Highlights

  • Introduction What makes some companies work and others not? (Location 18)
  • Instead, they start with a core belief about whom they want to serve, what that person needs, and why they need it. Then, action by action, they start piecing together a theory for how they could capture value while serving them, using data to test and expand their understanding every step along the way. Put simply, they identify the levers of control in their business, and then they move those levers. (Location 33)
  • The goal of this book is to take that process of finding the levers and creating repeatability in your business—what we’re convinced every successful entrepreneur does to reach his or her success—and make it a playbook for anyone. (Location 36)
  • The framework is a set of five tools, and behind those tools are five fundamental questions about your business. They are: Who is my customer, what are they buying, and why? How do I create value and ultimately revenue? What do I do now and next? Is what I’m doing working? What’s my plan? (Location 43)
  • Each writer brings a unique set of functional expertise that spans sales, products, operations, and finance. (Location 61)
  • If you read this book and put in the work the exercises require, you’ll start to see a few major things change. (Location 69)
  • First, as a team, you’ll start to say the same things. (Location 70)
  • The book is designed to help you create your own shared language for who your customer is, how you create value, and your plan for growing the business. (Location 71)
  • The power of a metrics-driven business is its ability to tell you, with a strong degree of confidence, whether all that effort you’re putting into the business actually matters. (Location 75)
  • W3 stands for the three first and most important questions you need to answer to validate whether your business is even a good idea and if it has any chance of being successful.1 W3 is the entire reason that you decided to build your business to begin with, and it’s the guiding light that will keep you growing, learning, and innovating so you can bring value to a group of people while also making money and building a phenomenal business. (Location 119)
  • The three simple questions are: Who do you believe your customer is or will be? What does your customer buy from you (not what you sell to them)? Why does your customer buy your product (or why do you think they will)? (Location 123)
  • Until you prove your W3 theories are right—by doing the work of talking to customers, testing concepts, collecting data, analyzing the data, getting more customers, and then doing it all over again—you will not be on the path to reaching repeatability or your maximum potential. (Location 126)
  • But simple doesn’t always mean easy. With running a company, simple almost never means easy. This is hard work. (Location 140)
  • I kick off the W3 workshop by asking the representatives for each company to take one minute (and only one minute) and write down their answers to these three questions: Whom are you selling to? What are they buying? Why are they buying it? When the time is up, I ask them if that time felt fast, just right, or like they had plenty of time. Everyone usually feels like one minute was more than enough time. (Location 148)
  • Then I ask the companies to answer another question: How do you know? (Location 154)
  • If you aren’t able to clearly articulate your W3, which is essentially your entire value proposition in three minutes, to someone whose attention you have in a controlled environment, what do you think your success will be in an environment where you have to grab someone’s attention in much less time? (Location 174)
  • “I realized that while I have strong conviction, I don’t really have enough quantifiable or validated data to prove that I’m right.” (Location 180)
  • Although strong conviction is essential to building your vision, until you have data, you shouldn’t go too far in any one direction. The sooner you realize that, the better chance you will have of identifying your real W3 quickly—at least in its first iteration—so that you can get to scaling your business. (Location 182)
  • As you go through these questions, work with your founding team and executive team if you have one. It’s not only critical that you understand all this and believe it deeply, but that the entire team and entire company needs to understand and believe it, too. (Location 196)
  • W1: Who Do I Believe Is My Customer? (Location 198)
  • Defining your who should start to get uncomfortable for you. (Location 202)
  • You will probably feel like you are (greatly) limiting your ability to grow or even reach your entire addressable market because you’ve made your who too narrow. (Location 203)
  • developing the narrowest and most specific definition of whom you believe your customers are (or could be)—both today and in the near future. You want your definition of who to be so narrow and specific that even you think your business will be small if those are your only customers. (Location 206)
  • The ultimate proof is when your who is so narrow and specific that you know, with 100 percent confidence, that every single time you have a conversation, it will result in a sale (within an appropriate time frame for your business). (Location 212)
  • Why? you ask. Good question. The answer is that once you know your who that perfectly and that intimately, you will be able to identify and define every single attribute of why that who makes a perfect customer. (Location 217)
  • Now, did we sometimes sell outside of those tight criteria? Sure. But when we did, we tracked what attributes were different in those cases so we could learn and continue to expand peripherally. When we started seeing trends in those new attributes, we’d expand our focus. (Location 255)
  • W2: What Do I Believe My Customer Is Buying from Me? (Location 266)
  • “There is a difference between what you are selling and what your customer is buying. Can anyone explain what the difference is?” (Location 268)
  • It’s the difference between what you do and what you do for your customer (Location 270)
  • Your customer doesn’t give a shit what you do, but they do care what you do for them. It’s that simple. (Location 271)
