The model library

Six common ways startups earn money, each described by how money comes in, how it goes out and where the model tends to break. General education, with no companies named.

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Six models in detail

Each entry links to a long read that develops one of its themes.

Subscription

Customers pay at regular intervals for continued access to a product or service. Revenue repeats until they cancel, so keeping customers matters as much as finding them.

Money in: Monthly or annual fees, sometimes tiered by features or by the number of users.
Money out: Acquisition, hosting or fulfilment, support and the team that builds the product.

Questions to ask

How quickly are customers leaving, and why?
How long does it take to earn back the cost of a new customer?
How much growth comes from existing customers paying more?

Marketplace

The platform connects two groups, such as buyers and sellers, and keeps a share of each transaction. It rarely owns the goods or employs the people doing the work.

Money in: A take rate on each transaction, listing fees or service fees, from one side or both.
Money out: Attracting both sides, payment handling, trust and safety, and subsidies in the early years.

Questions to ask

Which side was harder to attract, and what did it cost?
Is the take rate rising, falling or under pressure?
How often do participants complete deals off the platform?

Freemium

A basic version is free for anyone, and a smaller group pays for more features, capacity or support. The free tier acts as the main way new customers arrive.

Money in: Paid plans from the share of users who upgrade.
Money out: Serving every free user, plus the usual product and support costs.

Questions to ask

What share of free users become paying customers?
What does one free user cost to serve?
Would the product still attract users if the free tier were smaller?

Usage-based

Customers pay in proportion to what they consume: storage, messages, transactions processed or computing time. Revenue rises and falls with their activity.

Money in: Metered charges, often with a minimum commitment or volume discounts.
Money out: The infrastructure or suppliers behind each unit of use.

Questions to ask

Does each unit earn more than it costs to supply?
How dependent is revenue on a few large customers?
Do customers tend to use more over time?

Advertising

The audience uses the product for free, and advertisers pay to reach it. The product has two kinds of customer with different interests.

Money in: Advertisers pay by reach, by click or by result.
Money out: Content or product development, hosting and the sales team that serves advertisers.

Questions to ask

How engaged is the audience, beyond its size?
How much revenue does each user bring over a period?
How exposed is revenue to ad budgets and privacy rules?

Hardware + service

Customers buy a physical device, often priced close to cost, and pay a recurring fee for the software or service that makes it useful.

Money in: The device sale plus a subscription or usage fee.
Money out: Manufacturing, inventory, shipping, returns and the service itself.

Questions to ask

How much cash is tied up in inventory?
How many device buyers keep paying for the service?
What happens to margins if manufacturing costs rise?

How to read any business model in four steps

1Name the unitDecide what one sale is: a customer, an order, a transaction or a device.
2Follow the money inWho pays, how much, how often, and through which channel.
3Follow the money outWhat each sale costs to deliver, and what each customer costs to win.
4Find the fragile linkAsk which single change, in customers, costs or funding, would break the model.

Terms you will meet in every pitch

Short definitions of terms that appear across the library and the research archive.

Recurring revenue: Revenue customers are committed to pay again, often stated per month or per year.
Take rate: The share of each transaction a marketplace keeps.
Conversion: The share of free users or trial users who start paying.
Expansion revenue: Extra revenue from existing customers who upgrade or use more.
Dilution: The reduction in an existing shareholder's ownership when a company issues new shares.
Default alive: A company whose revenue would cover its costs before cash runs out, if nothing else changed.