Loading summary
Transcript41 lines
- [00:00]
A
You're listening to Revenue Vitals with Chris Walker.
- [00:18]
B
Hi, everyone. Thanks for waiting patiently in the waiting room for us. We are getting ready to go here. Appreciate you all.
- [00:24]
C
What's up, everyone? Sorry, we're off to a late start today. I've done. I was just on an event that I did with Eric Jacobson and the Hatch team that ran a couple minutes over, and I announced this decision a little while ago that I'm never doing four podcasts in a day ever again. But at this point, I've actually decided that I'm never doing three podcasts in a day again. So it'll be two maximum. So it's another learning for me. I really want to put so much effort into this event and so much prep. And when I have two other podcasts right before it, I'm, like, showing up a little bit late. I'm a little bit flustered. I'm not fully prepared. I don't like it. So I'm going back to just like, I want to really focus on delivering a lot of value in this event and pack a punch. So just communicating some learnings to all of you. So we have some housekeeping coming up. So the first thing is that starting for next Tuesday, the link for this event will change. We need more space and we're upgrading our tech at Pesetto. And so there's going to be a new link. All of you that are already registered will receive an invite. We'll auto register you again so you get it on your calendar. Anyone that's new, you can visit the Passetto website on events. And there is going to be a new link that you can use to join. So maybe next week during the transition, someone from our team will be on the old Zoom. So if you're over there, we send you into the new one so you don't get lost with just a housekeeping item that's happening. And then we're coming in with some guests on the show. So coming up, we have Jocko Vanderkoy, who's the author of Revenue Architecture that I've been talking quite a bit about. And the founder of Winning by Design is going to be joining us to talk through the concept together of the Revenue Factory that'll be happening on September 10th. This exact, like, registration link, this meeting, so everyone that joins will be able to come and see that concept. I think that is him. And I will have a lot of fun with that one. That's on September 10th, 12pm Central. And then two weeks after that, on September 24th, we have David Spitz joining who I've mentioned and showed some benchmarks that he's calculated and provided on public SaaS companies. He's the CEO of Bench Sites and some of the stuff that he's publishing on the correlation between growth rate and enterprise value or revenue multiple or on sales and marketing efficiency and the correlation between revenue multiple or just the overall cost, the sales and marketing efficiency of public SaaS companies and the benchmarks and the medians around that incredibly impactful work, taking all the company's financial reports, analyzing them, coming up with these factors so that all the people that work in private companies can see how these CORF and that want to IPO at some point. These companies that are private that want to IPO at some point can see how these factors if our sales and marketing efficiency is 350% versus 200%, how much that can impact our enterprise value based on the revenue multiple. The revenue multiples for low sales and marketing efficiency are 2 to 6x and the revenue multiples for SaaS companies that have real really good sales and marketing efficiency are 9 to 15x. So you can think about your company being worth two to three times more in value just based on how efficient your go to market is, which is a crazy statistic. So anyway, David Spitz will be joining for that one. We'll be talking about SaaS benchmarks and other things like that. If you have somebody from your finance team. David is an ex finance person and worked in investment banking, very experienced. So if you want people on your finance team that could be a good one to get them involved in. And again, this event will continue every week and I'll continue to sprinkle guests into the mix when I think it'll be really valuable to add a new perspective or to add on on a topic that we've been discussing here. So stay tuned, mark your calendars for all of those things. The topic that I want to discuss a little bit because we're talking with companies and this is like the beginning of the initial planning for 2025 that's happening right now. Most companies want to be able to have a preliminary 2025 plan ready by the end of the Q3 closed board meeting. And so a lot of those initial like budgeting and estimates and things like that are happening right now. And one of the things that I see consistently that I'm trying to help people look at in a different way and maybe that will allow them to see things in a different way is that there is a distinct fundamental difference between the idea of key performance indicators and attribution being able to understand these two things because companies will take attribution and bring it into their forecasting and planning and modeling and it creates all these other issues and complications. And you spend a lot of time debating the model and the departments and all these things and you lose sight of the bigger picture. And so to be clear, attribution is not going to tell you how fast an opportunity converts from a meeting into a qualified opportunity. Attribution is not going to tell you how