First Principles Thinking for PMs and Entrepreneurs

Ameet Ranadive
Apr 1, 2017 · 8 min read

As product managers and entrepreneurs, we constantly face the question of whether and how we should pursue new product opportunities. We come across new ideas all the time from our customers, our sales team, our executive team, our competitors. Sam Altman once said, “Ideas are cheap and easy, and there are a lot of them.” So which ones should we pursue?

When considering any new product idea, I urge you to use First Principles Thinking. Elon Musk is a big proponent of First Principles Thinking, which he summarizes in this video below:

As Elon says in the video:

“First principles is kind of a physics way of looking at the world. You boil things down to the most fundamental truths and say, ‘What are we sure is true?’ … and then reason up from there.”

He contrasts First Principles Thinking with thinking by analogy:

“I think it is important to reason from first principles rather than by analogy. The normal way we conduct our lives is we reason by analogy. We are doing this because it’s like something else that was done or it is like what other people are doing… it’s like slight iterations on a theme.”

Breakthrough products are created on the basis of a fundamental insight. The product manager or entrepreneur must identify a new way of creating customer value that the rest of the market has not yet discovered. This new way of creating customer value can be based on the application of new technology, on new forms of interaction design, or on a re-configuration of the business model or value chain.

First Principles Thinking enables an entrepreneur or product manager to identify those critical insights. If you boil things down to fundamental truths and then reason up from there, you are not constrained by conventional thinking. You don’t need to depend on prior work. You can ask the question,“Why do things have to be this way?” You can imagine a future based on a completely different way of looking at the problem, and based on fundamental truths and insights.

As Mike Maples, Jr. of Floodgate wrote:

“If you aspire to do something truly legendary, in business or any other field, you will discover that the biggest breakthroughs come from obsessively pursuing insights that defy conventional wisdom.

“In the startup world, this translates to having what PayPal founder and Facebook investor Peter Thiel calls a ‘secret’ or what Benchmark co-founder Andy Rachleff would describe as an idea that is ‘non-consensus and right.’”

Not only can First Principles Thinking help you identify unconventional insights, but it can also help you avoid pursuing non-existent or small opportunities. This is equally important for PMs and entrepreneurs, since your time is very limited and you can’t afford to sink time and resources into opportunities that will never materialize into something big.

Here are three tools for First Principles Thinking for new product opportunities.

  1. What is the customer’s fundamental problem?
  2. Is the market big enough?
  3. What would a 10x solution look like?

Here is the first fundamental truth you want to understand using First Principles Thinking: is there a real customer problem to solve, and if so, what is it? If there is no customer problem, when you reason up from there you conclude that there is no opportunity to pursue.

What does First Principles Thinking look like here? Using tools like Jobs to Be Done, you understand the fundamental truths of:

  • What progress is this customer trying to achieve? What problem are they trying to solve?
  • What is the context of their struggle? Who are they with, what else are they doing, where are they, etc.?
  • How does the customer judge quality or success for a better solution?

To get to these fundamental truths, you have to do primary research yourself — get out of the building, talk to customers, develop empathy for them, and reconstruct the problem in your own words.

By contrast, reasoning by analogy looks like this:

  • This market research report says that customers are having problem X. Therefore, the customer’s problem is X.
  • Customers are already using product X, which solves problem Y. Therefore, the customer’s problem is Y.
  • Our sales team reports that competitor product X has feature Y, which solves problem Z. Therefore, the customer’s problem is Z.

By taking a First Principles approach rather than reasoning by analogy, you can avoid the two most serious mistakes that PMs and entrepreneurs make with new opportunities:

  1. Chasing after non-existent problems
  2. Assuming that today’s competitors are addressing the customer’s fundamental problem

Breakthrough ideas come from discovering a fundamental customer problem that nobody is currently addressing. Today’s competitors may be solving yesterday’s customer problem. If you reason by analogy, you may also chase after yesterday’s problem and miss that the real opportunity — today’s problem, and more importantly, tomorrow’s problem. If you use First Principles Thinking, you may have an insight that defies conventional thinking.

Once you have confirmed that there is a fundamental customer need, your next question should be, “Is the market big enough?” If the market is not big enough, when you reason up from there you also conclude that there is no opportunity to pursue.

What does First Principles Thinking look like here? You get to these fundamental truths:

  • Will this opportunity scale to dozens, hundreds, thousands, or millions of customers?
  • What are customers currently paying for the alternate solution, and will my solution get paid the same, more, or less?

The opportunity size is the product of number of customers times the price each customer is willing to pay. Keep in mind that whatever solution you provide will be compared to the customer’s nearest alternative. If the alternative is “do nothing,” your solution needs to provide enough value that customers will be willing to pay a non-zero amount for your product.

