How to describe your business as an equation

Lenny Rachitsky and Dan Hockenmaier argue that every business can be reduced to a simple equation, and that you don't fully understand your business until you can write one. Building the equation forces teams to name their inputs, outputs, and how they interact, which reveals which metrics matter and where leverage lies. The post provides starter equations for common tech models, including bottom-up and top-down B2B SaaS, B2C subscription and ad-supported products, B2C and B2B marketplaces, and DTC e-commerce. It also covers why contribution margin matters beyond revenue for high-cost businesses, and how to calculate customer acquisition payback period. The authors frame the equations as starting recipes to adapt, not final answers, and note that alignment across product, GTM, finance, and sales is often the hard part.

01Key takeaways

• Write your business as an equation to find the inputs that drive revenue and where effort has the most impact.
• Expect disagreement across product, GTM, finance, and sales when defining the equation, and resolve it early.
• Adapt the starter equations to your business rather than using them unchanged.
• For businesses with meaningful cost of sales, optimize contribution margin rather than revenue alone.
• Track customer acquisition payback period, since it shows how quickly you can reinvest in growth.
• Pick the highest-leverage lever in your equation, invest in it, and experiment with one lever you have neglected.

02Key sections

Why write a business equation

Distilling a business into one equation clarifies its drivers and shows where resources have the most leverage. Doing so tends to surface disagreement across teams, which is part of the value.

B2B SaaS equations

Three SaaS variants are laid out, split by pricing (seat or usage) and growth motion (bottom-up or top-down). Each breaks ARR into new, expansion, reactivation, churn, and contraction components.

B2C and consumer equations

Consumer products are modeled either as subscriptions, built from new and retained subscribers and revenue per subscriber, or as ad-supported products, built from active users, impressions, and CPM/CPC/CPA.

Marketplace and DTC equations

Marketplace revenue is modeled as transactions times average order value times take rate, with B2B variants emphasizing active customers. DTC uses traffic, conversion, and order value.

Margin and payback period

For high-cost businesses, revenue is insufficient, so contribution margin after variable costs is the better target. Payback period (CAC divided by annual contribution margin per customer) measures how fast growth spend is recovered.

03From the post

“1. What to do if your product isn’t taking off 2. First-principles thinking 3. Inspiration for the year ahead Subscribe to get access to these posts, and every post. Every business can be distilled into a simple equation. And until you can express your business as one, you don’t fully understand it. Figuring out this equation forces you to think about the inputs that drive your business, the outputs you want to prioritize, and how these variables interact. It also gives you a map for understanding which metrics you need to track, what factors drive the growth of your business, and, most importantly, where you have the most leverage to drive an outsize amount of impact (and thus where to assign your precious people and resources). To help you flesh out your own business equation, Dan Hockenmaier and I put together example equations for the most common tech business models: 1. B2B SaaS 1. Bottom-up B2B SaaS with seat-based pricing 2. Bottom-up B2B SaaS with usage-based pricing 3. Top-down B2B SaaS 2. B2C/consumer 1. B2C subscription (trial or freemium) 2.…”

04Frameworks mentioned

Summary and takeaways written by PM Atlas; quotes are short excerpts. © the original author.