many qualified pipeline opportunities you need to win a close one customer. Attribution is not going to tell you how much your cost efficiency metric is to be able to plan, how much money you have to spend to create pipeline, or how many reps that we need to close a specific amount of revenue, or what our per rep performance is, or what our quota attainment is. These are all core KPIs that we can use in our revenue factory that have nothing to do with attribution, that allow us to plan a lot more accurately in a unified way and a lot more objectively than breaking it down and saying marketing needs to source this amount, SDRs are going to source this amount, we're going to get this much self sourced from AES and things like that. Because what you have is you have basically the attribution model being the difference in the planning. And the reality is, as a business at the highest level, it doesn't matter whether the SDR booked the meeting from third party data, or whether the person came in from from a content download, or whether it came from a demo request, or whether an AE happened to meet someone at a meeting and reach out. It doesn't matter where we got the pipeline. What matters is that we got it and that that account is in pipeline. And how much did we get and how much did we spend and what does that look like compared to last quarter and the quarter after that and does this meet our CAC target and are we on track for our profitability? These are the things that matter when it comes to creating a structured plan for 2025. And then after that bring in the other data that you have to be able to think about. Where should it come from? I'm highly suggesting that you don't say 40% comes from marketing and 30% comes from SDRs and 20% comes from AES and 20% comes from partner or whatever the math is. I am actually recommending that you do not do that. But for most companies that's what you've been doing. For the past five years and maybe this year isn't going to be the one that you change it and maybe you're going to be able to, you're going to stick with that. I've mentioned for a couple of weeks that marketing does not book meetings and create pipeline. For the most part, marketing collects first party signals from owned assets that allow BDRs to make cold calls and get meetings or to do outreach and get meetings. And so it's not like when marketing gets sourced something through the website that you didn't need the bdr, you still have to pay the BDR in the meeting, a certain percentage of them, they're still not going to be able to convert. And so the idea that one thing came from marketing, the other came from SDRs and the other came from AES, just doesn't make sense. Another part of when you look at marketing just as what did marketing source marketing can deploy investments across the entire customer life cycle to get the biggest impact on growth and ROI. So potentially the biggest use of marketing dollars for 2025 could be putting stuff together for your current accounts to boost GRR and NRR. And allocating $2 million from Google Ads and moving it into customer marketing could be like the most effective, important thing that you could do for your business next year. When you score marketing on sourced pipeline, you make that fundamentally impossible. A CMO cannot move that money over there when they're scored on sourced pipeline. And so what you're doing is you're taking the marketing function that can be used across the entire customer life cycle and you're segmenting it off to sourcing trackable leads. And that's why you see a lot of marketing teams don't invest in active pipeline marketing. Most companies don't invest significantly in customer marketing because the marketing KPIs that have to do with pipeline production and attribution don't allow you to do that thing or don't incentivize you to do that thing. And so at a high level, we need our go to market KPIs. Our go to market KPIs have nothing to do with attribution, have nothing to do with attribution models. It doesn't have anything to do with the departments. We're running a revenue factory. It has to create pipeline, close new logos, renew accounts and expand customers. Those are the parts of the factory that need to happen. We can deploy investments across those and we understand the conversion, the time, the cost and the economics across each part of that very simplified process. Every company that has sales opportunity data can come to a view that's similar to this and that will tell us are we doing good? What is the current performance and what are the historical trends and also where are the biggest opportunities and where are the biggest issues and the biggest risks. You get all that stuff. Then once you know that unit economics on creating pipeline and GRR are the two biggest problems in your business, then you can start going and looking at attribution and individual investment analytics and breaking it down by segment and all the things that you can do to figure out what are we going to do Once you have the context around that GRR and this are happening when companies currently do this with the Bottoms up reporting, that context doesn't exist for the people that are doing the analysis and making the reports. The person that's making the demand gen report does not know and is not looking at the data knowing that your GRR is 81 and it's the biggest issue in your company. Their report has nothing to do with that. Their