In his book, Scaling Lean, Ash Maurya introduces the product value equation. I believe this simple but important equation holds the key to understanding any business model as it demonstrates how customer value, revenue and costs are linked together.
The first part of the equation shows how your business generates value. Your product must create more value for your customer than you try and capture back from it. Essentially this means your product or service must be worth more to your customer than they have to pay for it otherwise they won’t have the incentive to use the product in the first place.
The second half of the equation shows how you monetise the value you’ve created. Simply, the cost of creating value for your customers must be less than or equal to the value you can capture back from them.
When launching a new product we tend to focus on the first half of the equation, trying to provide value to our customers and demonstrating our ability to capture some of this value back. Being able to do this repeatedly, is the key to gaining traction with your product.
Once we demonstrate traction we begin to think more about the second half of the equation. We can either reduce our costs or increase our price but eventually, we need to ensure that the captured value is greater than our costs so we can turn a profit and run a sustainable business.
As product managers we are always trying to balance this equation, but we don’t have to successfully balance it from the outset. It is through iterative experimentation that we can gradually adjust the numbers within this equation until we have a sustainable model.
If you’re interested in learning more about how to model your product and run experiments to balance the product value equation my colleague Monira Rhaimi and I did a talk on this very subject! I hope you find it useful!