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The Power of “Paper Models” in Decision-Making

Vision and Values

We often need to make decisions with limited data. Sometimes, the information you need simply doesn't exist yet, or collecting it would be too expensive or time-consuming. The “paper model” approach is a powerful tool to make informed decisions in these situations of uncertainty. It allows you to use your best judgment and educated guesses to create a framework for analysis, even when perfect data is out of reach.
Why “paper model?”
In tech companies, we build "paper prototypes" to validate a design or better test user needs. A paper prototype is quick and dirty and isn't expected to survive its primary reason for being created.

Calling this a "paper mode" similarly emphasizes that this is really just a casual, ephemeral tool. Directionality is more important than accuracy, and speed to insight is more important than completeness. It's not about fancy spreadsheets or complex software (though those can be helpful!). Instead, it's about working backward from a desired outcome and getting a clearer picture of how to get there.
Essentially, you sketch out the key variables that influence your success and tweak them until you hit your target metric. The beauty is you then have a chance to step back and “gut-check” whether those numbers are realistically achievable.
A Personal Finance App Example
Imagine you're working on a personal finance app with a million monthly active users. You want to grow your average revenue per user (ARPU), and a board member suggests exploring the idea of an affiliate marketplace. Their definition of success is achieving an ARPU of $3 through this new marketplace.
How does a paper model help you make an informed decision?
  1. Break It Down: Map out the user journey within an affiliate marketplace:

    >> What percentage of your users log in with enough regularity to even see the offers?
    >> Out of those, how many are likely to click through to explore affiliate offers?
    >> How many offers, on average, might a user redeem?
    >> What's the typical value of an offer redeemed?
  2. Plug and Play: Figure out the numbers you know (number of regular users, value of a typical offer). Next, for the remaining variables, adjust them until you’d hit your goal. Even a rough model might quickly reveal that to hit the $3 ARPU target, a staggering 40% of your users would need to redeem at least one affiliate offer a month! Congrats: your simple paper model just uncovered the key metric to watch.
  3. The Benchmark Test: This is where things get interesting. Compare your numbers to industry standards. If similar companies see 3-10% redemption rates, that's a red flag. Could your company outperform everyone else by that much? Maybe, but it forces you to question the underlying assumptions.
Why Paper Models Are So Powerful
Paper models aren't a replacement for detailed analysis, but they offer something unique:
  • Focus on What Matters: They force you to pinpoint the levers that will have the most significant impact on your goal.
  • Uncover Hidden Constraints: Sometimes, a simple model reveals how unlikely a particular scenario is.
  • A Kickstart for Informed Decisions: Even a back-of-the-napkin model can prevent you from sinking time and resources into a lost cause. It can also help refine your goals or strategies based on clearer insight.
Limitations
While paper models are an excellent tool for initial planning, it's important to acknowledge their limitations. Here are a few dangers to consider:
  • Oversimplification: Paper models can paint an unrealistic picture by neglecting complexities. Real-world factors and unforeseen challenges often arise, throwing your initial calculations out of whack.
  • Data Dependence: Even a paper model relies on educated guesses. If your starting assumptions are significantly off, the entire model becomes unreliable.
  • Misplaced Trust: A paper model can create a false sense of security. It's crucial to remember it's a starting point, not a crystal ball. Don't get so fixated on the model that you miss the need for further research or data collection.
Put It Into Practice
The next time you face a big decision, try sketching out a paper model. It's great for team discussions, too! You might be amazed at how a fast, simple exercise can illuminate complex problems.
Have you used a similar approach? How did it work for you? Let me know!
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