strategy has nothing to do with that. That's an issue for the people that are building other reports that come bottom up. They don't understand that the unit economics around creating pipeline are the actual biggest issue. The person that's doing Google Ads doesn't know that. And so when they're doing Google Ads and they're putting together the report, they're not looking at the Google Ads expenditures or the ROI or anything with the lens of we're not creat pipeline for our our investment at this stage of the process. And so the bottoms up reports what happens. Everything is just sunshine and rainbows from the bottom up. Every program's working the influenced revenue model. Our events are influencing revenue. So many people love our brand from the trade shows. Our MQLs are on track. Da da da da da. The top level growth rate slowing down. CAC is at 3 year plus CAC payback, unsustainable financial performance metrics that are either declining or stagnating. And we need to figure out how to put those together to actually fix things. I guess the point that I'm really trying to make is that the KPI should tell you how you're doing, not attribution. And when we strip out attribution from the KPIs it creates a far more objective view at the executive level about where are the issues in our revenue factory. It's a much better way to put it. And so I'm encouraging people to start with KPIs. You need performance KPIs and you need cost, unit economic KPIs. You need both sides of the equation. You can then use those to feed into the base 2025 model. Just play out the same trends and the same stuff that's, that's happening for this year from a unit economic standpoint and efficiency standpoint. Play it out to next year, see where you would end up. If you change nothing, then start to put all the other things in place. You can run this in a tops down or a bottom, in a bottom up framework. So you can say we need to get to 30% growth. What needs to happen to get there. Or you can say here's what happens if we do nothing, if we add certain things, here's the outcome. Where do we actually land? How does that compare? You can go in both angles and then from there then you start getting into custom crafted plans about how we're going to invest certain things in terms of headcount and programs. And that's where you start looking at attribution. So just a recommendation. I'm sure as 2025 planning heats up with our customers, I'll have a lot more insights on some of the common missteps and roadblocks that happen in 2025 planning. So we'll get more into that. But if people are thinking about it, have questions on that or working on it right now we'd take questions about KPIs and attribution or annual planning, quarterly reforecasting first and then we can go from there. Thanks everyone for being here.
- [12:09]
B
Sounds good. I have a question. So how would you suggest to kick this process off? It suggests that this is really at the executive level. So should a company share the KPIs through the executive level first and then that gets shared with the senior leadership team? Or how do you recommend to go about this as a CEO yourself?
- [12:31]
C
So if you look at this at a high level, what you're doing is you're doing what your FP and A team does for the business, but you're translating that process specific to go to market. So when you think about FP and A, what is it? Financial planning and analysis. And so typically you start with the analysis even though it comes at the end. FP&A. The A is actually the first place that you start for a business. The recommendation of how to actually implement this is step one to get the KPIs measured and be aware of them at the executive level and understand the historical trends. Just don't change anything about anything that people are doing. Just Be aware of what's happening and get other people thinking about this is how it's calculated, this is how my outcomes drive this metric and get people just thinking about it. Then step two is once you've had a couple of quarters of looking at it and looking at the trends of it, then you can start to figure out how are we going to integrate this into our planning? Then the next step would be how am I going to integrate this into how our senior leaders are incentivized or what they're gold on. Then it would be how do I roll this down to my VP and director level layers? And to be honest, like, I got to see how this plays out a little bit longer. But there's some parts of me that think that a director never needs to see this data, that this should be managed by, that this should be managed by executives, and that the KPIs that come down from that should be more focused on what those people can control. And it's the job of the CMO and the VP layer to translate business level metrics into individual contributor or like sub functional level objectives.
- [14:10]
B
Awesome. Super helpful. I'm going to bring on Duke. He has a question.
- [14:14]
D
Thanks, Cindy. Hey Cross. So what are the KPIs that are the most important to look at and measure?
- [14:21]
C
Let's do it. Sidney, I don't know if you have that deck, Duke. We presented some of this stuff last week, but I love going back especially on these concepts. So happy to do it. So we'll just talk through at a high level like the metrics stack. Sydney will pull that up and we'll talk through.
- [14:35]
D
Thanks for confirming on LinkedIn this morning too of the book. I appreciate it.
