Defining Product State and Financial Accounting

Yes, this is a little awkward title for a post. These two topics are so far apart that you might need an intergalactic spacecraft to reach one from the other. The thing with most unrelated things in life is that there may not be any direct, consequential relation between them, but there is always an opportunity to inculcate the learnings from one into the other. I recently embarked on a journey to earn myself some fundamental business knowledge, and if you are familiar with what I am talking about, you would know that Financial Accounting is one of the core concepts you have to start embracing pretty quickly in this journey.

When you hear of Financial Accounting, the first question that comes to your mind is why study Accounting? — “To understand and analyze the current financial situation of an organization” that’s what you are told during your Accounting 101 class. If you are an investor or a potential investor the financial reports will be your starting point to think about the investment, but we humans are lazy by nature, and we love talking in the terms of simple numbers, percentages and ratios. People in the world of finance are no different and they love ratios too. DuPont ratios are one of the popular measures of the current state of a company.

In simple terms DuPont analysis is an expression that breaks Return on Equity into three parts.

Return on Equity is the amount of net income returned as a percentage of shareholder’s investment and therefore this is a very important figure for the potential investors. DuPont equation divides this expression into Net Profit Margin, Return on Assets and Financial Leverage. Each of these elements individually helps you assess the state of the business-

The beauty about this equation is that it tells you so much about what is going on with the business. You just have to look at the individual ratios and you know what is good, what is not so good and what could be optimized. So far so good, now the question is how does this all relate to the state of a product, or a mobile app specifically in this case. If you want to understand the state of a product, which is an app in this case, then how do you go about measuring it in a similar fashion?

Let’s first look at how does a typical app lives in the app universe-

So, this is the snapshot of the various stages your app could be in at any point of time. Now let’s look at what ratios are of importance here-

1. Paid User Per Install(PUI) is the ratio of Paid Users/Total Installs — the overall number to get an idea of how many paid users you have in the context of total installs. Improving this ratio directly is non trivial because of the of intermediate stages involved.
2. Active User Leverage is the ratio of Paid Users/Active Users — a measure of the ability of the product to monetize the current active user base. A very low number may require strengthening of the up-sale strategies, playing around with payment model and subscription packages.
3. User Frequency: ratio of Active Users/Active Installs — the difference of the Denominator and the Numerator is your interview audience. You want to understand why only 10% of your active installs use the app, then this is the place to get started. Also, it is worthwhile to look at the performance of your notifications — maybe it is time to personalize the notifications a little more.
4. User Retentivity: ratio of Active Installs/Total Installs — a measure how many of original hard earned installs are still sticking with you. A very low number here may signal an onboarding issue or some technical problem due to the OS version, device type or device orientation.

Putting all these together, we get our nice little equation to define the Product State-

I have worked with few assumptions while working on these ratios such as a unique user is equivalent to a unique install, the majority of the paid users are active users in a long run.