Business model

Business Model Design

Guide founders from business model selection through pricing, unit economics, and competitive positioning to investor-ready articulation.

Workflow

1. Diagnose Current State

Ask: "Where are you in business model development?"

State	Signals	Next Step
No model yet	Has product idea, no monetization plan	→ Step 2: Select Business Model Type
Model chosen	Knows type (SaaS, marketplace, etc.), needs pricing	→ Step 3: Design Pricing
Has pricing	Needs to validate unit economics	→ Step 4: Unit Economics Analysis
Entering market	Needs differentiation strategy	→ Step 5: Competitive Positioning
Pitch prep	Needs to articulate model clearly	→ Step 6: Create Deliverables

2. Select Business Model Type

Match founder's product to the right model archetype. See references/business-model-patterns.md for the complete pattern library.

Core Model Types (YC Framework):

Model	Description	Key Metrics	Best For
SaaS	Cloud subscription software	MRR/ARR, NRR, CAC	B2B software with recurring value
Transactional	Take cut of transactions	GTV, Net Revenue, Retention	Fintech, payments
Marketplace	Connect buyers + sellers	GMV, Take Rate, Liquidity	Platforms with network effects
Subscription	Recurring consumer service	MRR, Churn, LTV	Consumer products with habit
Enterprise	Large contracts to big companies	Bookings, ACV, Pipeline	Complex B2B, long sales cycles
Usage-Based	Pay per consumption	Monthly Revenue, Retention	APIs, infrastructure, cloud
E-commerce	Sell products online	Revenue, Gross Margin, CAC	D2C brands, physical goods
Advertising	Monetize free users via ads	DAU/MAU, Retention, CPM	High-scale consumer apps

Selection Questions:

1. Who pays? (End user, business, advertiser, both sides?)
2. How often do they pay? (One-time, recurring, per-use?)
3. What's the natural buying pattern? (Impulse, considered, enterprise?)
4. Where's the value? (Product, platform, network?)

3. Design Pricing Strategy

Three foundational approaches — choose based on market position:

Strategy	When to Use	Method
Value-Based	Differentiated product, clear ROI	Price based on customer value delivered
Cost-Plus	Commodity market, known costs	Cost + target margin (rarely optimal for SaaS)
Competitive	Established market, price-sensitive	Position relative to alternatives

See references/pricing-frameworks.md for detailed implementation.

Pricing Model Selection (for SaaS/subscription):

Model	Pros	Cons	Use When
Per-seat	Simple, predictable	Limits adoption	Value scales with users
Per-feature (tiered)	Natural upsell path	Complexity	Clear feature-value tiers exist
Usage-based	Scales with customer	Revenue volatility	Value directly tied to consumption
Flat-rate	Dead simple	Leaves money on table	Early stage, testing
Freemium	Low friction acquisition	Conversion challenge	Wide top-of-funnel, viral potential
Hybrid	Flexibility	Complexity	Enterprise + self-serve motions

Value Metric Selection (HOPE Framework): Find the metric that best captures value delivery:

• High value connection — Does it correlate to customer outcomes?
• Obvious to customer — Is it familiar and predictable?
• Predictable — Can customers forecast their usage?
• Easy to implement — Can you actually measure and bill it?

Common value metrics: seats, contacts, API calls, records, storage, revenue processed, messages sent.

Pricing Sanity Checks:

• Does price reflect value delivered?
• Can customers predict their bill?
• Is there a natural expansion path?
• Does pricing align with how customers budget?

4. Unit Economics Analysis

The health check for any business model. See references/unit-economics.md for formulas and benchmarks.

Core Metrics:

Metric	Formula	Healthy Benchmark
CAC	Total S&M Spend ÷ New Customers	Varies by model
LTV	(ARPU × Gross Margin) ÷ Churn Rate	3× CAC minimum
LTV:CAC Ratio	LTV ÷ CAC	3:1 to 5:1 optimal
CAC Payback	CAC ÷ Monthly Gross Profit	<12 months for SaaS
Gross Margin	(Revenue - COGS) ÷ Revenue	>70% for SaaS

Diagnostic Questions:

1. What does it cost to acquire a customer? (CAC)
2. How much will that customer pay over their lifetime? (LTV)
3. How long until you recoup acquisition cost? (Payback)
4. Are you making money on each transaction? (Gross Margin)

Red Flags:

