# How to Describe Your Business as an Equation
## Metadata
- Author: [[Lenny Rachitsky]]
- Full Title: How to Describe Your Business as an Equation
- Category: #articles
- Summary: The text discusses different business models and equations for tech businesses, including B2B SaaS, B2C, marketplaces, and DTC/e-commerce. It highlights the importance of revenue equations, customer acquisition payback period, and contribution margin in analyzing and valuing businesses. Various examples and metrics are provided to help understand and apply these concepts effectively.
- URL: https://www.lennysnewsletter.com/p/the-math-formula-behind-your-business
## Highlights
- To help you flesh out your own business equation, [Dan Hockenmaier](https://www.linkedin.com/in/dan-hock/) 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. B2C free (ads)
3. **Marketplaces**
1. B2C marketplaces
2. B2B marketplaces
4. **DTC/e-commerce** ([View Highlight](https://read.readwise.io/read/01hzjpypy6tzjmnjsksy1493rv))
- [
](https://substackcdn.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F146643fa-898f-480b-bd5b-eee6b29fef3a_2000x1500.png)
**ARR = New ARR + Expansion ARR + Reactivation ARR – Churned ARR – Contraction ARR**
• **New ARR** = New seats * price per seat
• **New seats** = Visitors * conversion to trial/freemium * conversion to paid * seats per account
• **Visitors**
• Paid ads
• SEO
• Direct (e.g. word of mouth, virality)
• Referral (e.g. G2, social, articles)
• [Turbo boosts](https://www.lennysnewsletter.com/i/75292796/turbo-boosts)
• **Conversion to trial/freemium**
• Visit to CTA
• CTA to signup
• Signup to activation
• **Conversion to paid**
• Awareness of paid plan
• Starting the purchase process to completing the purchase process
• Value of product
• Lead nurturing
• **Expansion ARR** = Accounts upsold * average price increase
• **Accounts upsold**
• In-product upsells
• Outbound
• Hitting limits
• **Average price increase**
• Seat growth
• Headcount growth
• Internal virality
• Colleague invite rate
• Invite conversion rate
• Cross-sold products (e.g. Figma -> FigJam)
• Hitting more expensive tiers
• Raising prices
• **Reactivation ARR**
• Reactivated logos
• Reactivated seats
• **Churned ARR**
• Churned logos
• **Contraction ARR**
• Seat contraction
• Downgrading tiers
• Stopped using additional products ([View Highlight](https://read.readwise.io/read/01hzjq1a9yjzwydzz3471nhct7))
- [
](https://substackcdn.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Fd3e2efe3-0faa-4141-8bc4-d65bf4c7ecfb_2000x1500.png)
**ARR = New ARR + Expansion ARR + Reactivation ARR – Churned ARR – Contraction ARR**
• **New ARR** = New usage * price for usage
• **New usage** = Visitors * conversion to trial/freemium * conversion to paid
• **Visitors**
• Paid ads
• SEO
• Direct (e.g. WOM, virality)
• Referral (e.g. G2)
• [Turbo boosts](https://www.lennysnewsletter.com/i/75292796/turbo-boosts)
• **Conversion to trial/freemium**
• Visit to CTA
• CTA to signup
• Signup to activation
• **Conversion to paid**
• Awareness of paid plan
• Starting the purchase process to completing the purchase process
• Value of product
• Inbound sales/account managers nurturing leads
• **Price for usage**
• **Expansion ARR** = Accounts upsold * average price increase
• **Accounts upsold**
• In-product upsells
• Outbound
• Hitting limits
• **Average price increase**
• Usage growth
• Headcount growth
• Internal virality
• Colleague invite rate
• Invite conversion rate
• Data/customer/use-cases growth
• Cross-sold products (e.g. Figma -> FigJam)
• Hitting more expensive tiers
• Raising prices
• **Reactivation ARR**
• Reactivated logos
• Reactivated users
• **Churned ARR**
• Churned logos
• **Contraction ARR**
• Reduced usage
• Downgrading tiers
• Stopped using additional products ([View Highlight](https://read.readwise.io/read/01hzjq20b781cmd967s1wm601e))
- [
](https://substackcdn.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F8bf410a3-fb5f-4aeb-b616-78abf52baba9_2000x1500.png)
**ARR = New ARR + Expansion ARR + Reactivation ARR – Churned ARR – Contraction ARR**
• **New ARR** = Leads * qualified leads rate * meeting booked rate * win rate * ACV
• **Leads =** Direct **+** indirect
• **Direct =** Outbound + inbound
• **Outbound**
• Cold emails
• Cold calls
• Cold DMs
• Events
• **Inbound**
• Paid ads
• SEO
• Referrals (e.g. G2, backlink, social mentions)
• Direct (e.g. signs up for demo on website)
• [Turbo boosts](https://www.lennysnewsletter.com/i/75292796/turbo-boosts)
• **Indirect**
• Channel partnerships
• Number of partnerships
• Leads per partner
• Conversion rate
• **Expansion ARR** = Accounts upsold * average price increase
• **Accounts upsold**
• In-product upsells
• Sales nurturing
• Hitting limits
• **Average price increase**
• Seat/usage growth
• Headcount growth
• Internal virality
• Colleague invite rate
• Invite conversion rate
• Data/customer/use-cases growth
• Cross-sold products (e.g. Figma -> FigJam)
• Hitting more expensive tiers
• Raising prices
• **Reactivation ARR**
• Reactivated logos
• Reactivated users
• **Churned ARR**
• Churned logos
• **Contraction ARR**
• Reduced seats/usage
• Downgrading tiers
• Stopped using additional products ([View Highlight](https://read.readwise.io/read/01hzjq2kq7vsg59dmb7q6e1tvm))
- Consumer businesses make a software product for individual consumers. Examples include Netflix, TikTok, and Google.
Consumer products typically monetize in one of two ways—*subscriptions* (e.g. Duolingo, Spotify, Tinder) and *ads* (e.g. Instagram, Snap, YouTube). ([View Highlight](https://read.readwise.io/read/01hzjq3d83wftrca59rk5tbg1z))