  • Instead of leading with pride about the kickass product you’ve built, lead with how that product is going to impact their work. (Location 273)
  • we sold search. Our customers did not buy search, but search is the what we sold. They bought one of three things: sales, leads, or research. (Location 278)
  • Think about your what in the context of what you do for your customer (not just what you do)—even if the difference seems subtle. Spend time talking to prospects and customers, really trying to understand what they are actually buying from you. Take five to ten minutes to write down a few theories on what you believe your customer is going to (or already is) buy(ing) from you. Then move on to why (Location 306)
  • W3: Why Does My Customer Buy from Me? (Location 310)
  • Now we understood what mattered to our customers—nurturing leads into sales and increasing revenue. More importantly, we could also understand how our customer measured that why (Location 317)
  • When a customer can tell you the value they receive from your product and they can show you how they are measuring that value, you have the ultimate data you can collect to prove your W3. (Location 319)
  • It’s not about how you measure the customer’s why—it’s about how they measure it. (Location 321)
  • The best way to get that understanding is to simply ask them. Ask your customers, “What is the value you get from my product or service?” and then follow up with, “How do you know? How do you measure it?” (Location 325)
  • When You Sell to Businesses, You Actually Have Two Whys For companies that sell to organizations and not just individuals, there are really two whys: why the business (as a whole) buys your product or service, and why the actual buyer buys it. (Location 326)
  • When selling to businesses, you have two whys: why it matters to the business and why it matters to the individual buyer. In order to truly understand these, you need to understand how your customer will measure success. (Location 345)
  • Chapter 2 2. Revenue Formula (Location 365)
  • How do I create value and ultimately revenue? (Location 368)
  • You Can’t Be Metrics-Driven If You Don’t Have a Revenue Formula (Location 382)
  • A revenue formula is the mathematical equation of your business. It’s how you turn your product, sales, marketing, technology, customer service, and every other department into math that makes sense as you run and grow your business. (Location 413)
  • Without a revenue formula, you cannot build a repeatable business. (Location 421)
  • The power of the revenue formula is that even at the earliest stages of your business, it will help you figure out what you should (and shouldn’t) be working on and, if you even have a valid business at all, by using math rather than emotion as your guiding light. (Location 434)
  • never lose sight of the fact that business (and life) is three parts math and one part theater. (Location 439)
  • If you are an early-stage company, no matter how strong your conviction, all you have at best is a hypothesis of what your revenue formula will be one day when you are ready to move from repeatability to the scale phase. Until then, it is your job to prove (and disprove) why your revenue formula is right. (Location 442)
  • Business.com revenue formula: Visits × Coverage × Conversion Rate × CPC = Revenue (Location 479)
  • 1,000 visits × 80 percent of pages with clickable content × 80 percent of people who clicked on that content × $1.86 cost per click = $1,190.40 monthly revenue. (Location 491)
  • There is also one metric that is not overtly expressed here but that is of the utmost importance: churn. Although we didn’t include it explicitly in our revenue formula, we used the same thinking to clearly identify the drivers that affected churn. (Location 515)
  • There is one final piece to controlling churn here, which is outside of the revenue formula—that is, salesperson compensation. I cover this in depth in Sell More Faster, but the gist is that the comp plan should incentivize closing not only high-paying but long-term customers in the specific categories or pages that generated the most revenue. (Location 526)
  • Chowbotics’s revenue formula is a SaaS (salad as a service) model. More specifically: Number of Units × Cost/Unit/Month × Months Installed = Revenue (Location 533)
  • Step 1: Establish a Theory (Location 559)
  • “We have more than one product; should we make a revenue formula for each?” If you are an early-stage company, you can’t have two products, whether you like it or not. You need to decide right now what business you want to build and focus on that. (Location 568)
  • But as an early-stage company, you cannot sell two products. You just do not have the time or resources. (Location 571)
  • “We have more than one revenue stream; should we make a revenue formula for each?” No, you don’t. In fact, you have no revenue streams—you’ve merely generated some revenue. A revenue stream means you are at repeatability. Pick the one you think will be your primary and go test it to see if you are right or wrong. Stop focusing on the other one. (Location 573)
  • Simplify the thing you are really doing here, which is not yet growing your business, but validating whether your idea can even be a business. (Location 578)
  • Adding the complexity of products or revenue streams now just means you don’t likely have enough conviction yet in one or the other to put all your focus there. If you don’t have the conviction, then you shouldn’t expect your team or potential investors to have that conviction either. (Location 580)
  • And although you will have only one revenue formula, it’s a complex formula that will require quite a bit more testing and work after your first assumption. (Location 589)
  • Step 2: Identify the Drivers for Your Key Values (Location 591)
  • What are all the (known) things that can contribute to growing your top-line value? (Location 592)
  • Step 3: Identify the Subdrivers for Each Driver (Location 621)
  • Before we get into this next part, make sure you have some time, at minimum thirty minutes but ideally at least an hour, where you won’t be interrupted. Turn off your email and silence your phone. This is tedious but mandatory if you want to make the most out of the rest of this book. (Location 621)