• LTV:CAC < 1:1 — Unsustainable, losing money on every customer
• LTV:CAC 1:1 to 2:1 — Dangerous, need optimization
• CAC Payback > 18 months — Cash flow risk, slow growth
• Gross Margin < 50% — Not a software business, harder to scale

By Business Model Type:

Model	Key Economics	Target
B2B SaaS	LTV:CAC 3:1+, Payback <12mo	NRR >100%
B2C SaaS	LTV:CAC 3:1+, Payback <6mo	Viral coefficient >1
Marketplace	Unit margin positive, GMV growth	Take rate 10-20%
E-commerce	Contribution margin >30%, CAC < first order	Repeat rate >40%

5. Competitive Positioning

How to stand out in a crowded market. See references/positioning-frameworks.md for detailed frameworks.

April Dunford's Positioning Flow:

Competitive Alternatives → Unique Capabilities → Value → Target Customer → Market Category

Step-by-step:

1. List Competitive Alternatives

   • What would customers do if you didn't exist?
   • Include: direct competitors, indirect solutions, doing nothing, manual processes

2. Identify Unique Capabilities

   • What do you have that alternatives don't?
   • Features, technology, service, price, experience

3. Map to Value

   • So what? What does each capability enable?
   • Connect features → benefits → outcomes

4. Define Best-Fit Customers

   • Who cares most about your unique value?
   • What characteristics make someone care?

5. Choose Market Category

   • What context makes your value obvious?
   • Options: existing category, subcategory, new category

Positioning Statement Template:

For [target customer] who [need/job], [product] is a [category] that [key benefit]. Unlike [competitors], we [key differentiator].

Porter's Strategic Options:

• Cost Leadership — Win on price (lowest cost structure)
• Differentiation — Win on value (unique capabilities worth premium)
• Focus — Win in a niche (cost or differentiation, narrow market)

Positioning Strategies:

Strategy	When to Use	Risk
Head-to-Head	You can genuinely beat the leader	Resource-intensive
Big Fish, Small Pond	Niche underserved by leaders	Market may be too small
Create New Category	Truly novel, no good comparison	Education cost is high

6. Create Deliverables

Output 1: Business Model One-Pager

## [Company Name] Business Model

**Model Type:** [SaaS/Marketplace/etc.]

**Value Proposition:** 
[One sentence: For whom, what problem, unique solution]

**Customer Segments:**
- Primary: [Description, size, characteristics]
- Secondary: [If applicable]

**Revenue Model:**
- Type: [Subscription/Usage/Transaction/etc.]
- Pricing: [Structure and price points]
- Value metric: [What you charge for]

**Key Metrics:**
| Metric | Current | Target |
|--------|---------|--------|
| MRR/ARR | $ | $ |
| Customers | # | # |
| LTV | $ | $ |
| CAC | $ | $ |
| LTV:CAC | X:1 | X:1 |

**Unit Economics:**
- Gross Margin: X%
- CAC Payback: X months
- Expansion potential: [How customers grow with you]

**Go-to-Market:**
- Primary channel: [How you acquire]
- Sales motion: [Self-serve/Sales-assisted/Enterprise]

Output 2: Pricing Recommendation

Document should include:

• Recommended pricing model with rationale
• Specific price points with justification
• Tier structure (if applicable)
• Comparison to alternatives
• Expected conversion/upgrade rates

Output 3: Unit Economics Spreadsheet

Create spreadsheet with:

• CAC calculation (itemized S&M spend)
• LTV calculation (ARPU, churn, margin)
• LTV:CAC ratio
• CAC payback period
• Sensitivity analysis (what if churn changes?)
• 12-month projection

See references/unit-economics.md for template structure.

Output 4: Positioning Statement

Format:

For [target customer with specific characteristics] who [struggle with specific problem], [Product Name] is a [market category] that [delivers specific benefit/outcome]. Unlike [primary alternative], our product [key differentiator that matters to target customer].

Plus supporting elements:

• Competitive alternatives map
• Unique capabilities list
• Value proof points
• Best-fit customer profile

Reference Files

• references/business-model-patterns.md — 55+ business model patterns with examples
• references/pricing-frameworks.md — Value-based, competitive, and hybrid pricing in detail
• references/unit-economics.md — LTV, CAC, formulas, benchmarks, and spreadsheet template
• references/positioning-frameworks.md — April Dunford method, Porter's strategies, positioning templates

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Adapted from Linas Beliūnas's The One-Person Unicorn founder skill set.