How to Achieve Profitable Efficient Growth with Sam Jacobs

Speaker A: Hi folks, I'm Scott Stauffer, co, uh, founder and CEO of Scale Matters. And welcome to another episode, uh, in our webinar series. It's called Bridging the Gap, uh, between Finance and Go to Market. Uh, what we try to do is provide some thoughtful content that helps to create alignment, uh, between finance leaders and revenue leaders so that, that can hopefully help accelerate growth. Uh, before we jump into it, just a short note on, uh, Scale Matters, uh, revenue and finance leaders basically come to us when they're struggling to answer important questions like, uh, what's the relative ROI of the different channels we're using right to source prospects? Or what's the root cause of our, uh, recently declining win rate? Or is my sales team sized properly in relation to top of funnel? In almost all of these cases, their company's go to market data posture is not really set up to help them answer these key business questions. And that's where we come in. To help. At Scale Matters, we define a data strategy, we help them properly instrument their environment, uh, and then we implement processes to help maximize data hygiene and then ultimately deliver these very actionable insights that help them inform their decision making. Uh, our work fundamentally changes the way our customers operate their businesses, kind of taking the guesswork out of the equation. And it's very relevant to our topic today. Um, I'm, uh, delighted to be joined by Sam Jacobs, uh, who probably everyone is aware of. Uh, he's the CEO of Pavilion and one of the most thoughtful voices in go to market, uh, community. Uh, Sam has spent the last decade, uh, building the world's largest private community of go to market leaders. And he's been at the forefront of helping executives sort of adapt to this new era of constrained capital and shifting incentives. And in this session, Sam's going to break down his framework of his he calls profitable, uh, efficient growth, which is a way for companies to, uh, better align, make smarter investments and build lasting value. So Sam will go through, um, the framework, uh, he'll introduce Pavilion a little bit, uh, and then Sam and I'll go back and forth and, and dig in a bit, little, little bit deeper. So, uh, Sam, I'll turn it over to you.