- [14:40]
C
Yeah, happy to do that. Glad you made it here. And this is an excerpt from that book and this is something that we're adapting. For instance, I don't agree with the like cacti LTV and this being the primary efficiency metric at the top. But that's beside the point. At a high level you have your investor and financial metrics which every cfo, CEO and board are looking at. You think about net new ARR, total ARR growth rate, sales and marketing efficiency, CAC payback rule of 40, free cash flow. Like you can get all this. The CFO is going to report on all that stuff quarterly once the company's above like 5 million in revenue. Everyone's looking at these numbers or at least some form. It might be a different metric, but it's basically getting to the same thing. Right? So you have those Those are the metrics that are really the top level. And so what companies see right now is they can see growth rate is slowing down, CAC payback period is going up, our costs are inflating, our growth is slowing. We have an issue at the top, the highest level. But then when you try to break it down and go into it, there's no process to take all the financial data with the CRM data and put it together and say, okay, our growth rate's slowing down. Let's methodically break it down and figure out why. That's what's missing. And so with this KPI stack, you basically have very high level compound metrics at the top that all CFOs and CEOs are used to seeing and board members and then being able to translate that down into the CRM metrics. So you can look at growth rate, know that growth rate is comprised of these three metrics. Look at those three metrics, then know that those are comprised of these three metrics. Continuously break them down and identify. We have an issue in the unit economics around creating Pipeline, for instance, or we have an issue around, our biggest issue is actually gross revenue retention when you think about our growth model. And so this framework just allows you to break that down to combine revenue data, expense data, and CRM sales progression data all together to create this form of KPIs. So you can see that at the bottom level there is like a data model. Salesforce has a standardized model that's built in that you have opportunities and you have certain objects and there's certain data collected like the day the opportunity was created and the day that opportunity was closed. So every company has some form of a data model already in their CRM, whether they intentionally chose it or just use what came out of the box in their CRM. And that in order to get to this level, you basically need an enhanced data structure inside of your CRM and you need an enhanced data structure inside of your accounting system that allows this, these two data points to be connected together or data sources.
- [17:15]
D
Got it. That's great. Thank you.
- [17:17]
B
Right, I'm going to bring on. Let's see. Tatiana, just trying to unmute you with all that screen share chaos. Just give me a second. Okay, you're.
- [17:31]
E
Hi, good afternoon, good evening. I'm on my evening walk in the southwest of England. So apologies for camera off. I know this. You've touched on this before and you've always come up with the most logical answer, Chris, about publishing pricing for B2B SaaS. And although it sounds beautifully eloquent and logical. Why aren't I seeing people adopt this widely? Because I've been on about three or four vendor calls in the last week or so and nobody publishes their pricing. And I find that very bizarre. And we sell B2B stats ourselves, and I'd like to publish pricing, but I don't have. I can't point to other examples in our industry to the CEO and say, look, these guys are doing it, these guys are doing it, and our CEO is afraid that we're going to put our necks out and look silly or whatever. So it'd be good to know your thoughts on that.
- [18:19]
C
I think that as a business, if you have confidence in your product and confidence in your offer and confidence in the ROI that you deliver against that offer, that it's very easy to put your price on the website. I think that companies that are think they're going to be undercut by competitors or don't actually think their product is as valuable and they need their sales rep to prove the value or other things like that make it easier for companies to retreat and hide behind the pricing in hopes that more people will talk to them so that their sellers can pull the artisan gymnastics close some deals. And so to me, it really comes down to the simplicity of the offer and the confidence in the offer from a business. If you notice that the Passetto website, Passetto has been officially in business for eight months and we do not have a pricing page. And it's because we haven't fully figured out our pricing and packaging. Who would have thought that once we can figure out, okay, these are the things that we sell, this is how it gets packaged, this is where it gets priced, this is what companies will pay. Once that stuff gets figured out, it will immediately flow onto the website for us because it's just helping a buyer buy. And we're going to have confidence in those levels of offers. And so for any company that's at 10 million in revenue or above, there's really no excuse for this anymore. You have an offer, you've chosen pricing and packaging, you've sold it to enough people to get 10 million in recurring revenue. Enough different people have sold the deal to get you that far that I don't think there's an excuse for it anymore. Now people will say, oh, our offer is too complicated, or we're going to customize it for every customer. We have to do X, Y and Z. And like, if it's complicated, you can also say, starts at $8,000 a month and goes up from there based on these factors. You could ask people certain things or you could tell them and give them a base range. So to me, I don't have a lot of passion for this debate any longer because it's just opinions and a lot of fear, honestly. And so I. While I'm happy to, like, communicate the facts, the reality is the facts don't matter. If the facts matter, then people would do it. The fact that every customer wants to know the price before they talk to your sales team, if you asked your customers, you would get that data that people want to be able to understand and put it in their budget before they engage in a sales process. They want to understand how you compare in price to other alternatives. Just like they do when they shop a car or a house or anything like that. Before they go on and go and see a tour of a house or go to an open house, they want to at least know the fucking price before they spend their Saturday going to the house. That I just think that they're. The logical reason is that you should at least be able to put a starting point or a range or, you know, should be able to put your exact pricing model. And the reasons that companies don't do it are not logical.
