The relationship between business models, first principle thinking and metrics

Theres a management saying – “what gets measured get done.”

It implies that you’re only going to act on the things that you actively monitor, it also suggests that if you’re not measuring it, you’re not in a position to influence it. So this stresses the importances, even at a conceptual stage to try to have as detailed a view as possible on the moving parts of your machine (your business)

With every machine there are two categories of measurement to consider – 1. The throughput or flow from each part to another part or stage of the machine; 2. The operating capacity within one part of the machine. Its worth noting that the operating capacity within one part can also consist of looking at the throughput within sub-components that make up that part of the machine.

It seems daunting to think of your business machine in such detail at the early stage, but really its quite intuitive. And its a good exercise is de-risking your business. 

When was learning to drive a manual car, the driving instructor actually spent a fair amount of time explaining what was happening to the machine as you engaged the clutch and switched gears, understanding that actually helped me to understand how to better control the car. In the same way, understanding how your business machine works on a process and mechanical level helps improve your understanding of where to optimise.

Another example of this is with Elon Musk and Tesla, Elon Musk has been know to view problems using the scientific approach of first principle thinking, First principle thinking essentially consists of breaking down a problem into components the idea is to break down complicated problems into basic elements and then reassemble them from the ground up. 

Applying this to our business, we can start with this approach from the idea stage, by applying it to the business model, lets say we have the idea to setup a restaurant that sells rice dishes. 

We can’t just go to investors with this idea, we need to at least have a business model, and ideally some kind of business plan or financial model.

So to create our business model, we need to apply first principle thinking to break apart the idea into its components in the case of our rice restaurant – we need to think about rent, staff, food cost, number of seats and dishes we’ll serve – so we already have some idea of what kind of data points we really need to be capturing and develop assumptions around.

You can see from this, there’s a direct relationship between the Business model, its first principle components and the AARRR funnel, we can also see that since we have clarity on the components and how the relate to the success of the business we can start to select which need to be defined as the NSMs. 

We can also determine from this what steps might be missing and if we have identified the step but lack data, we can determine where tracking needs to be implemented.

In Startup, there’s a lot of buzz words like funnels and NSM, but ultimately it boils down to being able to understand how to components of your business perform individually as well as interact together to influence throughput and business growth.

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