Speaker B: Yeah, absolutely. Hi everybody. My name's Sam. I, uh, I run Pavilion. Uh, as Scott said, we are the largest community for go to market executives, uh, in the world. Our emphasis and our focus is on helping operators, uh, build great companies and lead great careers. Uh, we started just about 10 years ago in 2016. That's a picture from one of our very first dinners in New York City. That's where we uh, are. We originated, we've got chapters all over the world, uh, and you can see some of the cities where we have geographic uh, representation. Um, 10,000 members, 450 cities represented. It's really a go to market community. So it's not just sales, although sales predominates, but also that's just a function of uh, employment trends, which is sales is the biggest employer, uh, uh, of go to market. And then of course there's marketers, customer success, revenue operations, etc. Uh, we are focused on pretty typically venture capital backed or private equity backed. So institutionally and institutional investment backed companies that are looking to grow. And that's where uh, this idea uh, really emerged. So what we're looking at is some data that we've uh, assembled over the last couple of years, um, just to check in on where things are from a market perspective and to set the stage for this concept that I call profitable efficient growth which really isn't, it's not rocket science at all, um, but it is a way of framing how people can think about investing in growth in the right way. And again in some ways, uh, not to uh, as Scott was sort of saying, I'm not trying to diminish anything, um, but these are basic ideas about business that for a long time were lost, uh, from companies uh, and operators that were building venture backed uh, and venture scale organizations. And today it's more relevant than ever. Not just because there was this correction, uh, and sort of tech recession, uh, beginning after you know, interest rates started going up in 2022. But now we're in the world of AI and it's more important than ever because there's a lot of smoke and mirrors and there's a lot of uh, discussion about the rate of AI companies growing. But when you look under the covers on certain uh, of these companies you realize that they're structured in such a way that you know, maybe one day they'll be great companies but today they may not be. So a great example of that's Replit, which has shifts from negative 18 to negative 36% gross margins. Every single time that somebody uses the uh, Replit service, they either lose $1.18 or $1.30 for every dollar they receive in revenue. So these, maybe that's a good business in the long run as token costs and compute costs go down. Uh, but for now I think understanding the market is really, really important. So what are we looking at on the screen? Pretty simple stuff. And I talk to CMOs, CROs and operators all day, all week. Uh, uh, and these are very real concepts. First of all, growth rates have declined. And I think the most important thing is that client acquisition cost, customer acquisition cost has grown very significantly, almost doubling over the last couple of years. By the way, this is from a basket of about 80 publicly traded, uh, you know, typically B2B SaaS. I'm sure SaaS isn't their only pricing mechanism or a business model at this point. But you know, these are technology companies that you're familiar with and we are looking at what does it cost for them to acquire a new customer. You can see that it's almost doubled. How has their growth rates changed? They've contracted very significantly. And uh, we also know this was from April, so a little bit dated. But uh, you know, we haven't refreshed the survey. But the point is there's a lot of what I see in the market is bifurcation. Some companies are doing incredibly well and some companies are not doing well. I was literally at an event, I live in Barcelona now, and, and every, I was at an event last night and every CMO and CRO was talking about demand, demand generation, lead generation. How do we get, um, how do we get, you know, access to our customers? 500 billion, uh, dollars is the amount that uh, there was a McKinsey study, uh, actually that said companies that focus on efficient growth, uh, have generated $500 billion more in enterprise value over the last 10 to 15 years than companies that have not. So this is a really important idea, I think, right. What we're seeing across sort of like the basket of technology businesses is that basically the good old days are over. Yes. If you are a novel AI company, certainly if you're ChatGPT or uh, a company that's on top of ChatGPT, you're seeing incredible growth. But for traditional growth stage, uh, software businesses and many of them in the go to market space, by the way, where I spend a lot of time, they are in a lot of trouble. Right. Growth efficiency, which is gonna, it's, it's the, the question is really for a. How much do I need to spend to generate a dollar of net ARR growth, net annual recurring revenue growth and that that number continues to go in the wrong direction. And we also know that companies are spending more and more again. What is, what does all of this mean? I think we can feel it intuitively and in our bones. What, what it all means is that there are so many competitors, there are so many companies putting messages out into the market that to get anybody's attention and to get them interested and engaged to become a customer, it's not impossible. It's becoming more and more expensive. And this is in a world where capital is very much constrained. So in 2021 that might have been true, but there were zero percent interest rates and everybody had the money to spend on literally this phrase, growth at any cost, which is as it says, you know, on, um, the tin. It is any dollar of growth is worth whatever I have to pay for it. And that is a function oftentimes of, uh, interest rates in the broader macroeconomic environment. Right. That literally, if you do NPV analysis, if you understand how to build a free cash flow model, you understand that, uh, with zero percent interest rates, a dollar of growth or a dollar of revenue, a dollar of cash flow in 20 years at 0% is literally worth the same as a dollar of cash flow today. Well, now interest rates have normalized to a much greater degree, and that's not true anymore based on the time value of money. And so what we've had is this sort of perfect storm for many growth stage businesses where it's getting harder and harder to reach their customers and to engage them in an efficient way, while the access to the capital markets has been curtailed. And that means that you have to be smarter and more efficient than ever, and you have to find paths to growth that really combine skills that you might get from the CFO's office and into your go to market function. Which is why, you know, I'm here on this webinar, uh, because part of what we teach at Pavilion, part of like our ethos and my personal belief is that the finance function and the go to market function need to be much more aligned and that sales leaders cannot, uh, they just cannot live in a world where they don't know how to build their own models, where everything that's financial is determined by the cfo, where all they do is spend money. They don't understand that they're capital allocators. That's what we teach at Pavilion.

Speaker A: Yeah, before you go on, uh, do you think this, which do you think has, has a higher R squared, uh, more pollution because there's so many vendors and so it's more costly to separate yourself or actually less demand.

Speaker B: What a question. I think it's more pollution. Uh, but this is my opinion right to your point of R squared. I'm not running a study, but it's certainly a function of both. Right. What, what I mean, there's A bunch. It's really interesting. The cost of starting a business continues to decline. So the costs, and especially even though I was, you know, um, making a snide comment about negative gross margins for replit, the reality is that, you know, you see a lot of companies boasting about the percent of AI written code that is in their software. It is easier and easier to build a company and to build specific kinds of vertical SaaS point solutions. I think the rate of growth for new software companies is 7% per quarter. And that's been true for the last couple of years. And the point is that there are so m many different vendors at the same time that as interest rates have gone up and there is more consciousness about capital, I do think there has been a softening of demand because I think people feel like they are overburdened with tools that they don't use. Uh, and I, but I, but I think fundamentally the biggest, the biggest driver is just so many different vendors and so many people vying for attention. And we, you know, we all. Again, the reason I, I like to bring it back to sort of first principles and human nature is how easy is it to get any of our attention these days where our inboxes are flooded with email, there are ads everywhere, and it's becoming harder and harder to separate signal from noise. So I think they're both related. But I think the bigger driver is the number of vendors that are frankly and sort of to the point of this presentation. This presentation isn't about a playbook for how to go to market, but it is a presentation about how to think about aligning your organization so that you can find the right path to market in a way that will allow you to continue to have a company meaning efficiently and profitably.

Speaker A: Yeah.

Speaker B: What do you think, Scott?