Opportunity size is a fundamental truth that you need to confront early on. If it turns out that this problem only applies to a handful of customers, when you reason up from that fundamental truth, you conclude that this is a niche opportunity. Or if customers aren’t willing to pay much or anything at all, you won’t be able to monetize your solution. In either case, the market is too small. Better to use First Principles Thinking to get to this point early rather than after you have already sunk a lot of time and resources into pursuing this opportunity. Too many entrepreneurs and PMs spend too much of their time going after small opportunities.

Assuming that there’s a real customer problem, and the market opportunity is large enough, the next fundamental truth you should consider is: what solution can we build that will motivate customers to switch from their current alternative?

As Basecamp CEO Jason Fried has written before, it’s important to know “What are people going to stop doing once they start using your product?” He writes:

“Habit, momentum, familiarity, anxiety of the unknown — these are incredibly hard bonds to break. When you try to sell someone something, you have to overcome those bonds. You have to break the grip of that gravity.”

Khosla Ventures investor Keith Rabois has said:

“if you’re going to displace [an incumbent] you need to be 10X, the classic order of magnitude, better. A lot of people fail on that dimension. They build products that aren’t that order of magnitude better for the consumer. So that’s one of the reasons why you haven’t seen a lot of consumer adoption.”

So how do you build something that is 10x better? You engage in First Principles Thinking, by starting from scratch and asking, “How could this be 10x better than it is now?” You don’t assume any prior work or rely on conventional thinking.

In “How Google Works” by Eric Schmidt and Jonathan Rosenberg, the authors observe:

Most people tend to think incrementally rather than transformationally or galactically… That’s why one of Eric and Larry’s [Google’s cofounder] challenges to engineers and product managers in Google product reviews was always “you aren’t thinking big enough”… Later replaced by the Larry Page directive to “think 10x.”

In the same chapter, the authors discuss why it’s important to “think 10x.”

The obvious benefit of thinking big is that it gives smart creatives much more freedom. It removes constraints and spurs creativity… Astro Teller, the head of Google[x], notes that if you want to create a car that gets 10 percent better mileage, you just have to tweak the current design, but if you want one that gets five hundred miles per gallon, you need to start over. Just the thought process — How would I start over? — can spur ideas that were previously not considered.

“How would I start over?” This is First Principles Thinking in action. When you “think 10x,” it forces you to start over, get to the fundamental truths of what is required to deliver 10x performance. Then you can reason up from there. When you “think 10x,” you may revisit conventional assumptions; you may need to apply groundbreaking technology; you may discover a new business model that unlocks 10x value.

Larry Page credits 10x thinking for leading to the creation of Gmail, as well as to Google’s investment in self-driving cars. And although he doesn’t specifically mention “10x thinking” in the video above, Elon Musk is applying that approach to battery packs. He discusses how conventional thinking is that battery packs cost $600/kw-hour — that’s how they’ve always been, and that’s how they will always be. However, when he breaks down battery packs to their constituent materials, he finds that battery packs only really cost $80/kw-hour. This kind of First Principles Thinking will enable us to envision and create 10x solutions.

First Principles Thinking is an important tool for any entrepreneur or product manager considering new product opportunities. To engage in First Principles Thinking, you boil things down to fundamental truths — what are we sure is true? — and reason up from there. First Principles Thinking is in contrast to reasoning by analogy, where you do something because it’s like what’s been done before, or it’s like what other people are doing.

The reason why First Principles Thinking is so important to entrepreneurs and PMs is that if you want to build a breakthrough product, you have to pursue “insights that defy conventional wisdom.” What Peter Thiel calls a “secret,” or what Andy Rachleff calls being “non-consensus and right.” First Principles Thinking allows you to discover those unconventional insights, by starting with fundamental truths and reasoning up from there. In the process, you may discover an unmet customer need, a new way to apply the latest technologies to solve a problem, or a new business model that is a “secret.” And you can avoid pursuing non-existent or small opportunities, and instead focus your time and energy on meaningful ones.

The three tools for entrepreneurs and PMs to apply First Principles Thinking to new opportunities are:

  1. What is the customer’s fundamental problem?
  2. Is the market big enough?
  3. What would a 10x solution look like?

By applying First Principles Thinking to new products, entrepreneurs and PMs will be able to create breakthrough products that delight customers, defy conventional wisdom, and scale to massive market opportunities. I’m excited to apply First Principles Thinking to new products that I’m considering. How will you apply it?

PM Insights

A collection of posts that contain lessons learned from my time as a product manager.

Ameet Ranadive

Written by

Entrepreneur. Product management @ Instagram.

PM Insights

A collection of posts that contain lessons learned from my time as a product manager.