The Five Parts to Every Business — PM Mental Model #1

AI Created by DALL-E using the words “Mental Model”

Charlie Munger, Investment Guru and vice president of Berkshire Hathaway, who sadly recently passed away ,once said;

“I’ve long believed that a certain system- which almost any intelligent person can learn — works way better than the systems most people use. What you need is a latticework of mental models in your head. And with that system, things gradually fit together in a way that enhances cognition.”

Munger’s insights lay a perfect foundation for the profession of product management. Just as Munger uses mental models to guide his and his more famous partner Warren Buffet’s investment decisions to making them some of the world’s richest men, we can apply mental models and frameworks to navigate the world of the product manager to build products that people love, the goal of any business.

Mental Models build structure into your thinking, they are representations, frameworks, or sets of beliefs that you carry in your head to help you understand and navigate the world around you. Mental Models are used to provide guidance, reason, make decisions, and solve problems by simplifying complex situations into more manageable parts.

Product Managers, particularly in the fast-paced and continuously evolving SaaS industry, are known for their extensive reading habits. Staying informed through reading helps them keep up with the latest trends, technologies, customer behavior patterns, and competitive strategies. It enables them to make data-driven decisions, innovate effectively, and understand the market more deeply. Moreover, reading across various subjects including psychology, business strategies, and technology allows product managers to build a diverse set of mental models, enhancing their problem-solving and strategic thinking.

I recently read and have been inspired by the excellent book “The Personal MBA: A World-Class Business Education in a Single Volume” by Josh Kaufman. This must-read book is essentially a catalog of the many Mental Models Kaufman believes everyone should learn if they want to be successful in business (and save over $100,000 on an MBA education).

It got me thinking about all the books, articles, and blogs I have read over the years and the associated mental models I have built up to help me as a Product Manager. The literature on Mental Models I have read list models like Occam’s Razor, First Principles Thinking, Pareto’s 80/ 20 Rule, and Hanlon’s Razor, these are all incredibly useful and worth a read, but I like the idea of creating a blog dedicated to the subject of Mental Models specifically for Product Management.

The aim, of course, is to provide product managers of any level with a structured understanding of the Mental Models that can help them be better at their role or indeed help to break into the profession.

Understanding the broad landscape of mental models brings us to our first, invaluable framework by Josh Kaufman in ‘The Personal MBA.’ He outlines the ‘Five Parts to Every Business,’ a model that acts as a starting point for anyone starting a business or building a product, as follows:

Any business or product can be defined as having the following 5 parts:

1. Value Creation — Discovering what people need or want and then creating it
2. Marketing — Attracting and building demand for what you have created.
3. Sales — Turning prospective customers into paying customers.
4. Value Delivery — Giving your customers what you’ve promised and ensuring that they’re satisfied.
5. Finance — Bringing in enough money to keep going and make your effort worthwhile.

No business or product (of course there is the concept of Loss leader but I will park this concept for now) can continue if one of the above is missing, so when planning a new business always begin with these 5 parts to help you identify any gaps or issues quickly.

Kaufman goes on to describe a business as a repeatable process that:

1. Creates and delivers something of value.
2. That other people want or need.
3. At a price the are willing to pay.
4. In a way that satisfies the customer’s needs and expectations.
5. So that the business brings in sufficient profit to make the venture worthwhile for the owners

Again, take any of these factors away and you don’t have a business or product. Keep in mind that:

• A venture or product that does not create value for others is a hobby.
• A venture or product that doesn’t attract attention is a flop
• A venture that doesn’t sell the value it creates is a non-profit organization or a loss leader (a product or service sold at a price below its market cost to stimulate other profitable sales).
• A venture 0r product that doesn’t deliver what it promises is a scam.
• A venture or product that doesn’t bring in enough money to keep operating will fail.

As a result, any business or product is a collection of the following processes:

1. Value Creation — Discovering what people need, want, or could be encouraged to want, then create it
2. Marketing — Attracting attention and building demand for what you’ve created.
3. Sales — Turning prospective customers into paying customers by completing a transaction.
4. Value-Delivery — Give your customers what you’ve promised and ensure they’re satisfied with the transaction.
5. Finance — Bringing in enough money to keep going and make your effort worthwhile.

As a product manager in the SaaS business ‘Value Creation’ transcends mere product development; it’s about understanding the evolving needs and pain points of your users. This requires continuous market research, user feedback, and the agility to adapt features accordingly. For a SaaS product manager, this means not just building a solution, but crafting an experience that grows with the user’s future needs. Marketing, on the other hand, becomes more than just spreading the word; it’s about educating potential users, establishing thought leadership, and building a community around your product. This involves leveraging various digital channels, from content marketing to social media, tailored to where your potential customers spend their time. Sales strategies in SaaS also diverge from traditional models, focusing heavily on demonstrating value through free trials or freemium models & product-led growth and nurturing leads over time with an emphasis on customer success. ‘Value Delivery’ in SaaS is particularly critical, as it’s not just about handing over a product; it’s about ensuring a seamless, ongoing service that adapts to customer feedback and technological advancements. Finally, ‘Finance’ in the SaaS realm involves unique challenges and metrics such as monthly recurring revenue (MRR), churn rate, and customer lifetime value (CLTV), which require a nuanced approach to budgeting, pricing strategies, and growth forecasting that all product managers should be tracking.

We will dive deeper into many of these subjects in future blogs but in summary, the “Five Parts to Every Business” mental model, as outlined in Josh Kaufman’s “Personal MBA,” succinctly encapsulates the essential components required for any business or product’s success. This model serves as a foundational framework, reminding us that a viable business must create value, market, and sell its offerings, deliver on its promises to customers, and manage finances to ensure sustainability and profitability. Ignoring or underperforming in any of these areas can lead to a venture’s downfall, turning it into a hobby, flop, scam, or financial failure. Therefore, when planning or evaluating a business, it’s crucial to address each of these five parts comprehensively landscape of business operations.

Here is a link to Kaufman’s book, it’s a must read….Enjoy and feel free to comment with your own experiences or other mental models you use to help on the topic!!!