Lenny Rachitsky: belief

Transcript context

…So if you think about some of the basic building blocks and probably the simplest use case would be a SaaS business, there's really three components that you need to build for that. One is to understand your acquisition channels. Are you looking at paid marketing or sales or viral kind of customer referrals? And for each of those you have some different assumptions around traffic or spend or conversion rate, those kind of things. So that's the first section. Second would be retention. So at what rate are these customers activating? And then have some kind of basic monthly retention curve. So how long are they staying around? What's the survival rate in each of these? And those kind of stack over time. And then you have monetization. So in the simplest example, they might be paying you some monthly or annual fee and so that translates in monetization. So actually if you're modeling a relatively simple SaaS business, those are the only core building blocks you need and you add a lot more complexity on it based on your kind of individual business that you're building. If you then are trying to build this for more of a transactional business, you need to layer on the way that your current kind of retained customers start to transact. So how many transactions per month? What's the AOV? And then you're also going to typically need to build unit economics because those businesses often have higher costs. And so you're going to be thinking about cogs or other major costs that you build into it. And then one click beyond that would be to build this for marketplace business. So now what we've talked about is mostly modeling like the demand side of a business. So now you'd also need to think about supply acquisition and retention and how these two sides interact. So as we add supply, what's going to happen to demand? But those are the basic pieces. I think you can start pretty linear like acquiring customers, they're activating, retaining and generating contribution margin typically would be the output. But where it gets really interesting is we start making it non-linear. So the most basic example of this would be virality. Your existing customers are referring new customers and those go on to refer new customers. Based on that coefficient, it has a lot to do with how fast your business grows. And similarly with paid marketing, as you generate contribution margin, you can reinvest that and grow and actually if you link those two up explicitly, it makes it really clear why thinking about something like payback period is a much better measure of paid marketing performance than LTV to CAC because the speed at which you get enough money back to then go acquire another customer has much more bearing on how fast your business can grow than just the raw kind of [inaudible 00:09:39]. This is where it gets really interesting where you get some variables to play with. Okay. So let's unpack a bit of the stuff you just talked about. There's a whole decade of knowledge that you just I think collapsed into a couple of minutes. So just to spend a little more time there. So the core three kind of variables to a SaaS business, if you're thinking about the growth model of a SaaS business, for example, you said acquisition channels, where's traffic coming from, and that's essentially how much traffic are you getting, how is it converting and things like that. Exactly.…

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