Speaker A: Uh, I think you're probably right that the excessive growth in vendor count is probably the biggest driver. But I do also think, you know, in this world of AI, there's a lot of hesitancy to buy traditional software. Trying to understand whether, um, you know, whether and how AI should play in an organization's DNA.

Speaker B: I agree with that 100%. And what I'm hearing from, you know, from the front line, so to speak, because I'm an LP in a bunch of funds as well, is there's tremendous pull for AI. A lot of it is in sort of proof of concept and experimental use cases. And the challenge with some of the reporting that we see on these companies that are going from self reported, right. We went from 1 to 40 million ARR in six months is that they're stretching the definition of what we all considered to be ARR certainly, uh, the middle R of recurring. We don't know if it's recurring yet because a lot of these are pilots and they are pulling from, uh, an AI budget that is sort of department agnostic. And so, you know, you might have a tax use case and a legal use case and an RFP use case and you go to market use case. And the point is like every, they're just testing these tools to see where do they get traction, which makes it really, really hard to call this recurring in any kind of way. And it implies that, you know, things that go up can go down and that there might be, uh, as rapid a descent to zero as there was an ascent into, you know, these upper echelons of ARR. So we'll see. It's certainly an interesting time. Yeah. Um, what's the point of profitable, efficient growth? You know, I can, I can distill all of the next slides down to a few key ideas, but the basic one is in a growth at any cost world, you know, you are pushing towards the next fundraising round and you are optimizing for, uh, whatever your investors need to see in order to subsidize and underwrite the next, you know, stage of growth, the stage of existence, whatever that's 18 to 24 months. Um, but the point is, uh, that that is all a function of the fact that you're burning capital and that you're spending more money than you have, so you're depleting your balance sheet. Therefore, investors get to tell you how to run the business, the harder route, uh, because it takes longer and you know, I don't know that there's a, you know, what is the, the, the saying, you can have it, ah, fast, good and, um, and cheap. Pick two. Um, but there is no shortcut to delivering a great customer experience that enables you to have a sustained company. That's why it's so hard. But that is the more sustainable path. And, uh, and, and so how do you do that? And what is the true driver of profitable, efficient growth? It's not rocket science. The true driver of any value, of all value in a recurring revenue business, to the point of my previous comment, is recurrence is the idea that your customers stick around and everything that we do and everything that you need to do to build a profitable, efficient growth business fundamentally orients around your ability to keep your customers. So let's reverse. Someone going to ask a question I heard something, maybe not. Okay, um, so companies that prioritize customer value build efficient growth businesses. Uh, and uh, you know, over time what we've seen is that uh, again looking at these publicly traded businesses and try to, and try to do some regression analysis to ah, Scott's point about R squared on what actually drives durability. No surprise, the companies with ah, very high net revenue retention and you know, uh, above 90% gross retention are the companies that end up delivering sustainable and enduring value. So the core profitable efficient growth principles are all really centered around a concept of retention. Um, now they are with under. And the reason by the way is because when you look at unit economics, retention is the biggest driver of lifetime value. Uh, you know, at any meaningful margin profile, uh, it becomes interesting and it becomes able to subsidize your customer acquisition cost if you have very high retention. If you don't, obviously, uh, what it means is you can't spend as much to acquire a customer. I teach a class in Pavilion's CRO school and the class is called Developing a Theory of Enterprise Value and the Real. Again the essence of the class is of course all about retention. Uh, but the point of the class is that um, if you have high churn and poor retention, it doesn't mean that you don't get to have a company. Every consulting business, every ad agency, you know, every services business, many of them, not every, but many of them have terrible retention because it's project based work. The point is to not be with the customer forever. Um, so it doesn't mean that you don't get to have a business if you have poor retention. It just means you can't spend as much on sales and marketing, you can't spend as much on growth. The beauty of SaaS, the beauty of this whole idea is that if you know the customers are going to stick around, you can subsidize their, the acquisition of those customers to a much greater degree. If I know that they're going to be here for four or five years, I can spend more to get them. And that is what fundamentally supercharged the growth of SaaS. Uh, really the turn of uh, of this century, really beginning with Salesforce. So the core concepts are capital efficiency, which just means measuring and understanding what kind of return you're getting on your investments, thinking about uh, your investments from a portfolio perspective and really thinking about it from a tranched perspective, measuring your investments, optimizing around customer value and aligning. And the alignment is aligning sales, marketing, customer success with product, which is Just a way of saying, uh, one set of data that everybody understands, uh, so that you can make capital efficient decisions. So I think, you know, the biggest things that you see on the screen, the most important of them are capital efficiency and really measurement oriented around customer value. This is the bowtie, uh, popularized by winning by design, I guess, probably invented by Jocko, my friend. And um, what is the point of, you know, this, uh, illustration and articulation? The point is that if you run a recurring revenue business or you have an interest in having your customers come back, which is almost all companies, all of us want to have a recurring revenue business. I would