- [21:04]
E
Thank you. I totally agree. And if you don't mind, once this is put on YouTube or on a podcast, I'm going to send this snippet to my CEO if that's all right with you.
- [21:12]
C
Okay, happy to deliver that news.
- [21:15]
E
Thanks, Chris.
- [21:16]
C
Bye bye. Have a good walk.
- [21:18]
B
I love that she's getting her steps in and listening. Okay, we do have another question about segmentation when it comes into the planning process. So you touched on this a little bit in your intro, but at what point do you then go into the segmentation modeling? This person said, I've traditionally done this when we get into the bottoms up, tops down comparison. And it's the how are we going to get there? Okay, now let's start breaking this out by segment and understanding where we're going to place our bets. What would you recommend to bring in segmentation into the order of operations for planning?
- [21:57]
C
So one, it depends how you define segmentation. So when you think about the go to market motions from no touch, low touch, medium touch, high touch, and dedicated touch, you're basically, as you move down the motions, you're increasing cost, you're increasing complexity, and you're increasing deal size in order to support that increased complexity and cost. So the motion that you're going to run to acquire Coca Cola for A million dollars a year is very different than to get a 2 person, 2 seat SMB customer on $10 per month per seat. They're going to be very different motions overall and different cost structures. And so when you break down a company's revenue model, it is basically the sum of individual production lines. So you have your enter. Even if you don't think about this differently in your company, you just think you run an inbound demand gen motion and that you get this many of your tier 2 or mid market accounts and you get this many enterprise accounts and you get this many SMB accounts that subconsciously you're putting more effort and expenses on the enterprise customers in the sales process. And you're not doing that for the companies that have three seats. And so you're actually creating different ones. Now let's say you run a medium touch motion and you get 10% of your stuff from enterprise, 70% from your SMB mid market, and then you have 20% from this like micro customer that you just try to close on like a low touch self service type of motion that adding those three things up gets you your total revenue. You have your micros, you have your SMB mid market and you have your enterprise. All three of those things combined, you get your total revenue. Then you could look back and you can look at the historical trends of the enterprise growth, you can look at the historical trends of the mid market growth and the micro and you could see is one of them growing a lot more year over year than the other. Is one of them slowing down? Something like that. What a company would find if they did this analysis most of the time is that they get 10% of their revenue from enterprise customers, but they don't really have an enterprise motion, that they're just getting lucky as the enter. Some enterprise customers funnel through their inbound aesdr motion and they get some customers that way. But in order to really scale and grow that they're going to need a dedicated team, they're going to spend more time in person, they're going to spend more time with personalization and exec relationships, maybe they need partners. And so when you think about segmentation as segmentation across the different production lines in your factory, SMB enterprise, however you do it, segmentation makes a lot of sense. When you start to break it down by vertical or geo within a production line, it starts to get very complicated. And so I think that there's a variety of ways of segmentation, but the real primary segmentation layer has to be customer lifetime value driven and customer lifetime value then would drive, okay, how much can we spend to acquire that customer and then where are we going to go on that motion? And planning by that level of segmentation first I think is the best bet. So that's where I would start. I'm sure there might be some follow ups. I'm happy to keep going on this one because it's interesting.
- [25:10]
B
Yes, it's definitely complex. This person can't come off mute so they're DMing me. But they said that they primarily sell to SMB Mid Market SaaS. Same motion coming in, same lead flow, you know, same amount of touches per customer. So essentially same production line. I guess they are struggling with their superiors of trying to forecast out the industries who's going to source by an attribution metric. Right. So industry by who's bringing in those industries? Is it marketing, is it sales, is it SDR outbound? So would your recommendation be to remove that or what advice would you give?