  • The next step is to pick five subdrivers of paid. These are the more specific tactics that we need to actually do to see if paid is a valid tactic to drive the right users to Business.com. (Location 629)
  • Keep in mind, right now this list is simply nothing more than a theory of where we might find our users and increase visits. If you’ve done your work on W3 (Chapter 1), then when you find the right channels, it’ll be like shooting fish in a barrel. Without doing that work, it’s more like shooting fish in the clouds—it’s not really possible. (Location 636)
  • If you can’t do a few tedious tasks now, consider whether you really have what it takes to build a long-term and meaningful business. Anyway, if you don’t list your subdrivers now, the next chapter will literally be useless. So get to work! (Location 641)
  • Chapter 3 3. Assumptions and Prioritization (Location 668)
  • What he needed to know now was where should he focus and, equally as important, what can he ignore? (Location 675)
  • He worked through his potential strategies for where to invest his time, money, and operations using the same skills an expert head of product at a software company would in building their product roadmap and afterward came away with massive clarity he had around where he should (and shouldn’t) be spending his time. (Location 679)
  • Great companies often have great processes, but great processes do not make great companies. (Location 693)
  • What we’ll learn here are critical skills of prioritization and assumption validation that apply to any product you are taking to market, whether or not it is a tech-enabled business. (Location 696)
  • If I can leave you with one key takeaway from this entire chapter, it will be this: great product development comes from having a culture of learning and validation. (Location 697)
  • great product development comes from having a culture of learning and validation. This (Location 698)
  • In any business, especially before you hit profitability, time equals runway, and the more time you burn, the more runway you burn, which ends up costing you significantly. (Location 705)
  • Whereas if you spend just a bit more energy up front validating what your customers actually want before trying to build your next great idea, you will end up saving yourself significant time (and thus significant future money). (Location 706)
  • This chapter is about helping you make sure that you are trying to execute on the right things before you spend your precious time and energy doing significant work on them in the first place. (Location 708)
  • Great product folks, it turns out, pretty much universally excel at asking the right questions about what drives customer behavior and then devising clever ways to find answers to those questions. (Location 715)
  • They are great at (1) having assumptions about their customers’ needs, (2) developing hypotheses for testing these assumptions, and (3) prioritizing which of these hypotheses they should test and by when. (Location 716)
  • Notice that none of these are things we typically associate with product work, such as running sprint planning, writing requirements or user stories, designing features, or executing roadmaps. (Location 718)
  • a great product person has assumptions about their customers’ needs, can hypothesize creative ways to satisfy these needs, and can prioritize which hypotheses to test in priority order. (Location 721)
  • Product Prioritization Workshop (Location 736)
  • You’re going to need about an hour or so to do this the first time. (Location 737)
  • Ready to dive in? Crack open that pack of Post-it notes (or start pulling virtual Post-its out in your virtual whiteboard tool). The instructions are going to be somewhat vague to start, and that’s intentional. Please fight through the discomfort in this first step. It will all be worth it. (Location 746)
  • Step 1: What Drives Your Business? (Location 748)
  • Don’t overthink this. (Location 754)
  • If you’re generally struggling to come up with things, here are two tips: Think about what’s on your product roadmap or company priority list today. If you’ve already prioritized it, presumably you believe it’s important. (Location 769)
  • Before we move to step 2, take a minute to think about whether that exercise was easy or hard for you. Did you take a while to get going and then get on a roll? (Location 779)
  • Step 2: Do You Have Data for That? (Location 793)
  • Here’s the point of this step: if you have data to back up a belief, draw (or type, if virtual) a big star on the note for it. (Location 799)
  • Here’s the rubric I want you to use as you debate: (1) Do you have some sort of company dashboard that roughly backs up the statement? This could be your analytics engine, your customer relationship management (CRM), your sales data, your customer service logs, what you see in your profit and loss (P&L), or cash flow statement, or your daily customer receipts. Whatever it is, do you have some form of primary source data that backs this up, at least at a high level? (Location 804)
  • (2) Have you talked to enough customers such that you truly believe that this statement is true? (Location 807)
  • If you read it in a market intelligence report, no star. If a prospective investor told you their opinion, no star. This needs to be firsthand data. (Location 810)
  • To do this step, I want you to go through each of these Post-its with stars and think in extremes. Which of these validated beliefs, in their wildest version of success, will drive the next wave of growth for your business? Which of them, if they somehow stop working or stop being true, will end up spelling the end for your business? In either case—where the Post-it will either create wild success or epic failure—I want you to draw a circle around the star. (Location 844)
  • Step 4: Which Unvalidated Assumptions Are Most Critical? (Location 861)
  • This time, look at all of your sticky notes without stars. These are your unvalidated assumptions. They are things about your business that you believe to be true, although in actuality, you really don’t know. Which of these unvalidated assumptions are most critical to your business? (Location 861)
  • Step 5: Four Piles of Post-Its (Location 875)
