Markets and business models
Business models
The main ways software companies make money, and the economics each implies for margin, sales motion and venture scale.
A business model is the story of how value turns into cash: who pays, for what, how often, and at what margin after you deliver the product. Investors and boards care because revenue quality (recurring, high-margin, expandable) compounds differently from one-time or thin-margin revenue. Engineers should care because the model dictates what you build: metering, payouts, ads inventory, or a billing system that can handle commits.
Two products can solve the same problem and be completely different businesses. Read the concept pages in order, then pick the family that matches how value actually shows up.
The main families
| Model | Recurring? | Predictability | Typical gross margin | Sales motion |
|---|---|---|---|---|
| Subscription SaaS | Yes | High (especially annual) | ~70–85% | PLG → mid-market → enterprise |
| Usage / API | Often | Medium (commits help) | ~50–75% (AI often lower) | Dev-led → enterprise commits |
| Marketplace | Partial | Medium | Net revenue GM often high; ops can drag | Supply + demand GTM |
| Transactional / fintech | Per txn | Medium–high at scale | Wide (10–70%+) | Sales + partnerships |
| Advertising | No (auction) | Medium at scale | High on incremental ads | Self-serve + agency |
| E-commerce | No | Low–medium | ~30–60% product GM | Brand + paid + retail |
| Hardware + software | Hybrid | Medium | Blended | Channel + direct |
| Open core | Subscription/cloud | Medium–high | Cloud-like | Community + enterprise |
Subscription SaaS charges per seat, month or year. Salesforce, Notion, Datadog (often hybrid with usage). High margins, predictable revenue, land-and-expand.
Usage / API charges for consumption. Twilio, Snowflake, model APIs. Huge net retention when usage grows — and volatility when it shrinks. Real COGS. See usage economics.
Marketplace keeps a percentage of GMV. Airbnb, Uber, DoorDash. Net revenue is take rate × GMV, not GMV. See marketplace economics.
Advertising sells attention. Needs enormous scale because ARPU per user is small. See consumer economics.
Concepts in this section
| Step | Concept | What it answers |
|---|---|---|
| 1 | Revenue quality | Why some dollars are worth more than others? |
| 2 | Customer segments | How consumer vs enterprise changes the same model? |
| 3 | Five ways to $100M ARR | How many customers at what ACV? |
| 4 | Hybrid models | When do you add a second revenue line? |
| 5 | Choosing a model | Which meter fits the value and the COGS? |
Common mistakes
- Treating GMV as revenue. A 15% take on $80M of volume is $12M of revenue.
- Designing an elephant sales process for a mouse ACV. The motion must match the animal.
- Starting with three meters. One primary model first; hybrids come later.
Key takeaways
- The model defines who pays, how often, and at what margin — it is a product decision.
- Revenue quality (recurring, expandable, high gross margin) drives valuation more than raw size.
- Customer segment changes CAC, churn and org design inside the same family.
- $100M ARR is customers × ACV. Start with one primary model.
Further learning
YC Startup School on which models dominate top outcomes and how pricing ties to the model:
16 Startup Metrics (a16z)We have the privilege of meeting with thousands of entrepreneurs every year, and in the course of those discussions are presented with all kinds of numbers, measures, and metrics that illustrate the promise and health…Andreessen Horowitz
Related
SaaS economics
Spend to acquire a customer, deliver at high margin, earn them back over many months, and expand the account.
Marketplace economics
Take rates, liquidity, chicken-and-egg dynamics and why some marketplaces become giants.
Unit economics: CAC, LTV and payback
Whether one more customer makes money, how long until cash comes back, and why the LTV formula lies if you treat it as truth.