think, um, you need to think about the right side of this diagram. And we have tended to optimize, uh, for a lot of different reasons, mostly because it's the most measurable. Ah, around the left side, which is a traditional funnel. Right. So the point of this slide is, uh, in a growth and any cost world, all we talk about in the board meeting is new business, new business logo acquisition, new business ARR. And um, we don't talk about uh, retention. We don't have sometimes customer health scores. We don't have the ability, uh, uh, to really even understand the likelihood of a customer to stick around. So the bow tie concept, as you see, again, these concepts are not, uh, rocket science, but they are useful frameworks. And, and so this idea is really, if you're spending two thirds of your time in the board meeting talking about new business and only 1/3 talking about your existing customers, you're probably doing it wrong. And what we need to do is architect the customer journey so that we understand that the purchase of your product is not the end. I think any CEO knows that. Your VP of sales often doesn't know that. Um, but any CEO knows that we don't really need the customer to buy one time. What we need is them to buy 20 times we or 10 times. And that's why we have to institute a framework, uh, that really measures and incentivizes. And that's why part of this conversation is about aligning incentives. We need to deliver incentives that align the organization on retention, not just new logo acquisition. So how do we begin to do this? Uh, you know, as, as it said, uh, a couple slides ago, I think a big part of it is just measurement. But I think, and again, this is, um, me, you know, talking my book. I, I really uh, am very, um, adamant. I don't know about religious, but I'm very passionate about basic P L fluency. I think that everybody in the Organization, but especially anybody in your leadership team needs to understand how to read a profit and loss statement. They need to understand what deferred revenue is. They need to understand what gross margin is. They need to understand what, how does the cash flow statement connect to the P and L. And I'm saying this because, um, because it's shocking that so few people do know how to do this. And I honestly, um. Let me give you a specific amusing example. I, um, was at a dinner with the CEO of a consulting business. CEO of this consulting business was, uh, bragging about, um, uh, the growth rate of their revenue. That's because she sells to software companies and she thinks that all companies are valued on revenue. So she's talking about how they've doubled revenue in the last 12 months, which sounds good, except that she also, I said, well, how's your profitability? You know, I would imagine you have 20 to 30% operating margins. She says, no, I've been selling these projects at a loss. Uh, so we're actually burning capital. I think maybe they were break even. Well, this doesn't work. This doesn't. Her business isn't. Isn't valued on revenue. It's valued on ebitda, if it was going to be valued at all. She's not do. Selling a dollar for 90 cents is not a business model. And yes, it's very easy to do so again, basic P L fluency, which I find is absent at various levels of the organization. Measurable unit economics. Unit economics. I think we all know what they are. But if you want to hear my definition, unit economics are the relationship between, uh, you know, how much money you spend to get a customer, how much they pay you back, uh, what it costs you to service them and how long they stick around. And those factors in combination. Tell us, do we have, uh, you know, is this machine that we've built, this business machine, is it healthy and functioning correctly? The other thing I would say is there's a great quote by Weston Gaddy, who's the, um, the general partner, one of the general gps at Radiant Capital, and he says growth is not a right, it is the privilege of companies with good unit economics. Which again, all of that is a fancy way of saying you can spend more to acquire a customer if you know they're going to stick around. But also be aware of the gross margins, be aware of what it costs you to service that customer. Uh, because consulting businesses are not valued on a revenue multiple. Sorry to, uh, to my friend, um, discipline monthly cash flow forecasting. All of this is proxy for understanding how your business is performing and measuring it pro properly. The second to last point I think is also important. Tron Investments. You know, there was a previous slide, it said portfolio, you know, portfolio theory. When it comes to how you allocate capital, another, another, you know, thing that I tell and teach CROs and CMOs. You are Capital allocators. That's what you are. All of us, in any kind of, uh, executive management function are capital allocators. So how do you allocate capital efficiently? You can't allocate, uh, you know, 10 times more capital than you did in the previous period and expect to do it efficiently. Efficiency by definition is at, uh, cross purposes with speed in many ways because efficiency requires precision. And precision is not something that you can grab from the ether. It is something that you develop through experience and understanding, which means it'll take a long time. So, you know, I think, you know, Scott and I might talk about like, how do you speed this up? How do you accelerate this? It's very hard because, uh, because if we're trying to be efficient, then by definition we have to be willing to be a little less quick. And that's why there's a, there's a little bit of a, um, a conflict, or at least there's some. There's venture, uh, capital and the speed at which it expects growth can be in conflict with profitable, efficient growth. And you know, there's been a movement over the last couple of years. Profitable efficient growth was fashionable from really 2022 to maybe last year. It's a little bit less in fashion as ChatGPT and other AI platforms have reported soaring revenue and you know, uh, anthropic reports that they're worth multiple billions of dollars, et cetera, et cetera. There are some VCs saying forget about efficiency, it's growth at any cost. Again, I would say, um, you know, for me and my business and, and other people running businesses that are not sort of AI native, I'm focused, keeping my heads down and running a profitable, efficient growth business as I was before.