- [25:56]
C
Let's play out this example. Right, so you have this inbound motion where you have all these marketing expenses. You do one to many advertising, you have an SDR layer and an AE layer and you're closing some segment of mid market deals that are 40k a year and then you have your SMB deals that are 4k a year and you're running that through the exact same production line. Except for when you close one customer in SMB you get 1/10 of the revenue that you do with a big customer. But the costs say the same that if you can't philosophically find a problem with that just at a high level, then there's a big issue here. Like 4000 ACV doesn't even pay for the SDR headcount cost. There's no way you can run that full motion with marketing and SDRs and website costs and events and a salesperson commission. There's no way you can run that motion for a 4K ACV deal. Those companies are going to burn to the ground. So you can't do it. You need one person selling the deal and a highly incredible organic marketing engine to sell those types of deals. And you have to sell them in seven days. Like ideally one call. It just doesn't exist in SaaS. So the motion that you run to close a 4K customer fundamentally has to be different than the one that you use to close a 40k customer fundamentally needs to be different than your 400k customer. And when you mix them all into one, all you're doing is you're getting lucky in the enterprise for deals that are just happening to flow through a motion that isn't built for that type of customer. And you're destroying yourself on the low end running an SMB customer for 4k a year through the same motion where your CAC is going to be 20 to 50 grand. I don't know if I answered the question specifically, but we really need to be thinking about these as different lines. And if you're 8 million ARR and you have an SMB, a middle market and enterprise motion at 8 million ARR, you should probably think about only having one. There's probably one that actually delivers most of the value and the other two were in there just making everything more complicated. You should strip those things out, figure out how to make one really work, get to 20, add a new one later. So I think that motion complexity was used to drive growth faster in the era of growth at all costs. But now that we're not in that era anymore, like adding new motions just creates a less efficient overall machine. Instead of running one thing that works really well, now we're running three things that kind of work.
- [28:15]
B
Yeah, this person basically said that their segments are fake segments because their ACV is only like 25k for SMB and 30 to 35 for mid market. So it's just kind of essentially just number of seats really that is a fake segment. And so the segments is not really aligned to a different touch of emotion in the factory. It's essentially one factory. They're just have this pharma graphic data.
- [28:43]
C
That they're laying on segmenting out that doesn't actually provide that much value.
- [28:48]
B
Yes, I think that was their realization.
- [28:50]
C
Yeah, the differences in customer value should be 3 to 10x higher between segments. So if your SMB customer is 20, your mid market customer should be at least 60 and if your mid market customer is at least 60, your enterprise should be 180 or more and your strategic should be 500 or more. And so you can see like you really need big differences in customer in first year ARR and in customer lifetime value because increasing complexity in the motion increases cost by minimum 2x. So if you're going to increase cost by minimum 2x, you need at least 2x out, but you probably want at least 3x out in terms of return. That gives you a 3x baseline. So if your S&B customers 4k and your mid market customers 8k, that's, that's not really doing a lot of service to your company. When we get on with jocko on September 10th and maybe I'll do a little preview of this next week. We'll talk through the production line concept and how the growth model is basically just the summation of three different production or however many production lines you have. And the separation of the costs between SMB and enterprise is very, very difficult. But segmenting what customers are flowing through your factory is very simple. It's any company that has the data can tag the customers and look at the flow of and most companies are doing that already, especially closed one customers. So that can help with planning and forecasting too.
- [30:09]
B
Okay, another question, this person's driving so we don't need any driving walking today. This is an active episode here. So the question is they are trying to improve their go to market efficiency and using some like of the go to market efficiency ROI metrics that we've talked about in the past in previous episodes. So they know that they need to reduce budget but they also don't want to reduce budget too much and want to reallocate the actual budget specifically on paid in events, on the event types, the paid channels. So if they reallocate their sales cycle is about 90 days. So how long would you suggest that they monitor the reallocation and if the reallocation strategy is effective or not?