  • High-Priority Validated Assumptions (Circle + Star) (Location 877)
  • This broad swath of stuff is where you should be operationalizing. This is what’s ready for you to productize and execute on. (Location 879)
  • High-Priority Unvalidated Assumptions (Circle, No Star) (Location 883)
  • You URGENTLY need to address these items. These are items that you believe to be critical drivers of your business, yet in actuality, you really have no idea. You are guessing. (Location 885)
  • Low-Priority Validated Assumptions (No Circle, Star) (Location 890)
  • Low-Priority Unvalidated Assumptions (Location 896)
  • Feature-Level Prioritization (Location 901)
  • Taking the time to make sure you aren’t building your whole business on a house of cards (those unvalidated assumptions) is slowing down to speed up. (Location 906)
  • You can also use this same exercise at the individual feature level. What do you know? What do you not know? What’s critical? What’s not critical? You can use that information to decide what to take through feature validation. (Location 907)
  • Creating Hypotheses to Test Your Assumptions (Location 909)
  • It’s relatively easy to come up with a feature and build or offer it to the market. It’s much harder to come up with a well-written hypothesis that you want to test, then force yourself to write down ten to fifteen possible tests you could run to validate or invalidate that hypothesis. (Location 912)
  • If you can run those tests and validate those hypotheses without actually building and shipping features or spending tons of money, then super kudos to you. (Location 914)
  • The best entrepreneurs are actually ones who out-execute the competition by being faster at validating what the market wants than anyone else. They reduce waste and don’t spend multiple cycles building a product no one wants or trying to sell something that no one wants to buy. (Location 935)
  • The last note I will leave you with on this overall topic is that every company has to have a roadmap, a picture of where the business is headed. If not to run the day-to-day product, then at least to share with your staff, potential investors, future investors, board members, new hires, and so forth. Folks want to know where you (think you) are heading. (Location 939)
  • I’m a big believer in creating a “learning roadmap.” (Location 960)
  • But rather than being defined by features and dates, your learning roadmap defines the assumptions you want to validate and the dates by when you need to validate them. (Location 961)
  • It’s the difference between saying “Shipping project X by Y date is critical to the company. We will put all hands on deck!” (bad) versus “We believe that we need to figure out whether X is important or not by Y date. We are putting our best resources toward testing our assumptions. If we do find out it’s important, then we plan to have product in market around this area by Z date” (good). (Location 963)
  • What if every member of the company were asked to create a daily learning goal and to report on what you learned during standup along with blockers and tasks? What if this learning goal is something that each person can do in fifteen minutes or less and could be achieved on their own without the help of another team member? (Location 990)
  • Chapter 4 4. Key Performance Indicators (Location 1009)
  • Is what I’m doing working? (Location 1012)
  • The goal of this chapter is to help you know if the things you are doing in your business are working, and more importantly, whether those things matter in the first place. (Location 1026)
  • By the end of it, you will have a single core metric that you track as a company that can align and focus your efforts as a team. (Location 1027)
  • You’ll also have a clear milestone or goal for where you want that metric to be in the future. (Location 1028)
  • you’ll also choose one key metric to track for each team, along with any supporting metrics you want to track to make sure everything in the business is staying healthy. (Location 1029)
  • I like to think about metrics as a language. They communicate things about what happened in your business in the past, what’s happening now, and what might be happening in the future. (Location 1034)
  • KPIs are decision-making tools. They are only useful to the degree that they help you decide what to actually do in your business. (Location 1039)
  • I’ve discovered there are three fundamental questions that, if you can answer, you’ll be well on your way to finding KPIs. Here they are: What’s the single most important thing we have to achieve as a business right now? Why does that thing matter? How will you know you’ve achieved it? What number tells us the status of that thing—whether what we are trying right now is helping us get there or not? Once we’ve achieved that most important thing, what will it enable us to achieve next? (Location 1044)
  • Question 1: The Most Important Thing (Location 1056)
  • Once you start seeing your revenue formula in this way, you can ask yourself which of these drivers (or subdrivers) represents the most critical, unvalidated assumption. Ask yourself, “What is the thing that’s most likely going to kill me right now if I don’t get it right?” (Location 1075)
  • For MDaaS, we’re going to say this is average visits per center (phrased as question: “Can we get people in the door?”). Now that we have decided that is our most critical, unvalidated assumption, we can ask ourselves a different question: “Of all the things I can do to move that variable, where do I have the most leverage?” (Location 1077)
  • In other words, where do I believe (subject to testing) if I apply the most amount of effort I’m going to get the best results? (Location 1079)
  • By literally copy/pasting your weekly numbers from the revenue formula and zooming in the one that’s most critical to prove right now, you already have the basics of your company’s KPIs. (Location 1087)
  • Here are a few more questions to discuss as you do: What’s the single most important thing we have to achieve as a business right now? Why does that thing matter? Where does the thing we most need to achieve live in the revenue formula? What driver(s) does it affect? What will achieving this goal prove about our W3? What validated, high-priority assumptions are we acting on with this focus? What unvalidated, high-priority assumptions are we trying to prove with this focus? What number tells us the status of that thing, whether what we are trying is working? (Location 1093)