Speaker A: Hey Sam, go back to. Just for a second.

Speaker B: Yeah, sure.

Speaker A: So I, uh, I'm m absorbing this and I'm thinking about all these companies we work with and, and I'm not. I, uh, certainly do not mean to disparage the revenue leaders, uh, but, but it's.

Speaker B: Feel free.

Speaker A: It's a long. There's a large gap between where most of them are today in terms of this, um, really financial DNA and what needs to happen to make this uh, realized is the strategy to get them better or is there maybe an alternative strategy that says maybe CFO needs to have a little bit more um, responsibility and authority over go to market?

Speaker B: Well that is controversial. My mandate, my personal mandate is the former, not the latter. I'm trying to get, I've met so many people, so many VPs of sales, so many CROs. I'm trying to get people who think who grew up because remember, 0% interest rates wasn't just Covid, you know, it was the great financial Crisis. It was 15 years of free money. And so there is a generation. 15 years is close to a generation. There's a generation of, of sales leaders and marketing leaders. But it happen. It tends to be more with salespeople that they literally have never again they don't even know A gross margin is like I have to spend a lot of time explaining what goes into gross margin, how should you calculate it, what does it mean and what they have learned oftentimes from equally incompetent CFOs. So there's incompetence that go around. Is that the way you build a revenue model is, is by. Is a headcount model. You attach quota to a sales executive. You then say uh, every salesperson I hire makes a million bucks. If I hire 10 people, I'll make 10 million bucks. I'll factor in some, you know, quasi sophistication. I'll add ramp. I'll add a uh, quote attainment rate. I'll add some turnover numbers. I'll ah. But all of it still fundamentally the atomic unit of growth in most revenue models is I hire more people, I make more money. And um, it's been a, it has been a journey of, you know, I've been doing this for 10 years of trying to teach people that that doesn't. It's not de facto false. It just has an assumption built in that the way that you're going to that demand generation and creating, you know, awareness and interest is the same thing as making money. And therefore the best way to make money is to hire more people that will then ostensibly prospect and you know, reach out to their, to their market and tell people about what they're doing. And what I think we, what we found again to the point of efficiency is well like let's measure that. Maybe there's an enterprise sales solution with you know a ah, name territory and there's somebody that manages the Great Lakes region and there's only 100 companies that can buy the thing. And maybe it is makes sense Then you just hire another person to cover the accounts better. Most of the time though, most of the time it's uh, cheaper to hire, ah, a VP of marketing and invest in distributing this message out to the universe more cheaply than hiring a bunch of, you know, often, uh, lazy, uh, salespeople and, and not just not. Cause they're salespeople. Cause they're humans and we tend to be lazy. But. Long answer to your question, Scott, but I think what I'm trying to do is teach revenue leaders and sales leaders how to be on the same side of the CFO a little bit more so that it's not adversarial. Some metrics that we can think about,

