Hey Lenny - this is awesome, thanks for sharing. While this mental framework is helpful for me personally because this is how I think, how do you suggest practically using this framework across the company? What teams should be aware of this? How should it be communicated and used, specifically?
Great question. I plan to do a follow-up post on this with actual spreadsheets you can plug and play, but here's what I'd suggest:
1. Work with your team to get a solid version of a formula like this for your business. At least the high-level version. What are the inputs that contribute to your ARR/revenue?
2. Create a Google Sheet / Excel document with this formula, and plug in real numbers from your business. Do this manually to start, and then over time you can automate this.
3. Play around with the numbers to see what impact growth of each variable has on your ARR/revenue. This should help you decide where you should invest your resources. When doing this, also factor in how much effort it would take to make that change to the number.
4. This should help you align your teams behind the highest leverage priorities. You all agree that moving this metric or two will have the highest impact, so let's all try to work on moving it.
This is really helpful context, thanks for sharing! I am currently in the midst of defining metrics for a new product line and using these formulas as a framework for discussion will be a powerful force multiplier. In the end, getting all teams (aside from product) aligned on this will help the company's compass remain towards the North Star!
Makes sense. Thanks Lenny! To clarify, though, who does it make sense to involve in this process and/or share the ultimate outputs with? In a mid/growth stage company, who is best positioned to own? And what's the best way to get everyone aligned on it?
This will ofc vary from company to company, but just curious if you've seen any patterns re: ownership & communication. Thanks again for the insight!
Hi Marty! Every company is going to look different, but a few principles to consider:
- Finance, analytics, or product are typically the best team to actual build and own the model
- If you do it right, a broader set of stakeholders including leadership should care about it
- It is best not to try to build a highly complex model that describes everything in the business, but rather one high level equation (usually something like the ones we outlined here down to ~3-4 levels of drivers) and then mini-models for specific initiatives or parts of the business if needed
- The primary purpose of these models is usually not to actually forecast the business - there is just too much precision required. Instead, they are good for identifying which inputs have the most leverage to drive the long term outputs you care about, and using that to impact size initiatives or the output of different teams
- If you can do the latter effectively and communicate it out, that is typically the thing that I've seen drive the most buy in for use of these models
one of my favorite concepts Lenny, thanks for sharing man...i just finished a spreadsheet that models out b2c subs growth in a way that might be more helpful to founders focusing on the inputs per cohort or experiment group if you're interested just lmk (dms open on twitter)
ARR in this context can be a great output metric but it is vulnerable to being misleading if you're iterating on the model whatsoever (changing pricing, etc)
This is a fantastic piece, thank you for sharing. I'm sure that I'll find myself rereading this for a while, at least.
I'm really curious to find out if top-down B2B businesses can also become product-led instead of being sales-led, and are there businesses that have already transitioned. Also are sales led organizations as scalable as product led.
Fantastic and super useful post. Thank you very much! Just a quick question — shouldn't we subtract the churned users/subscriptions in the section 'B2C with subscription-based pricing (trial or freemium)'?
For that one, we switched to "Retained subs" (i.e. how many are still around from last month) instead of "Churned subs" (how many left), because that's how we find people in these businesses think about it. You can look at it either way—how many stuck around, vs. how many people left—so feel free to adjust it to churned if it makes life easier for you.
Let me know if this resonates, or if you still think it's off.
Great post; establishing a shared understanding of the revenue equation and underlying driver tree is the foundation for a lot of valuable follow-on analysis.
Small nitpick: The B2C (free) equation needs some tweaks: 1. The first operator on the blackboard is a plus when it should be multiplication, 2. the decomposition of impressions / user has a surplus "sessions" in it (it should just be "sessions / user times impressions / session), 3. for the CPM-based calculation you'd have to divide the whole thing by 1000 (and for CPC you'd need to add a CTR).
Hi Lenny! For Bottom-up B2B SaaS with usage-based pricing, I assume when you talk about reactivated customers that means those that churned and then came back after a while, is that so?
