How Should You Charge Your Customers?

Determining the way your startup will price and ultimately charge its customers is fundamentally one of the most important things you can get right as a founder. Your pricing strategy can make or break your business before it even begins.

Imagine if Facebook was a subscription service that charged users a monthly fee and didn't run ads? Do you think Facebook would be as successful as they are now as a result? Maybe, maybe not. One thing is for sure though. Thousands of entrepreneurs start businesses every year and have no idea what business models are out there. Imagine if you had the list of possibilities at the beginning? It would probably save you a lot of time, right? Well, luckily we're in the business of saving entrepreneur's time. Today we're going to present a list of nine business models, not industries, that every business falls into. This list was popularized by YCombinator, one of the world's most well-respected startup organizations. Let's take a look at the list.

  1. Enterprise - Enterprise businesses sell services or software to customers on a singular-basis. That is, they have contracts with fixed prices and terms. Not many startups adopt the enterprise business model. It often leads to having a long sales pipeline and high contract values. Some companies that use the enterprise business model are Docker, Cloudera, and FireEye.

  2. Software-as-a-Service (or SaaS) - As one of the most popular business models out there in the tech world, SaaS companies sell subscription-based licenses for some form of cloud-hosted solution or tool. Some companies that use the SaaS model are Segment, Ironclad, and Sendbird.

  3. Usage-Based - Usage-based models are rising in popularity, especially due to the rise of cloud services from Amazon Web Services, Microsoft, and Google. These companies charge their customers only by the amount in which the customer uses a particular product or service.

  4. Subscription - Another popular model is the subscription model wherein a company sells a product or service to a consumer on a recurrent basis. Think of companies like The Athletic, Dollar Shave Club, and Blue Apron.

  5. Transactional - Here is a business model that is everywhere, but it's not necessarily in the limelight. Transactional businesses charge customers a percentage of another transaction. Think of a real estate agent commission or financial services companies such as Stripe, PayPal, or Visa.

  6. Marketplace - Marketplace businesses have been around for many years. A marketplace model exists when an intermediary provides value supporting a transaction of a third-party buyer and seller. Think of companies like Uber, Airbnb, Amazon, or eBay.

  7. E-Commerce - E-commerce businesses have blown up in popularity with the rise of the internet and continues to grow at an ever-increasing rate. E-commerce businesses sell goods on the web to customers. Some companies that use the e-commerce model are Warby Parker, Bonobos, and Memebox.

  8. Advertising - Running ads is not a new concept but is a model that many folks never knew existed. Within the advertising business model, businesses offer free services to customers and collect revenue from advertisers who show ads to the business's customers. Think of YouTube creators that run ads on their channels or large social media sites like Facebook, Snapchat, or Twitter.

  9. Hardware - Hardware companies aren't as popular as they once were, but there are still plenty of opportunities out there to create successful hardware businesses. A hardware business sells physical devices, normally hardware + software combined goods, to customers. Think of companies like Apple, Fitbit, and GoPro.

There's a lot to take in here, but start learning each individually and find real-world examples. As you work through the startup process, think of how you will charge your customers. Having a strong foundation on what exists is important for not making costly mistakes down the road. As your business grows, you might be able to incorporate multiple models into one company among different departments, but at the beginning, we recommend identifying the model you plan to use during your go-to-market strategy.