  • Question 2: Are We Getting There? (Location 1099)
  • What number tells us the status of that thing—whether what we are trying right now is… (Location 1099)
  • Inputs and… (Location 1104)
  • One simple way to understand your metrics is by categorizing them as… (Location 1104)
  • Inputs: Things that You Do You control… (Location 1105)
  • Inputs measure effort. Examples of inputs are number of emails sent, number of sales meetings conducted, number of lines of code written, and average… (Location 1106)
  • Inputs are useful to track to keep people… (Location 1108)
  • but they don’t tell you anything about the impact… (Location 1110)
  • Outputs: Things that Happen as a Result of… (Location 1110)
  • You can’t control these directly, but you can… (Location 1111)
  • Examples are revenue, active user growth, customer churn, and customer acquisition cost. The most useful metrics for startups are outputs, but sometimes inputs are all… (Location 1112)
  • Lagging Indicators and Leading… (Location 1113)
  • Lagging and leading indicators help you understand how actionable… (Location 1114)
  • Lagging Indicators: Measure What… (Location 1115)
  • The percentage of customers that churn or number of completed transactions are examples of likely lagging indicators because they only happen after and as a result… (Location 1116)
  • Leading Indicators: Measure What Might… (Location 1118)
  • Customer engagement metrics, such as number of minutes spent in your app, can be an example of a leading… (Location 1119)
  • As another example, number of visits to your website, might be a leading indicator of completed transactions because in order to complete a transaction, a… (Location 1121)
  • Counts, Totals, Rates,… (Location 1123)
  • Knowing whether a number is a count, total, rate, or ratio will help you see what kind of insights you can and… (Location 1124)
  • Counts are tallies of something that’s happened over a certain time period: This week, thirty new users signed up; we sent six… (Location 1126)
  • They can be helpful in tracking your progress on how well you’re executing a task, but they don’t tell you much of… (Location 1127)
  • Totals are a cumulation of a number over time: Since the start of the business, we… (Location 1129)
  • Totals can help you see how close or far away you are from a goal or milestone. They can give you a sense of… (Location 1131)
  • They’re great for puff pieces, but they do nothing to measure the growth… (Location 1132)
  • Rates are a measure of how fast things are happening: We’re growing 10 percent in… (Location 1134)
  • Rates help you see into the future. Especially when combined with historical data (a four-week trailing average, for instance), they can tell you a lot… (Location 1135)
  • Ratios are a measure of the relationship of one thing to another: Fifty percent of all of our users are… (Location 1137)
  • They can tell you all kinds of insights you wouldn’t be able to see otherwise. They are numbers put into context. They can serve as health checks in the business and help you… (Location 1138)
  • Choose metrics that show you where opportunities or dangers might be arising (leading, not lagging). Choose metrics that indicate real progress, not just the effort you’re spending (outputs, not inputs). Choose metrics that give you a sense of the model—how each part of the… (Location 1142)
  • What number tells us the status of that thing, whether what we are trying is working? How sensitive is our number? Does it reveal potential opportunities or dangers quickly and clearly, or will it take some time for us to pick up the signal? Does the core metric have the right context to be useful? Which time periods do we want to compare it to (per day, per week, per month, or seasonally)? Are we measuring effort that reflects work done or… (Location 1147)
  • Question 3: What’s… (Location 1152)
  • Once we’ve achieved that “most important thing,” what will it enable… (Location 1153)
  • Your KPIs are relative—they only matter to the degree that they help you see whether you’re getting to a key milestone. (Location 1170)
  • Milestones are just steps along the “if this, then that” chain. (Location 1171)
  • The value of a milestone is in its ability to make a new milestone possible. (Location 1172)
  • Once we’ve achieved that “most important thing,” what will it enable us to achieve next? (Location 1176)
  • How will we know we’ve achieved our most important thing? What milestone will our core metric hit? Describe the new reality we’ll be in once we achieve our most important thing. What other metrics will change and how? How many steps down the “if this, then that; if that, then…” logic chain have we thought through? What metric might we focus on to tell us whether we’re getting closer to achieving the next most important thing? (Location 1177)
Setting KPIs for Each Team or Department
  • What’s the single most important thing we have to achieve as a team right now? Why does it matter? How does that thing impact the overall growth of the business? Where does it live in the revenue formula? How does it support the company-wide core metric we just set? (It’s okay if it does so indirectly.) What number tells us the status of that thing—whether what we are trying right now is helping us get there or not? Once we’ve achieved that “most important thing,” what will it enable us to achieve next? (Location 1184)
  • If your entire team is not using the metrics you came up with to actually decide what to do in the business, the exercise is useless. (Location 1190)
  • Where will our KPIs live? (Location 1193)
  • Who on the team will own the process of tracking KPIs? (Location 1195)
  • What will our process be for running experiments to figure out how to move our KPIs predictably? (Location 1197)
  • When and how will we check in on them regularly? (Location 1203)
  • When will we do a longer deep dive on these numbers? Who should be involved? (Location 1206)
  • Are there any other metrics we should be watching on a daily, weekly, or monthly basis? Why? (Location 1209)

