Typical business models and metrics
By: Shengyu Chen
Tags: Metrics, Ycombinator, Startup, Business Models

I came across another A16z gem on business models and metrics. I have been meaning to want to write about business models for a while now. There’s a complete list somewhere but that list is like 100+ items long and when I saw that, I was like, no…

Then came this video:

It’s a good summary of common business models. Boom that’s all I need on record. Kk, here we go:

1. Enterprise Business Model

An enterprise company sells services or software to other businesses on a single license basis. These contracts have fixed terms, designated contract values, and come up for renewal at the end of the term.

Example: Docker, Cloudera, FireEye

Key metrics:

Bookings: sum of value of all customer contracts (different from revenue -> need to earn revenue from bookings)

Total Customers: Total number of unique contracted customers today

Revenue: Recognized when service is actually provided to the customers

Key mistakes: LOIs/Bookings/ACV != revenue

2. SaaS model

A SaaS company sells subscription based licenses for a cloud hosted software solution.

Example: Segment, Ironclad, Sendbird

Key metrics:

MRR (Monthly recurrent rev): Revenue recognized for the month (doesn’t include one time, fees from professional services etc.)

ARR (Annual recurrent rev): Measure of revenue components that are recurring in nature on an annual basis

Gross MRR Churn: MRR lost in a given month/monthly rev at the beginning of the month

PAID CAC: Cost per customer acquired through paid marketing channels (total sales and marketing spend in a given month/total customers acquired via paid channels, including sales in a given month

Key mistakes:

ARR and and annual revenue run rate aren’t the same. One month’s all in revenue by 12 = Annual run rate not annual recurring revenue.

Don’t include one time revenue

3. Subscription

A subscription company sells a product or service on a recurring basis.

Example: The Atheletic, Dollar Shave Club, Blue Apron

Key metrics:

MRR: similar to SaaS

MRR CMGR: Implied compounded monthly MRR growth rate between two disparate months. CMGR = (latest month MRR/first month MRR) ^ (1/number of months) -1 This is smaller than the average of the growth rate.

Gross User Churn: total lost customers in a given period / prior period total customers. Unit churn

Paid CAC: Same as SAAS.

4. Transactional Company

This enables a financial transaction on behalf of a customer and collects a fee (usually a percent of the underlying transaction)

Examples: Stripe, Paypal, Coinbase, Brex

Key metrics:

Gross Transaction Volume (GTV): Total Sales or payment dollar volume transacted in a given period

Net Revenue: The portion of GTV that the company recognizes as revenue for services rendered

User Retention: Percent of customers who go on to make at least one purchase in month 2 (note this is a cohort metric)

Paid CAC: Cost per customer acquired through paid marketing channels (total sales and marketing spend in a given month / total customers acquired through paid channels, including sales)

Common mistakes:

User retention is a cohort metric. It is re calculated each month.

5. Market Place

This is a company that acts as an intermediary in the sale of a good or service between sellers and buyers, collecting a percent of the total transaction value.

Examples: Airbnb, eBay

Key metrics:

GMV (Gross merchandise value) This is the total dollar volume of merchandise transacted in a given period.

Net Revenue: The portion of GMV that the company recognizes as revenue for services rendered.

Net Revenue CMGR (Compound monthly growth rate) This is the implied monthly net revenue growth rate between disparate months.

User retention: percent of customers who go on to make at least one purchase in month 2

Paid CAC: Same as above

Key insights here: Airbnb users come back once a year to book. That’s not very easy to track during the year. So they had to be creative: tracking other things that lead up to that renewal a year later. So their questions are: what are the things the users do prior to actually booking on Airbnb? In their case, they usually do a lot of planning, researching and list creation. So internally, Airbnb need to track how well it helps the users do these planning, researching and lists creation.

Common mistakes:

In market places, paid CAC fail to include all costs associated with user acquisition such as referral incentives, discounts, cretics etc.

6. eCommerce

An eCommerce company sells physical goods online. Generally eCommerce companies manufacture and inventory those goods.

Examples: Warby Parker, Bonobos, Memebox

Key metrics:

Monthly revenue: Total revenue in a given month

Revenue CMGR: Implied compounded monthly revenue growth rate between two disparate months

Gross Margin: Gross profit in a given month/total revenue in the same month (Gross profit is the tot. Rev — cost of goods sold)

Paid CAC: same as above. Cost of customers acquired through paid marketing channels ( total sales and marketing spend in a given month / total customers acquired via paid channels, sales)

Common mistakes:

Net margin should consider all costs

7. Advertising

An Advertising company offers a free service to consumers and derives revenue entirely, or predominantly, from advertisers. Common advertising companies include social networks and content sites.

Examples: Snapchat, Twitter, Reddit

Key metrics:

Daily active users (DAU): Total number of unique users active in a 24 hour period, averaged over a given period of time.

Monthly active users (MAU): Total number of unique users at least once in last 28 days.

Percent Logged In” Total monthly active users with a registered account (logged in) divided by the total unique visitor (inclusive of both logged in and logged out) during the same 28 day window

Common mistakes:

Not defining what active means in your context of the business

8. Hardware (Similar to eCommerce)

A hardware company sells physical devices to consumers or businesses

Examples: Fitbit, GoPro, Xiaomi

Key metrics:

Monthly revenue: Total revenue in a given month

Revenue CMGR: Implied compounded monthly revenue growth rate between two disparate months

Gross Margin: Gross profit in a given month/total rev in the same period

Paid CAC: cost per customer acquired through paid marketing channels

Common mistakes in presenting;