as possible.

This was advice that I received during my YC batch back in 2010.

And that was to get as close to the transaction as possible.

If you're a company like Stripe that literally processes money for companies, or Brex, that is the corporate card that they use to spend money, then you're directly in that flow of funds.

And so it's really easy to take your cut.

On the opposite extreme, if you are an affiliate business, multiple things have to happen before you ultimately get paid, which means that you are very far from the transaction, which makes those not as good of a business.

For transactional businesses, because they're so close to the transaction, they often become critical infrastructure for other companies that they build on top of.

And that usually means that they are solving a top 3 problem for them.

So you can imagine, if you use Stripe as your primary method to get paid from your customers, the thought of ripping that out sounds terrible.

And that's why these transactional businesses become so dominant.

We also see that SaaS businesses are most likely to make the top 100 list.

And this is because they have consistent revenue.

So 31% of the YC top 100 companies are actually SaaS businesses.

And this is because the recurring revenue makes them great businesses.

This means that customers keep paying them every single month or every single year until the customer explicitly says to stop.

So this has lots of benefits, including the predictable revenue that they get, which allows them to compound and grow their business.

We can also see that very few advertising businesses become big winners.

And this may be surprising because we're so familiar with so many companies that have built their business off of an advertising business model.

There's Google, there's Facebook, there's Twitter, just to name a few.

But really, only 3% of the top 100 YC companies use an advertising business model as their primary way to make money.

And that's because advertising businesses need organic virality to win.

They need to catch lightning in a bottle and become the hub where all users go to to hang out or to see live streams in the case of Twitch.

But when that happens, they get really strong network effects just like marketplaces.

So people go to hang out on Reddit and form communities there because that's where everybody else is.

People go to Twitch to watch live streams because that's where all the streamers are.

And so it's really important to remember that you should not use ads as your primary business model unless you expect to be a top 10 site on the internet.

Otherwise, it's too hard to monetize and build a huge scale to become a massive company.

So, what are some overall lessons that we can take away from this list?

First, it's interesting to look at what's not in the top 100 list.

There are no services or consulting businesses there.

And so it can be a good idea to start doing services or consulting for your customers, primarily as a way to learn and make sure that you're building the right product for them.

But consulting businesses suffer from having non-recurring revenue, scaling with people rather than software, and having very low margins as a result.

So that's why these businesses are not venture scale.

Similarly, affiliate businesses, they tend to be too far away from the transaction.

That means that you have to acquire a customer, send them off to another product or service, hope that they actually make a transaction on that other product, or you will get some small commission from that 30 to 90 days later.

So it's too hard to make a lot of money at scale doing an affiliate business.

Similarly, hardware businesses, they require lots of capital to get off the ground, to buy physical parts, and they have low margins as a result.

So that makes it really difficult to start these businesses and also to scale them even if they're working.

And then businesses that are built on other platforms, you don't see in this list either.

That's because they tend to have a lot of platform risk.

If your business is built on top of another big, successful platform and your business starts to work, then it's actually in the interest of that platform to shut you down and capture all of that revenue for themselves.

So that's why even if these look like they're working in the early days, they can be turned off at any moment.

We also see that recurring revenue consistently creates winners.

And this is because it is highly predictable.

Once a customer has committed to pay, they're going to continue paying until they explicitly say that they want to stop paying.

They also have higher customer lifetime values versus one-off transactions.

And this results in lower customer acquisition costs, so you don't have to keep reacquiring customers over and over.

If you have a one-off transactional business, then you have to invest money in acquiring that customer the first time and then also keep putting more money into trying to get existing customers to spend more with you.

That's not the case with recurring revenue businesses.

But recurring revenue only works when you have strong retention.

It's not enough for your product to deliver value right up front and then never again.

You need to keep delivering value over and over again, otherwise your customers will churn and stop paying.

And then you can't scale a leaky bucket if you have lots of churn.

And to give you an example of that, if you had 95% monthly retention for your recurring revenue product.

So that means that 5 percent of your customers will churn and stop paying you every single month.

And if you started with 100 customers at the beginning of the year, then by the end of the year, you would only have 54 customers of your original 100.

That means that you would lose 46% of your customers in just 1 year.

And you would need to get 46 new customers just to break even with where you started the year.

And let's say, for example, you had 90% monthly retention instead of 95.

And that would actually lead to only 28 customers at the end of that first year.

That's a huge difference and a huge hill to climb.

So just that 5% difference in monthly retention can actually be the difference between life and death for a startup.

We can also see that some of the biggest winners are built with moats.

There are network effects that many marketplaces have, right?

Where each new user increases the value and they become the dominant player in the market.

There is also lock-in and high switching costs.

We see this with transactional businesses like Stripe.

If you're the primary way that people actually accept money and process payments, then chances are they're not going to switch off of you.

In SaaS businesses, you get the recurring revenue where customers keep paying over and over again until they say to stop.

You can also get lock-in by having customer data on your platform that once they stop paying, all that customer data goes away.

And then enterprise businesses, while they're often difficult and have long sales cycles to be able to sell into large companies, usually once you've sold into the company, the churn is a lot lower.

Technical innovation is another way to build really strong modes.

And we see this often in hard tech and bio companies especially.

So you can Think of companies like Cruise building self-driving cars, and Boom, which is building supersonic jets.