Speaker A: uh,

Speaker B: this shouldn't be, uh, this isn't rocket science. But I, uh, do believe, I think LTV can be a problematic metric. And I know my friend David Spitz from Bench Sites doesn't like it that much. But uh, I think for companies at any, a certain level of scale, uh, it's, it's useful. I think payback period is for uh, a company that's in growth mode is perhaps the most important metric because it tells you how quickly do I get the money back so I can redeploy it back into growth. We need to look at cohorts when we're looking at retention so that we can understand buckets of customers and how they're performing. And then if any, any company with any kind of, you know. And pavilion, my company is certainly one that has a bit of complicated, uh, you know, I thought I was building a simple business. It turns out that I wasn't. And you need to know, really, contribution margin, not just gross margin, but contribution margin by revenue stream and by product line so that you understand and you know, I'll give you a very real kind of funny example because we've got this big conference coming up in two weeks in D.C. called GTM. So we're in the conference business. Uh, we weren't when we started. It, uh, costs about a million, a million and a half bucks to put on this thing at the Mayflower Hotel. And, and the cash flow swings from making these deposits, uh, are really wild. And you can be, uh, in a period where you're collecting deposits from sponsors and you've made a bunch of sales and your balance sheet can surge and then all of a sudden it can come down and be very, very depleted because you're paying a bunch of deposits for the venue and for the space and for the catering. And you need to separate that business from the rest of your business so you can understand and measure it effectively. So contribution margin by product line I think is really, really important. And then we create a scorecard so that everybody can sort of look at the same data. The other thing that I would, I would really encourage everybody to not do is not have you know, ops people per department that roll up separately. In fact, one of my more controversial opinions is that I think in most cases RevOps, or at least the reporting function, the, the measurement and reporting function for revenue should report to finance. Uh, if RevOps includes enablement and forecasting and other things, fair enough. But I think there should be one data source for an organization. I don't think that everybody gets to bring their own Google sheet, their own spreadsheet to the meeting. And you know, you tell me that close rates are 30% and I tell you that they're 50%. You tell me that ARR is this, I tell you that ARR is that. That's not a healthy organization. So when, I think when we're trying to drive efficiency, we want a foundation of data that aligns across the organization so that we can, you know, make smart decisions in that even if we're wrong, we're all wrong in the same direction. Because I think, um, you know, executive meetings where everybody's having ah, you know, a ah, contest about whose data is right is not a productive use of time. Um, I think this is, this is sort of like the point really of this part of the presentation and this talk which is none of this matters if it doesn't show up in the incentives. And so, and this is not easy to do. Um, by the way, um, there's this thing that I call the churn death spiral. For uh, SaaS businesses, the churn death spiral, especially businesses that don't have access to capital, meaning they're not doing well enough, they can't raise more money. And uh, that death spiral is they need to maintain some level of profitability or just some, some level of momentum even if they're just reporting ARR and um, they have a churn problem. And so what they do to solve the churn problem is they become addicted to bad fit customers that they know are going to churn in three or six or nine months. But they need them because they need them to fill the gap that is happening in the moment, in real time. So we want to, and that's why it's a spiral, because there's nothing to do to get out of it. The only way to get out of uh, of being addicted to that revenue is to cut off the pipe and to not and to stop selling to bad fit customers. That transition will lower ARR as the people that are still in the system churn out over whatever time period you know you're, you're looking at. So three to six months and most many CEOs are not prepared, uh their balance sheet not might not be prepared or they just might not be prepared. To see revenue go down before it goes back up can be terrifying. So how do we avoid that situation? Well I think one of the things that we want to do is we want to look at how do we align our go to market team and our sales team, our new business team to some kind of retention metric. There's a lot of different ways to do it. Uh it could be you know they don't become a commissionable customer until they've been around for a certain period of time. It could be that you pay on um, first year renewal. It could be that the salesperson gets to sign the business, the new business but then maintains access to that relationship for the first year so they can be compensated on any upsell or expansion. But I think one way or the other if all you're doing is comping the entire go to market team on new business, uh, and they don't have any perspective or concern or care for uh retention I think you know as Charlie Munger would tell us, we're going to figure it out because it'll show up in the incentives and we will see that you'll continue to have an emphasis on your business and you'll continue to have a churn problem. Some, some benchmarks as your North Star. Uh, I, you know David Scott, the true Godfather of SaaS in my opinion, popularized 3 to 1 LTV to CAC. Uh, if you ask him where did he get that, his answer will be very straightforward. You made it up. Um, I like 5 to 1 because I think 5 to 1 on a, on a sort of fully loaded basis means that we can make investments that we know will be unproductive in the near term and pull down LTV to cac uh but push it up over the years. Um, I think 5% EID D margins is actually a little, I mean it sort of depends what kind of business you're running. Of course. Um, I personally like Ah, under 12 month payback period. And um, and, and I also you know the last bullet point is I, I uh, I don't want to over allocate uh, to basically um, untested investments. This is the Point of this last bullet point is I'm spending a million dollars. I just raised money, or I have a, I have surplus balance sheet and I know how that million dollars performs in, in terms of new customers. That doesn't give me permission to spend $5 million. That's the point of this last bullet. If I'm going to allocate a new tranch of capital, then I want to spend a million and a half and see what happens. The reason I'm saying that is because your CAC will go up, channels dry up, and nothing works into perpetuity. And so if you try and again this year for efficiency, if you don't care about efficiency, ignore everything you see on the screen. But if you care about efficiency, then you want to be very measured in terms of how you allocate new growth capital. So here's some questions to guide action. Um, I think, you know, for me the most important question is, is really the first one, which is, do we even have channels? You know, it's a channel because you can spend more on it. I, uh, I love it when people say, you know, word of mouth is a channel. That's great. How do you spend more money on word of mouth? It's not that easy. Uh, and by the way, that's why a lot of companies that have, uh, primary, you know, their, their, uh, their primary lead source is organic, social or word of mouth are valued less than companies that drive new business from paid acquisition, even though paid acquisition is likely to have higher churn and lower retention. Why? Because I can spend more on paid acquisition. I can scale up my growth investment so somebody can come to me and say, what would you do with $2 million? What would you do with $10 million? If you're primarily driven by word of mouth, you don't know what to say. And in fact, again, uh, you know, using the, uh, build in public idea that Pavilion has suffered from, that Pavilion has suffered from the reality that most of what we grew from word of mouth, which is great. How do you, how do you invest in growth when it comes to word of mouth? I suppose that there are ways that you can invest through the product and making referrals easier, but fundamentally you, you need some channels where I can increase spend proportional to the channel and see some kind of return. So that's my, those are my slides. Um, I'm, I hope everybody I know I built these a little while ago. We're, we're in sort of the middle of September. So I'm hoping that you're having a great 20, 25. Uh, you know, it is a tale of have and have not. Some people are having a great. I literally, I was at a, uh, an event last night and there's a bunch of people that were in the esg. They sold ESG solutions to large enterprises. They are not having a good year. I can tell you that that is not a great place to be in, uh, business, uh, right now, as we can all imagine, um, DEI consulting probably also not, uh, not awesome. Um, you can use this QR code, uh, to uh, to become a member of Pavilion should you wish to. Um, otherwise, I'm happy to take questions.