- [30:57]
C
The formula is very simple. It is the sales and marketing efficiency percentage equals the amount of money that we spent on total go to market divided by the incremental ARR which is new logo plus expansion minus churn minus contraction. So you have incremental ARR on the bottom total go to market cost at the top times 100%. The higher the number is, the worse the performance is that ideally like in the golden days of SAS, a public SaaS company would be at like 140%. Today they're at 200 to 250%. The lowest performing SaaS companies in the public markets are somewhere between 400 and 500% numbers. So you do get a sake of the thing. Now if you want to keep that top number the same that means that you need to double the bottom number. If the top number is staying the same that means you need a significant impact to incremental ARR. So if you're at 300% right now and you need to get to 150% because that's what the public median was and that's your target that you're going to spend the same amount of money and you need double the incremental ARR. If you're on a 90 day sales cycle I think that the Odds of that playing out is probably going to be four to six fiscal quarters to make that type of improvement. And for most companies, that's not an acceptable timeline. And so what you get left with is if our numbers are bad enough, we need to lower the budget. There's no way around it. I hate to be the bearer of bad news, but the math doesn't lie. I have consulted with companies that literally in the sales process they're like, we do not want to reduce our budget. We're trying to figure out how to spend more money. And then you go through the analysis and you say your sales and marketing efficiency is 400%. There's no fucking way that you can spend more money. You're spending two to three times as much as more than you should right now. And to just turn the conversation around. So one, if you want to just do this through efficiency improvements, you're not you, the delta has to be close. You can't be far away. If you're trying to get from 220% to 180% over the next four quarters through continuous improvement, you could probably do that. But if you're at 400%, you need to get to 200%, which is 2x efficiency across your entire go to market spend, which could be 50 or $100 million. It's just not, you can't easily correct that. So I think in most cases, like if your gap is small, continuous improvement, improve conversion rates, reallocate spend, try new programs, just ongoing optimization, incremental, like you're, you're good to make small jumps there. When the gap is big, you have to cost cut. If the gap is big, it means that things that you're doing are delivering very low ROI or no roi. You have to cut those things out, take a big chunk out of that number straight away and then do the same thing that you do in step, in the first step. So I guess in those, in that case you have two different path, but it's all dependent on how big the gap is. And we talked about that last episode as well. Like your, your plan of how you look at the analytics and what you're going to do is going to be very different. If you have to double the ROI of your 50 million versus get, you know, 1.1x more out of all of the money. The way that you look at it and the things that you do are very different depending on that gap. It's the difference between incremental continuous improvement and some type of transformational or breakthrough change or like moving $5 million from one thing to another or cutting 5 million. So I think that a lot of people are against the idea of cost cutting. I remember that at some point in my career I was also against it. But in this era right now, the reality is that the financial metrics do not allow us to spend the money that we're spending right now. That if we were the owner of the business that we work in and our company was spending $4 in sales and marketing to get a dollar in business that with gross margin adjusted, the customer has to stay with us for eight years to just before we even make a profit, we have to take care of this customer for eight years before we make any money. That if you ran that business, you would cut costs too. And so I think we need to be a lot more objective around the idea of cost cutting. There are many situations where it just has to happen and we shouldn't shy away from it. We should let the business data and the business metrics tell us what we need to do. And if that gap in sales and marketing efficiency is really high, it tells us that we have to cut expenses if we want to get this number in line in some reasonable period of time, which most companies are in. And the ideal thing, get rid of the big expenses that don't deliver ROI, get that number from 300 down to 220 and then make incremental improvements from 220 to 180 in the next four quarters.
- [35:28]
B
I think a key call out is the timeline. You know, this doesn't happen in 30 days or a quarter, especially if you're making larger adjustments to the business. They take time to play out. I think that's everybody wants to make improvement the very next quarter, which you might be able to make a small improvement, but maybe not what your actual goal is.
- [35:50]
C
Yeah, the leading metric to that would be the unit economics around pipeline creation. But another thing when you think about the timeline, super important when you think about sales and marketing efficiency. But three of the four numbers that make up incremental ARR are existing customer metrics. And so for some companies like it doesn't matter how much growth you have in new logo business, if your GRR is 85% and your NRR is 92% and you're churning out customers left and right, that your new logo engine is not going to be able to keep up with that over a certain period of time. And so it's just about having the vantage point that that number is impacted across the entire factory, not just in the, the Things that we do in marketing to create pipeline and do that more effectively can improve that number, it can help that number, but it's not the sole driver to fixing that metric.
- [36:42]
B
Yeah, great call out. We had a clarification or question from Duke.
- [36:47]
D
So when you were talking about the go to market efficiency, what did you include in the go to market spend? And I was just wondering, does that vary by company or are there. Doesn't matter. Set factors that are almost always included.