Chapter 5 5. Financial Modeling

  • These are the four pillars of company success, but you can do each of them perfectly and still not have success. You see, it all has to come together as one cohesive model, and you as the leader of the company must understand what is necessary to make the business successful and what levers you should be pulling on to have the greatest impact or likelihood of success. (Location 1250)
What Is a Financial Model?
  • There are lots of tools for managing your business: (Location 1270)
  • Traditional Accounting Statements (Location 1271)
  • —They are great at formalizing what happened in the past—the past month, past quarter, or past year. (Location 1272)
  • KPIs—They are great for telling you what is going on in your business right now. (Location 1274)
  • Financial Model—This is the only way to look up the road and know what is going to happen in the future. (Location 1276)
  • The financial model is the full mathematical representation of how your business works, all the drivers and how they interact. (Location 1280)
  • When done well, it takes all the guessing out of operating a business—you know what the drivers are, and you run experiments to find out the data you need to be able to accurately predict your future. (Location 1290)
Why Should You Build a Financial Model?
  • It will help you run your business better, allowing you to see the impact that today’s decisions will have on your results tomorrow. (Location 1294)
  • If you have a well-thought-out model, you should be able to ask questions such as, “If I raise prices by 10 percent, how much additional churn am I willing to accept and still be ahead of the game?” (Location 1299)
  • It is almost like having a virtual reality version of your business that you can “test drive” and try as many different permutations as you want and see what happens with each one. (Location 1302)
  • I strongly believe that it should be built by a founder or CEO from the bottom up so that it incorporates all the nuances of your business. (Location 1314)
  • Download a copy of Dollar Cave Club’s financial model at leversbook.com/DollarCaveClubModel. (Location 1348)

