Fintech 11 March 18

Entropy and SaaS metrics

By: Currencycloud
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Do you ever have those days at work when everything seems disordered? When the complexities of the great game that is software development overwhelm you? When you don’t see the ball clearly at all? I do.

Disconcerting though it is, I nearly always react in the same way: I go back to first principles and concentrate on value creation and solving real customer problems.

Here at Currencycloud I frequently return to four SaaS metrics contained in an equation of Lifetime Value – Opportunities, Conversion, Average Revenue per User and Churn – to help me sift signal from noise.

Similarly, in my previous role at Direct Line, I often used a grossly simplified model of insurance profitability to help focus product development efforts {for the geeks among you: Profit = Gross Written Premium x (1-(Expense Ratio + Current Year Loss Ratio)) + Investment Income + Other Income + Prior Year Reserve Releases}

You can probably tell a lot about me by the fact that I use equations to see through the fog of war that is the fintech business. It’s something that I’ve always found helps me. But why is this? Why does business seem like it’s getting increasingly complex? And why do I need simplifying equations to cut through that complexity?

Entropy, that’s why.

Without sounding pompous, let’s use the second law of thermodynamics – from where it came – to try and explain. This law states that “energy of all kinds in our material world disperses or spreads out if it is not hindered from doing so.” Entropy is the measure of this spontaneous process and is the reason why hot pans cool down when taken off the stove.

Thinkers like Steven Pinker and bloggers like James Clear have popularised entropy as an analogy – i.e. as a measure of disorder. Taking it away from physics into the realm of popular psychology, people now routinely use it as a mental model to explain why life becomes disordered unless energy is expended to push back against it; energy to craft stability and structure to counteract entropy’s inexorable pull.

The quote by Yvon Chouinard, the founder of Patagonia, contained in the James Clear post, above, says it best: “The hardest thing in the world is to simplify your life because everything is pulling you to be more and more complex.”

So, the next time you’re struggling with the complexities of business, or even everyday life, try and use a fundamental equation, or mental model, to de-clutter your thoughts.

By: Currencycloud
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