Speaker A: Yeah, I've got a few. Sam. Uh, first of all, thank you. And uh, very relevant, uh, and important stuff for everybody in my view. Um, let's talk about sort of what's possible. So let's say the company buys it, right? Develops the muscle, the DNA for private, uh, efficient growth. How much does that change stuff? Is it like a 20% upside 50? Uh, you know, and I know there's not a good answer, but just order of magnitude, how, how different does that make companies?

Speaker B: Well, honestly, it changes the whole tenor of the organization. It's a pretty fundamental shift, right? Because as I said, you're not going to grow more quickly. You know, you will grow more again. I have infinite examples of this from my personal life. But you will grow slower in this, uh, framework. But you will do so in a way that you can sustain your business for a longer period of time. The other thing that happens is as you re architect the business, you are re architecting for retention. So how long does it take to change retention? It's always very funny when people say retention as if it's just a KPI. Uh, retention is the whole thing. Like retention is the entire experience that your customers have with your product. And whether or not a. They agree that it's a recurring relationship because sometimes you might have a great product, they just don't agree that it's a recurring thing. And second, that, you know, they want us to, they, you delivered in the way that, that delights them and they want to stick around for a long time. So that can be. It can be very, very, uh, painful to make these transitions. It can be three to six months, probably closer to six months of strategic change, uh, to reorganize the organization around this. But then what's possible? Well, uh, I think, you know, what's possible is moving from unprofitability to profitability gives you the opportunity to stick around forever. So that's an order of magnitude change in terms of uh, you know, in terms of your viability. And then I think when it comes to enterprise value, I mean, I think fundamentally all of this is about how do you organize the organization in a way that puts continued emphasis on the customer and believing that customer happiness will relate in some way to your growth over time. And um, so what, you know, what is the percentage change? I mean it's not 20 or 30, it's 100 to 200% over time. But really it's almost binary. It's do you get to have a company or, or not.

Speaker A: And you know, slower growth isn't necessarily a guaranteed result of this. It's more kind of guaranteed short term result. But I think you mentioned the uh, churn spiral. Um, yeah, it hurts to get out of the business of acquiring customers that aren't good fit for you, but it, it doesn't hurt over the long term. So I think, you know, part of this whole mentality requires a little bit of a long term view. And then you go, okay, well is that orthogonal to the investment cycles of VCs and even PEs that are all, you know, PEs, you know, three to five years and done? You know, does that get in the way of this?

