How Can the Business Model Equation Help Define Product Goals?
Expressing the business model mathematically reveals which levers—such as visitors, subscription rate, conversion, churn, or pricing—most significantly impact outcomes. This helps teams focus their Product Goal on metrics that matter most to growth.
How Can a Business Model Inform a Product Goal?
- Anchor in Profitability → Start with the basic equation: Profit = Revenue – Costs.
- Decompose the Business Model → Break profit into its key drivers by expressing revenue and costs in terms of their fundamental components (e.g., customers × price, headcount × salary, etc.).
- Forecast the Default Future → Use current values for revenue and cost drivers to project outcomes over time. This baseline forecast indicates where the business is headed if no changes are made.
- Identify Leverage Points → Test scenarios by adjusting one variable at a time (visitors, subscription rate, conversion, churn, price) to see which realistically moves outcomes.
- Translate to Product Goal → Choose the behavioral metric with the most leverage and define a Product Goal around it (e.g., “Increase free registrations from 30% → 33%”).
Metaphor
Using a Business Model equation to set a Product Goal is like tuning a guitar: you map all the strings, test which ones are off, figure out which will shift the song most, then decide which string you can adjust quickly without snapping it. Impact matters, but so does ease of adjustment.
That’s why teams use the business model equation to choose the “string” that makes the most sense to tune into a Product Goal.
Works Consulted
In addition to any sources cited above, the following works informed my thinking:(1)