3. Multiple Ways to Detail a Profit and Loss (P&L) Statement

Introduction

A Profit and Loss (P&L) statement is commonly represented in spreadsheets, as they’re the favored tool of finance professionals. However, presenting a P&L can go beyond a densely packed spreadsheet. Telling the story behind the numbers in the P&L statement is a powerful way to understand a company’s financial health and the role product managers can play in influencing it.

To illustrate this, let’s explore examples from companies like Nubank, Airbnb, and Spotify, where product decisions influenced the P&L. These examples will demonstrate how understanding financial metrics and KPIs in the context of product management can highlight the impact of your work on company revenue, costs, and profitability.

Case Studies in P&L Storytelling

1. Nubank: Growth Through Active Customers and Product Expansion

Nubank has achieved impressive revenue growth by increasing both the number of active customers and the revenue per customer. Here’s how:

• Active Customers: Nubank’s active customer base has been growing steadily. The increase in active customers is a key indicator of company growth and potential revenue.

• Revenue per Customer: Revenue per customer has also increased over time. Nubank achieved this by expanding its product portfolio beyond credit cards, adding offerings like personal loans, which yield a higher margin than credit cards. The average Nubank customer now uses about 3.7 products, indicating higher engagement and spending per customer.

• Product Lifecycle Consideration: Different products are in different stages. Credit cards are reaching maturity, while personal loans are in the growth phase, with higher returns. Recognizing the life stage of each product helps balance the revenue growth and profitability across the portfolio.

By analyzing this progression, we see that Nubank’s P&L story highlights how customer acquisition, product diversification, and product lifecycle management contribute to gross profit.

2. Airbnb: Aligning Product with Revenue and Cost Reduction

Airbnb increased its revenue by 77%, but gross profit rose even more, by 93%, because it successfully reduced the cost of revenue by 20%.

Product Influence on Revenue:

• Feature Enhancements: Airbnb’s addition of flexible booking options, such as “flexible dates” and “flexible destinations,” aligned well with shifting customer preferences. These changes made it easier for users to find and book accommodations, which, combined with a broader demand for travel, led to an increase in revenue.

Cost Reduction through Product Enhancements:

• Operational Efficiency: Product updates, like a more welcoming onboarding page for hosts and clearer cancellation policies, reduced customer service and support costs. This is an excellent example of how product improvements can reduce costs while driving more bookings.

Airbnb’s case shows how P&L can capture the impact of strategic product changes. Revenue and cost-control initiatives can work hand in hand to transition from a net loss to a net gain.

3. Spotify: Driving Growth Through User Metrics and Product Engagement

Spotify recently turned its financials from a negative to a positive outcome by increasing both monthly active users (MAUs) and paid users. This case highlights how user-focused product metrics connect to the P&L.

Key Product Metrics:

1. New Users: Growing the user base, both free and paid, is essential for revenue growth.

2. Time Spent on Platform: Spotify tracks how often and how long users listen to content, which reflects engagement.

3. DAU/MAU Ratio: The Daily Active Users to Monthly Active Users (DAU/MAU) ratio shows how often users return to the platform, indicating stickiness.

4. Paid vs. Free Users: Converting free users to paid subscribers increases revenue and adds stability.

Each of these metrics drives revenue, whether through ads served to free users or subscription fees from paid users. Product teams can use these insights to boost engagement and conversion rates.

Layering Metrics: Primary (N1) and Secondary (N2)

Spotify’s metrics can be categorized into Primary (N1) metrics and Secondary (N2) metrics:

• Primary Metrics (N1): These connect directly to revenue and include new users, listening time, and the ratio of paying users to free users. Primary metrics are essential for financial performance.

• Secondary Metrics (N2): These are actionable metrics that the product team can directly influence to improve N1 metrics. Examples include:

  • User Retention: How often do users return daily or weekly?
  • Content Engagement: How much time do content creators spend on the platform, and how actively are they engaging with their audience?

By focusing on N2 metrics that influence N1 metrics, product managers can create targeted initiatives that improve user acquisition, retention, and engagement.

Expense Metrics: Cost metrics such as acquisition cost, retention cost, and content cost (e.g., paying creators) also play a role in the P&L. Understanding these expenses allows product teams to make budget-conscious decisions that improve the company’s margin by lowering costs without impacting quality.

Practical Application: Defining Metrics in Your Organization

To better understand the impact of your product on the P&L, take some time to outline the Primary (N1) and Secondary (N2) metrics relevant to your product and your company’s financial goals.

1. Identify Primary (N1) Metrics: Start with revenue-driving metrics, such as active users, conversion rate, or customer retention.

2. Define Secondary (N2) Metrics: Choose actionable product metrics that impact N1 metrics, like feature engagement, time spent on the platform, or frequency of use.

3. Map Metrics to the P&L: Connect product metrics to financial performance indicators in the P&L. This will provide a clear picture of how each product initiative can influence the company’s revenue and profitability.

4. Build a Story for the P&L: Use this framework to narrate your product’s financial story, showing how each product metric contributes to revenue and cost efficiency.

Conclusion

Product managers can make a significant impact on the P&L by connecting product metrics to business and financial outcomes. Whether through revenue growth, cost reduction, or a balance of both, the actions of the product team directly contribute to the company’s profitability.

By breaking down a P&L statement into Primary and Secondary metrics, product leaders can approach financial performance as a storytelling exercise, showing how their work connects to the company’s financial goals. Ultimately, understanding these financial principles and applying them to your work will allow you to make strategic decisions that drive both product success and financial sustainability.