Also, what about those customers that every month pay the same amount and are happy with our tool? They are not churning nor upgrading their package.
I have added them to our equation and called 'Recurring', split into Account Amount * Average Subscription value
Hey Lenny- as a startup founder building a B2B SaaS company, this is a crash course on how to think about revenue. Two things that would make it better:
1. Writing an article about “how” early-stage startups track these metrics. GSheets is the most popular tool I’ve seen (and works great for us!). Seeing someone’s revenue metrics weekly/monthly workbook would compliment this article well. Only need to show it for one of the revenue models shown above, too.
2. Including open source as a way to market! It’s amazing how much inbound it generates for a company like ours (<10 people).
Hey Lenny - this is awesome, thanks for sharing. While this mental framework is helpful for me personally because this is how I think, how do you suggest practically using this framework across the company? What teams should be aware of this? How should it be communicated and used, specifically?
Great question. I plan to do a follow-up post on this with actual spreadsheets you can plug and play, but here's what I'd suggest:
1. Work with your team to get a solid version of a formula like this for your business. At least the high-level version. What are the inputs that contribute to your ARR/revenue?
2. Create a Google Sheet / Excel document with this formula, and plug in real numbers from your business. Do this manually to start, and then over time you can automate this.
3. Play around with the numbers to see what impact growth of each variable has on your ARR/revenue. This should help you decide where you should invest your resources. When doing this, also factor in how much effort it would take to make that change to the number.
4. This should help you align your teams behind the highest leverage priorities. You all agree that moving this metric or two will have the highest impact, so let's all try to work on moving it.
Does this make sense?
This is really helpful context, thanks for sharing! I am currently in the midst of defining metrics for a new product line and using these formulas as a framework for discussion will be a powerful force multiplier. In the end, getting all teams (aside from product) aligned on this will help the company's compass remain towards the North Star!
Makes sense. Thanks Lenny! To clarify, though, who does it make sense to involve in this process and/or share the ultimate outputs with? In a mid/growth stage company, who is best positioned to own? And what's the best way to get everyone aligned on it?
This will ofc vary from company to company, but just curious if you've seen any patterns re: ownership & communication. Thanks again for the insight!
Hi Marty! Every company is going to look different, but a few principles to consider:
- Finance, analytics, or product are typically the best team to actual build and own the model
- If you do it right, a broader set of stakeholders including leadership should care about it
- It is best not to try to build a highly complex model that describes everything in the business, but rather one high level equation (usually something like the ones we outlined here down to ~3-4 levels of drivers) and then mini-models for specific initiatives or parts of the business if needed
- The primary purpose of these models is usually not to actually forecast the business - there is just too much precision required. Instead, they are good for identifying which inputs have the most leverage to drive the long term outputs you care about, and using that to impact size initiatives or the output of different teams
- If you can do the latter effectively and communicate it out, that is typically the thing that I've seen drive the most buy in for use of these models
Bookmarked this post so fast! I'd love to see every salesperson know their individual businesses in this way too.
Separately -- would you be open to swapping "white glove" with "premium"?
"White glove" has racist roots -- most folks don't know, and once you do know, you can't unsee it. https://contentdesign.intuit.com/word-list/#white-glove
Hey Karen, thanks for sharing your perspective. I took a look at this, and I honestly can't think of another short term that communicates the same idea (that our team is super hands-on through out the experience, and that it's not just a self-serve website). Premium doesn't do it, or VIP, or anything else I could think of. I also don't think anyone really thinks this when they see this term (vs. picturing a nice restaurant or hotel with the staff wearing white gloves). I also see very few people talking about this term being a problem, and lot of other explanations for where it comes from, e.g. https://www.quora.com/Whats-the-origin-of-the-expression-white-glove-as-in-white-glove-service, https://practicaldermatology.com/articles/2022-jan/applying-white-glove-service-in-the-practice#:~:text=The%20origins%20of%20the%20term,respect%20to%20those%20they%20serve.&text=Today%2C%20Merriam%2DWebster%20defines%20it,care%20or%20attention%3B%20meticulous.%E2%80%9D, https://www.henleyshipping.com/the-origins-of-white-glove-service/
Hey Lenny, check the second blackboard image out, the new arr is defined incorrectly in there.
