A business does not truly come together until you have the business model figured out and know what metrics you must track to reach your goals. Let’s take a closer look at some of the more popular business models out there, along with a description of each and the key metrics that dictate success.

🕸 Subscription model / SaaS

Under this model, services are paid for in monthly or annual payments rather than in one-off purchases. Services are provided on an ongoing basis, with the revenue from such payments providing a certain level of predictability. This predictability is advantageous for both companies and their customers. For a company, regular revenue is a stable foundation, while customers can continue to enjoy services or products. Examples of the subscription model include services like Spotify and Netflix, which both provide access to huge libraries of media.

Key metrics:

• Price per seat/subscription: The cost per user for each period.

• Monthly recurring revenue (MRR): Monthly income from subscriptions.

• Customer lifetime value (LTV): Total revenue from a customer over their lifetime.

• Churn rate: Percentage of customers who cancel their subscriptions.

• Upsell/downsell rate: Frequency of customers upgrading or downgrading their plans.

• Customer acquisition cost (CAC): how much it costs to acquire a new customer; key to determining LTV.

🦅 Freemium model

The freemium model provides basic services for free while charging for premium versions or other advanced features. It has a broad appeal, as anyone with a basic need can start using it. A subset of that user base converts to premium plans, and the rest stays on the free plan. It’s a great way to demonstrate product value to users and monetise them at a later stage. By offering services to users at no cost, companies like Hulu, Dropbox, and LinkedIn ensure the strong growth of their user base and revenue.

Key metrics:

• Conversion rate: Percentage of free users converting to paid plans.

• Average revenue per user (ARPU): Revenue generated per user.

• Engagement rate: Frequency of user interactions.

• Cost of servicing free users: Expenses for providing the free version.

• Pricing strategy: Effective tier pricing to maximize revenue.

🎩 Marketplace model

A platform brings together demand and supply. It manages interactions between buyers and sellers but does not actually hold inventory. Revenue is generated, either as transaction fees or from additional services offered ancillary to the platform. Platforms are in vogue now as a management concept because of their lower overhead costs and portfolio effects. The platform mediates between the interested parties. It is also a low-risk model because the ‘platform’ does not own a tangible asset, only the portal. Think of Amazon, eBay and Airbnb: that’s a platform.

Key metrics:

• Gross merchandise volume (GMV): Total value of goods/services sold.

• Take rate: Percentage of each transaction retained as revenue.

• Customer acquisition cost (CAC): Cost to acquire buyers and sellers.

• Buyers to sellers ratio: Balance of supply and demand.

• Net revenue: Revenue after refunds and discounts.

🍀 On-demand model

The on-demand model, which provides requested services on short notice urgently and often uses freelance labour to keep costs down, appeals particularly to younger populations who enjoy the convenience and flexibility it offers. For instance, companies like Uber and Postmates thrive on offering immediate services such as ridesharing or food delivery. 

Key metrics:

• Utilization rate: Percentage of service providers actively fulfilling requests.

• Variable costs: Costs that scale with service usage.

• Customer retention rate: Percentage of repeat customers.

• Fulfillment time: Average time to complete a request.

🏵 Transactional model

The transactional model charges fees for every transaction it facilitates between buyers and sellers. Take payments, real estate or recruiting: typically a company will earn revenue when they successfully facilitate a transaction between two parties. Think of who buys things like PayPal and Stripe – for every transaction processed over their platform, their customers will be charged a fee.

Key metrics:

• Transaction volume: Number and value of transactions.

• Fee per transaction: Revenue per transaction.

• Customer acquisition cost (CAC): Cost to acquire new customers.

• Compliance: Adherence to financial regulations.

🎬 Ads model

With the ads model, users get free access to services while ad space is sold and other forms of interactive advertising are presented to users. The more content users want to engage with, the more traffic is generated and the more the ads can be shown. Companies such as Snapchat and Twitter use this model to generate income from their platforms, as the more people use the site, the more ad ‘impressions’ they can sell. This, in turn, drives more clicks and increases the amount of revenue they can generate. Success for the ads model depends on having a large active user base. The more users spend time on a site, the more relevant ad traffic the site can make.

Key metrics:

• Audience metrics: Page views, watch time, user engagement.

• Ad revenue per user: Revenue generated per viewer.

• Click-through rate (CTR): Percentage of ad impressions resulting in clicks.

• Cost per mille (CPM): Revenue per thousand ad impressions.

🎲 Enterprise model

You sell software or services to large businesses, with individual contracts for each sale. You sell high-value deals to long-standing customers. Salesforce and Microsoft typically operate on this sort of model. They sell ‘solutions’ to customer problems that require enterprise-class software running on hardware in their data centres.

Key metrics:

• Number of bookings: Value of customer contracts.

• Total customers: Number of unique contracted customers.

• Revenue recognition: Revenue from services over the contract period.

⛅️ SaaS model

SaaS (Software as a Service) is a model where companies sell a subscription to use the software. The customer pays a monthly fee and gets to use the software hosted on the cloud. This is the model used by Salesforce, Mailchimp, or Slack, for example.

Key metrics:

• Monthly recurring revenue (MRR): Monthly subscription revenue.

• Annual recurring revenue (ARR): Yearly subscription revenue.

• Gross monthly recurring revenue churn (gross MRR churn): Monthly revenue loss due to cancellations.

• NRR (net revenue retention): Net revenue retention is the revenue retained from existing customers over a period of time, adjusted for expansions, downgrades and churn. 

• GRR (gross revenue retention): Gross revenue retention (GRR) is the percentage of recurring revenue that the company retains from the customers it had a year ago, after taking into account downgrades and cancellations but before any expansions.

• Paid cost to acquire customers (paid CAC): Paid cost to acquire new users through paid channels.

🪐 E-commerce model

The e-commerce model is a business mode in which physical commodities are sold online, either by direct manufacturing or by buying products from others. For example, Amazon offers products from different categories for sale on their website.

Key metrics:

• Monthly revenue: Total revenue from sales each month.

• Revenue compounded monthly growth rate (revenue CMGR): Growth rate of monthly revenue.

• Gross margin: Profit after the cost of goods sold.