Start with the Assumptions

  • just like other daunting tasks, I like to start by writing down everything I know. (Location 1351)
  • In the financial model, we start with the first tab of the spreadsheet’s workbook, labeling it “Assumptions,” and create all the variables we easily know. (Location 1351)

Lay Out the Income Statement

  • Next, we can create the three standard financial statements as an output of the model: the income statement, balance sheet, and statement of cash flows. (Location 1366)

Figure Out Where Revenue Comes From

  • If you can, you should have at least a year’s worth of actual numbers on your financial model’s income statement that are hard-coded numbers from your actual historical performance. (Location 1384)
  • Here’s the challenging part: how do we figure out how many subscribers we have at any given time? In other words, what drives the number of subscribers? This is where we are going to spend most of our time: understanding the levers we have that are going to get us more subscribers and then figure out how to build those into the model. (Location 1391)

Figure Out Where Subscribers Come From

  • I create a new tab titled Revenue Drivers. In that tab, I list the core drivers that make up how many subscribers I’ll have at the end of each month: the number of subscribers I had last month, the number of new subscribers I got this month, and the number of subscribers I lost this month. (Location 1395)
  • Beginning (or Last Month’s) Subscribers + New Subscribers – Lost (Churned) Subscribers = Ending Subscribers (Location 1397)
  • So new subscribers are a function of (1) the number of visits (or web traffic) we get and (2) how many of those visits we can convert to purchase a monthly subscription. (Location 1405)

Figure Out Where Visits Come From

  • Visits from Direct Visits = Total Other Visits × Direct Traffic Multiplier Visits from SEO = Last Month’s SEO Visits × Organic SEO Traffic Monthly Growth Rate (Location 1445)
  • This is a critical point to understand: I am not just hoping that web traffic will grow by some impressive percentage each month but rather breaking down the traffic into its components and then looking at what levers I can use to impact each of them. (Location 1450)
  • These are the levers that you have to drive growth. If you do not understand the levers, you cannot effectively grow your business. (Location 1453)

Moving from Visits Back to Subscribers

  • Now we must do the hard work of calculating how traffic converts into revenue. To do that, we go back up one level to the “Revenue Drivers” tab. (Location 1455)
  • Once you know the traffic you are getting from each source, you can multiply it by the conversion rate for that source and compute the number of new subscribers for that month. (Location 1460)

Factoring In Additional Revenue

  • Since e-commerce orders are generally not recurring revenue, you do not need to track last month’s orders and so forth. Instead, just multiply the traffic from a particular source (SEM, social, SEO, direct) by the appropriate conversion assumption to get the e-commerce revenue for that month. (Location 1473)
  • In this model, we also have a fourth revenue formula that comes from selling advertising space on our site. It is: Visits × Average Page Views per Visit × Impressions per Page × Revenue per Impression (Location 1475)
  • Now, on the “Revenue Drivers” tab, we have all four types of revenue calculated for every month of the model (I generally go out five years). We can then go back to the monthly income statement, list the four kinds of revenue, and pull the dollar values from the “Revenue Drivers” tab. (Location 1479)
  • If you’re following along, you have just completed the most important and most difficult part of building a model: figuring out where your revenue comes from and what drivers there are. From here, it gets much easier. (Location 1482)

Calculating Expenses

  • revenue is the most important part of the business and the most important part of the income statement if you want to be in control of your destiny. (Location 1485)
  • But without expenses, you do not have the full picture. (Location 1487)
  • And all expenses are not created equal. I group expenses into three big buckets. (Location 1487)
Expense of delivering your product or service (Cost of Goods Sold [COGS])
Sales and marketing expenses
Indirect expenses
  • These are the expenses that are required to run the business but are not related to delivering the goods or services and not related to selling more. (Location 1496)
  • Gross profit gives me an idea of how much I need to grow revenue to cover all the other expenses. (Location 1506)