Fantastic post other than that, thanks for sharing! 💯
Shit, lol. Removed it for now, will fix and get it back. Thank you for the heads up.
Fixed 😰
That was fast 😅
Brillant stuff, thx guys!
one of my favorite concepts Lenny, thanks for sharing man...i just finished a spreadsheet that models out b2c subs growth in a way that might be more helpful to founders focusing on the inputs per cohort or experiment group if you're interested just lmk (dms open on twitter)
ARR in this context can be a great output metric but it is vulnerable to being misleading if you're iterating on the model whatsoever (changing pricing, etc)
Love this post!!!! It takes a lot to work to simplify, simplify, simplify!
Keep the great work coming and great a question for some podcast interviews.
I can hear. Ok its time for my new section which I am calling "Equation Element" how do you describe your business as an equation etc...
Wow. Instant bookmark!
Shouldn't Impressions per user = impressions per session * sessions per user? Why multiply with sessions again?
This is a fantastic piece, thank you for sharing. I'm sure that I'll find myself rereading this for a while, at least.
I'm really curious to find out if top-down B2B businesses can also become product-led instead of being sales-led, and are there businesses that have already transitioned. Also are sales led organizations as scalable as product led.
Check these posts out:
https://www.lennysnewsletter.com/p/five-steps-to-starting-your-plg-motion
https://www.lennysnewsletter.com/p/sales-bottom-up
can you do your equation on your newsletter and podcast??? Would be super helpful
Fantastic and super useful post. Thank you very much! Just a quick question — shouldn't we subtract the churned users/subscriptions in the section 'B2C with subscription-based pricing (trial or freemium)'?
For that one, we switched to "Retained subs" (i.e. how many are still around from last month) instead of "Churned subs" (how many left), because that's how we find people in these businesses think about it. You can look at it either way—how many stuck around, vs. how many people left—so feel free to adjust it to churned if it makes life easier for you.
Let me know if this resonates, or if you still think it's off.
Very solid post. Thank you for sharing it. We also write about DevOps, you can check out one of our articles here https://www.metridev.com/metrics/cto-dashboard-a-game-changer-for-tech-leaders/
Great post; establishing a shared understanding of the revenue equation and underlying driver tree is the foundation for a lot of valuable follow-on analysis.
Small nitpick: The B2C (free) equation needs some tweaks: 1. The first operator on the blackboard is a plus when it should be multiplication, 2. the decomposition of impressions / user has a surplus "sessions" in it (it should just be "sessions / user times impressions / session), 3. for the CPM-based calculation you'd have to divide the whole thing by 1000 (and for CPC you'd need to add a CTR).
Thanks for the comment! Will investigate...
Hi Lenny! For Bottom-up B2B SaaS with usage-based pricing, I assume when you talk about reactivated customers that means those that churned and then came back after a while, is that so?
Also, what about those customers that every month pay the same amount and are happy with our tool? They are not churning nor upgrading their package.
I have added them to our equation and called 'Recurring', split into Account Amount * Average Subscription value
That's right, and that makes total sense to do what you did.
Hey Lenny- as a startup founder building a B2B SaaS company, this is a crash course on how to think about revenue. Two things that would make it better:
1. Writing an article about “how” early-stage startups track these metrics. GSheets is the most popular tool I’ve seen (and works great for us!). Seeing someone’s revenue metrics weekly/monthly workbook would compliment this article well. Only need to show it for one of the revenue models shown above, too.
2. Including open source as a way to market! It’s amazing how much inbound it generates for a company like ours (<10 people).
Great ideas! And #1 is very much my plan for a follow-up post on this.
On #2, I didn't include every way to market you idea, definitely see this post for more of that: https://www.lennysnewsletter.com/p/the-racecar-growth-frameworkexpanded
I don't know why you posted this, but this is beautiful 🧡