It takes a really long time to even get to a working product for these types of businesses.

And so for anybody to compete with them, It takes years of difficult technical development just to catch up.

We also see that higher margins and better unit economics can build moats.

In the example of companies like DoorDash and Instacart, they've reached economies of scale where they're so large now that they've been able to drive their costs further down at this scale and improve their margins, which new entrants are not going to be able to compete with.

And finally, if you get organic distribution for your product through virality or word of mouth, you can dominate your market through that as well.

If you are able to get users for free because other users of your product tell new users to come join, and you're competing with a company that has to pay to acquire their customers, then you are going to grow much faster and capture way more of the market.

So to recap, the best businesses generate recurring revenue, have high retention, build defensible moats, are as close to the transaction as possible.

They scale with software, not people, and they're proven and use business models that are familiar to customers.

And so it's important that you focus on innovating on your product, that's what should be new, and copying your business model from 1 of these proven winners.

It's important to think of pricing as a tool to help you learn faster.

It can help teach you who wants your product, how much they want it, how much value your product provides to your users, and which channels you can afford to use to acquire your customers.

So to help you get started, I've compiled 5 pricing insights from the top YC companies.

This is actually the most common mistake that we see founders make.

Often founders are afraid to charge for a number of reasons.

They're often afraid that their customers are gonna tell them no.

They're afraid that their customers are going to walk away and never come back.

And they're afraid that their customers are actually going to go and use their competitor's product.

But it turns out that charging is actually 1 of the most effective ways to learn a lot of really important things about your business.

The first is, are your users even willing to pay or not?

This is often binary, where either they're willing to open their wallet or they don't even see enough value in your product to overcome that hurdle.

It can also teach you which users are most willing to pay.

If you're trying to decide whether you should go after customer segment A or customer segment B, trying to charge and figuring out which 1 is most excited to pay can give you really good signal on who wants your product more.

It can also teach you how much they're willing to pay.

By setting higher prices, you can try to figure out how much value they see in your product.

Even if everyone refuses to pay, that's still valuable information for you to get because it teaches you that you haven't built enough value into your product yet, or you're talking to the wrong customer segment.

In the early days, Stripe wanted to test the amount of value that they were building in their product.

So while most of their competitors were actually charging around 3% per transaction, Stripe decided to set their price at 5% per transaction, nearly double what their competitors were charging.

And the reason that they did this is because they wanted to test how much value their customers saw in things like one-click signup and being able to get started quickly, and really in-depth, detailed developer API documentation that would help developers get started faster.

And so rather than trying to undercut the competition in order to win customers, they did the exact opposite and set a really high bar for themselves to prove that they had built enough value into their product.

The first thing that I recommend is that you don't overthink it.

If you look online, there are tons of charts and graphs and formulas and all these different complicated ways to maximize your pricing and figure out the right price to charge.

But really when you're just getting started, The important thing is to just find the right order of magnitude for your pricing.

And what I mean by that is, if you're charging $10 for your product, and your customers are willing to pay $100, you should probably change your price.

However, if you're charging $10, and your customers are willing to pay $15 or $20, don't worry about it.

You're in the right ballpark, which is the really important thing.

It often takes years to iterate and capture the full value of the product that you've built from your customers.

And so don't worry about capturing that full value early on.

You'll have plenty of time to maximize that.

The next insight is that you should price on value, not on cost.

And so there's 3 important components here.

This is what it costs you to be able to serve your customer.

And then there's the perceived value that your customers see in your product.

And so founders often start with something called cost plus pricing.

What this usually looks like is looking at how much it costs you to serve a customer and then adding an amount on top of that, say $10.

But this actually ignores the full value of what your customers see in your product.

So the difference between your cost to serve your customer and the price that you charge, that's your margin.

That's how much you make on each transaction.

And the difference between the price and the value that your customers see in your product, that's your opportunity to be able to raise your prices, to be able to capture more of that perceived value.

And now if your cost is higher than your price, well, that means that you're going to have negative margins.

And you cannot scale a business with negative margins.

Similarly, if your price is higher than the value that your customers see in your product, that means they're just not going to buy from you.

Well, there's a couple interesting ways to be able to do this.

You can ask them about the problem that you solve and get them to articulate the value to you.

And so what this often looks like is if you reach out to a customer and you get them on a call, and you can ask them, what is the problem that you are hoping that our products could solve for you?

And similarly, if you have a user that's signed up for your product but is not actually paying you, you can reach out to them and talk to them and ask them the question, what problem were you hoping that our products could solve for you?

And their response is usually going to be 1 of 4 interesting things.

The first is they're probably gonna tell you that they were hoping you could help them make more money.

Or they might tell you that they were hoping that you could help reduce costs.

Maybe your product saves them time or money.

They might also say that they were hoping that your product could help them move faster.

Maybe they have something they were looking to launch in 6 months, and with your product, they can actually get it launched in a couple weeks.

Or they might say that your product could help them avoid risk if you help with compliance or offloading something, a headache that they don't want to deal with.

Another way to find your value is to keep incrementally raising prices until you get pushback from users.

And when you keep incrementally raising your prices, you will ultimately find the ideal price, which is when customers complain, but they still pay.

It overcomes that fear of charging a high price and customers walking away.

See all Y Combinator transcripts on Youtube

Startup Business Models and Pricing | Startup School

00:09 - 32:33