Building the Balance Sheet and Statement of Cash Flow

Playing What-If Scenarios with the Financial Model

  • Now that you have a mathematical representation of your (Location 1538)
  • business, you can play what-if with any of the inputs and see the corresponding results. (Location 1538)
  • What if I spend more on advertising? (Location 1541)
  • Without a financial model, you are effectively driving the car without the ability to see out the windshield. (Location 1566)
  • If you understand this, you understand that the amount of cash on hand is not related to the percentage increase in price or in gross profit but rather in the absolute additional dollars of gross profit generated (Location 1575)
If You Change One Assumption, Revisit the Others
  • Now, it is not fair to believe that we can raise a price without impacting the customer’s willingness to pay. I will use churn to be a proxy for the customer’s willingness to pay. So if I increased price by 33 percent, I may guess that churn will increase by 33 percent also. (Location 1577)
  • Your ending cash balance in year five is now $860,011—you’re still way ahead. It is counterintuitive, but if you raise prices 33 percent and that in turn increases churn by 33 percent, you have more money in the bank. (Location 1582)
  • Armed with that information, you can go out and execute a test with real customers. Increase the price to $39.99/month and if churn is below 7.3 percent per month, the test is a success and you should increase your pricing. If the churn is greater than 7.3 percent, the test is a failure and you shouldn’t increase your pricing. (Location 1587)
  • In other words, you now have a way to combine financial modeling with real customer data to predict the future. (Location 1589)
Running More What-If Scenarios to Find the Levers that Matter
  • But, wait, do you see the problem? Look carefully. Spending $40,000/month on Facebook and Google ended up sending you into bankruptcy in year one. You did not survive long enough to see that great result in year five. (Location 1610)
  • You could write a formula for the marketing spend that takes both into account, spending more as revenue grows but never spending more than 30 percent of the cash on hand, for example. (Location 1614)
Updating the Model Regularly
  • At the end of each month, you should duplicate your latest version of the model and rename the new one with the current date. (Location 1642)
  • Next, take your model and start tweaking the assumptions to make the numbers for the month you just completed and look close to what actually happened. Almost every assumption will have to be updated, even if just a little bit. (Location 1643)
  • “Before we get started, I want you to know that the only thing I know for sure about this model is that it is wrong.” (Location 1676)
  • When you combine the financial model with the rest of the tools in this book, you can begin to move into true repeatability into your business. (Location 1687)

Chapter 6 6. Now What?

  • you now have everything you need to create a plan to transition from working on your business to working in your business. (Location 1709)

Creating Your Plan

  • Now you need to actually formalize the plan. In other words, “Who does what by when?” Take the elements of the levers you have identified and assign an owner. (Location 1713)
  • Assign Owners for Each Lever (Location 1716)
  • For example, go back through the revenue drivers and subdrivers in your financial model and ask yourselves, who owns each of these drivers? (Location 1717)
  • Each team member should clearly know their area of responsibility, the KPIs they will measure to know that they are on track, as well as how their work ties back to a value or values in your revenue formula and, ultimately, financial model. (Location 1720)
  • Even after the hard work identifying and testing the levers that now make up your model, the only thing you can know for sure is that it’s (at least a little) wrong. (Location 1727)
  • the real goal isn’t to be right 100 percent of the time. Instead, you want to expand your region of what you can predict and control in the business. (Location 1729)
  • As a company, you should be getting together weekly to share your progress in the form of metrics and data that show how you are moving your responsibilities forward. (Location 1732)
  • As a leadership team, you should be getting together every quarter to redo all the work in this book. (Location 1735)

The Sixth Question: Why Do You Exist?

  • Appendix The Sixth Question: Why Do You Exist? (Location 1744)
  • the reason you are building your business in the first place. Why did you decide to take the long and lonely road to building a business? (Location 1748)
  • Why did you decide to take the long and lonely road to building a business? Why do you wake up every morning and get out of bed? How do you want to impact the world, or your community, or whomever it is that you intend to bring value to? (Location 1749)
  • Unlike the other chapters, this is about a question that is fundamentally untestable (Location 1751)

How to Get to the Heart of Your Purpose

  • We’re going to start with a few “conversational statements” designed to get you all thinking and talking about the team, the work you do, and why you do it. Then, once you’ve all agreed on that set of statements, we’ll use them as fodder for creating a full mission statement. (Location 1759)
Conversational Statements
  • The We Are statement: Who are we as a team? How do we refer to ourselves and people like us? As you craft the statement, think about whom you believe your customers are and your connection between your customers and you. Your “We are…” statement is not about your product. It’s about the inclusive commonality that makes up all of your people collectively and shows up across your company. (Location 1769)
  • The We Do statement: What job do we do for our customers? This is literally a statement of what you do for your customers. It’s the job you perform for your customers, and it’s thought of more tactically than the other statements. You can swap the verb do for something more active or descriptive of the actions you take. (Location 1772)
  • The We Believe statement: What beliefs drive us? As you craft the statement, think about why your customers care about what you do and why you care about helping your customers. (Location 1774)
  • Once you’re aligned on your statements, you can stitch them together into one overarching sentence: “We are…who…because…” (Location 1779)

Purpose and Vision Statements