- [37:00]
C
Yes. So every individual company, they don't really think about it this way. So they'll categorize it however they are looking. Some companies will put customer success and cost of goods sold, other ones will put them in sales and marketing. Some companies will put the national sales meeting not in sales and marketing. They'll put it in like HR events and then therefore that $3 million in sales and marketing won't hit their CAC. So like and whether they're doing that objectively or they're trying to manufacture their CAC number, either way like it's not consistent. Right. And so what we're hoping to do at Pesetto is create one both definitions and third party analysts that go through and categorize the expenses that sit out of the organization. And so when we look at it and we see national sales, meaning we say okay, all your salespeople are there, you're doing training, you're bringing people together. That is a cost of running your go to market. That $3 million goes into your, your sales and marketing efficiency number. But at a high level, all of the headcount and programs you use to close new logos. So sales headcount solutions, engineers or other types of specialized resources, business development, headcount technology and tools, the CRM, the marketing automation, the outreach platform, the ABM, the deal desktop, the other 10 sales tech tools like Clary, all that stuff, you have the marketing headcount, you have your agency and consulting costs and marketing, you have all the program dollars in marketing, events, advertising, pr, analyst, relations, content, all that stuff. You have customer success and professional services, you have account management, you have gainsight and all the other tools that people use on that side. You have the operations resources. So the sales ops people that are calculating the comp plan, the salesforce admin, the marketing ops people, the outsourced resources that you use for that, the sales enablement team, the product marketing team. There is an exorbitant amount of costs that go into the go to market machine and so that that becomes the baseline number. The top of that division equation is all of that stuff combined and then you have the incremental ARR that you get. And so you can see when you think about all of this that if we have a $4,000 a year customer, it's pretty hard to make all those costs make sense to get a, to have a 4,000 doll month customer or $4,000 a year customer. So at a high level it's all of would be all of those things. Anything that's not in cost of goods sold or that falls into general and administrative, so that would be legal, hr, finance, product development. So nothing that goes into cogs, nothing that goes into gna, pretty much all the stuff left over is going to be sales and marketing or what we'll call what we'll call go to market.
- [39:28]
D
For clarity, what was the ideal percentage rate?
- [39:31]
C
There's really no such thing as an ideal percentage. The conventional wisdom would say 100%. So you spend that much money, you get a one to one ratio back on recurring revenues. That would be like the 2012 what people published. What I can say is that the median of public SaaS companies in 2021 was 140% and the median of the 80 public SaaS companies today is somewhere between 225 and 250% which means they spend two to two and a half dollars to get a dollar back in incremental arrow. The conventional wisdom of if that number is greater than 200% for six consecutive quarters, then your business and revenue factory is now considered entirely unsustainable. And so most companies have now reached that point slow down. In 2022, you have the full year of 2023 and half of 2024 playing out that most companies are coming to the realization that that number is above 250, 300% and it's not going anywhere. And now it becomes a a full on business level issue.
- [40:29]
D
Got it. Thank you.
- [40:30]
C
My observation so far, not hard data backed, is that the issue is worse in private companies than it is in public companies. So the public SaaS medians are better than what you would see in most privately owned SaaS companies.
- [40:44]
D
Is it because they're able to hide behind being private or why do you think that is?
- [40:47]
C
It's not really about the hiding. I think that there's somewhat of a selection bias that in order to become publicly traded and these things that most likely you have developed an efficient go to market motion. So there's like some level of a selection bias that happens that the people that get there obviously have better metrics than the people that haven't gotten there. And the second thing is that there's a lot of private companies that through the growth at all costs era, skipped the unit economic step and just used a 20x revenue multiple and funding rounds every 18 to 24 months to just ignore that their CAC payback period was 5 years. And then when the funding dries up and the revenue multiples go from 20x to 6x, that train runs out of the station. Now you're stuck at 150 million ARR with a five year CAC payback and you have to fucking slash across the company to try and get it back fixed. And so a lot of Companies in the 75 to 250 range just skipped the unit economic step based on the good interest environment. And now they're in this stage where literally they can't ipo, they can't raise another round, they're burning a ton of money, they have a significant amount of cost. They can either hope that they can get through it or they have to just dramatically adjust their expense line items. I think the funding environment, and now we're feeling the aftermath of the funding environment is the root cause in private companies. If there was. If the funding environment didn't exist, it would have forced more financial discipline, but that's what happened.
- [42:11]
B
All right, I think we're good to wrap up on that note.
- [42:14]
C
Cool. Thanks y' all for being here. We'll go through the factory production lines next week. I'll commit to getting that done. So we'll go through that and then we'll have an initial look at that. And then on September 10th, Jocko will be here. He actually wrote this book, so. Wrote the book. I believe in it a lot. We'll share a lot of that stuff and you'll get to learn directly from him and ask other questions that might be more nuanced or detailed. So him and I will share in that event, which will be really cool. Again, that's coming up on September 10th. You can register. There's a link to register for it on pizzetto.com you can click on events at the top and go from there. Thanks y' all for being here. We'll be packing a good punch next week. I hope you all have a great rest of your week and. And we'll see you again soon. Thank you.