In this paper, an attempt is made to find functional definitions of bioavailability and bioequivalence for topical products and to examine critical factors that influence topical bioavailability and bioequivalence. A physical model approach for quantifying the problem and increasing our understanding is presented here. The key assumptions are (1) that the target site is in the lower epidermis (basal layer) or in the dermis, and (2) that it is the thermodynamic activity (i.e., the free drug concentration, C*, of the active drug species) at the target site that is the true correlate of drug effectiveness. Studies initiated to implement the physical model approach involved first validating a ‘three-tiered’ model for finite dose drug uptake/transport in skin with experimentally determined input parameters (partition coefficient, K, and steady-state permeability coefficients, P, for the stratum corneum, viable epidermis, and dermis). Hydrocortisone was used as the model drug with hairless guinea pig skin as the model membrane. The physical model is used to show, via the C* concept, how formulation factors may influence bioavailability and bioequivalence. Finally, a method is presented for predicting the efficacy of topical formulations employing appropriate in vitro data and physical model calculations.