Speaker B: I mean, I think you just nailed it because I think that, that, that is the fundamental question. The fundamental qu. And by the way, you know, just to put a fine point on it, um, you know the, the Bessemer and I think it was Byron Deer, but um, you know, made the accurate comment that, you know, rule of 40, rule of 50, rule of whatever weights EBITDA and growth the same and they're not the same. Growth is still worth about three times what profitability is worth. So it's important to understand that growth is still more valuable. You just have to do it in a way that, that is efficient. And I think. But Scott, I think your fundamental point is is, is the right one, which is okay, does your invest. You know, uh, my old boss used to say your balance, your cap table strategy is your balance business strategy, which is a way of saying, you know, whoever owns the company gets to tell you what their incentives are. And if you have a bunch of VCs, you're going to reach a lot of resistance because their business model doesn't align with taking 20 years to do something that could take two years if they just poured money into it. So I think you, that this all starts with aligning with the investor base and aligning with the board and saying this is the strategy that we want to pursue. Second point is, yes, it is a long term perspective and that's why in the slides, you know, the harder route is the customer value route. It's way easier to call POC revenue ARR. Um, multiply a bunch of three month contracts by four, add them all up, go raise a huge round, take a bunch of secondary. I mean it's not easy but that is a shorter path for sure to uh, wealth creation. So I think you're making the right point. It doesn't mean that there's no growth at all. It means you have to be really, really thoughtful about finding paths to growth that are efficient. Last thing I'll say is that that doesn't. There's no easy button. You know, there's no, okay, well using this framework I'll uh, spend less on Google and more on LinkedIn. Like getting somebody's attention is more expensive today than it was 10 years ago and it will continue to get more expensive. So it's not about lower cac, it's really about better retention. Yeah, last thing I'll say and uh, let's keep the conversation going but Kelsey asked this question, uh, organic acquisition. How do you think about spend on brand awareness? Um, I think brand awareness is very similar to spend on customer retention which is uh, it is a long term investment. I think that we are. People are generally underinvested in brand. I wrote uh, you know, rewatching Mad Men, it strikes me that they are differentiating baked beans and floor cleaner and cigarettes in ways that evoke all kinds of different emotions. And yet in B2B none of us can do anything but just tell you, you know, this thing enriches your data, sends emails to this person. There's no creativity, there's no spirit, there's no thought. And um, so I'm a big believer in brand investments. I think it just has to be again tranche that has to be proportional to your overall sales marketing budget.

Speaker A: Yeah, I agree with you. Um, so, so a lot of this is about measurement, right? Being able to get the right KPIs, etc. Uh, you talk about full funnel, uh, metrics, et cetera. Scale matters. My company's been kind of pushing hard on full funnel analytics, uh, for over five years now. And we have seen uh, firsthand how taking sort of the cross functional whole system view drives better alignment, which drives better uh, decisions, which drives better results. But that is not the DNA of the vast majority of revenue leaders. Uh, and like our company, we find it difficult because uh, it's like, okay, well who would even budget for this cross functional stuff? Um, and I'm wondering, you know, much like you mentioned the AI budgets, which is sort of a corporate experimental thing, does there need to be some thinking about how to organize the investment strategy to support this type of mentality?

Speaker B: I think so. Uh, uh, but I don't even know that it's. I mean there's maybe there's some budget, you know, for like a bi tool like tableau or looker or something like that. Uh, I think it's m. The, the money is the time of the getting the executive team together or the business together and saying let's look at the, the sequencing of uh, trying to drive alignment and let's figure out where we are. And the point that I'm making is the first place it starts is your data. And you know, uh, all of the AI consultants are saying this as well. You can't do AI with bad data and you can't do alignment with bad data and you can't do alignment when every department has their own data. So I think that's where it all starts. It starts with let's figure out who's responsible for measuring how this business is performing against these KPIs and let's make sure that we get the right reporting package with consistency and that they deliver and from there we can start making decisions. But again, um, you know, the other thing that's happened over the last couple of years is everybody thinks they need their own OPS person. So the CMO needs marketing ops, the salesperson needs sales ops, Revenue ops. The CS person needs CS ops. Everybody walks into the meeting. This is what ARR is. There's three different numbers. This is what our close rates are. Where'd you get those numbers? This is how many leads we generated last month. Wait a minute, I didn't see those leads. I have. Well, we're talking about it from, you know, the point of this state in, you know, everybody's got their own data. That's the thing that does not work.

Speaker A: Yeah, yeah, interesting. So I, we're out of time, but one more question from Rich. Uh, when what impact do you think will be the impacts of AI on, on different components of cac?

Speaker B: I don't think AI is going to have. I think CAC is going to continue to go up. I think the, the true benefits of AI. Right. Well, let's look at the use cases where it actually works. Actually works. Right now it works in coding, software engineering, which you can think of as R and D. Or product development, but below the, below the line. Right. In OPEX and, uh, customer success. So when you see improvements in CS and you see improvements in coding, where do you see those manifest themselves? You see it in better cash flow. Right. Uh, you see OPEX going down as a percent of revenue, but I don't see customer acquisition costs going anywhere.

Speaker A: Back to, uh, the earlier point that you think the pollution is one of the biggest drivers here, this has just made it worse. Right? I, uh, mean the email boxes, the, uh, LinkedIn stuff, at least for me, it's palpably worse than it was three years ago.

Speaker B: And Google's talking about, you know, there's people that are talking about the death of search engine marketing. That might be true, but I can tell you that content agents, AI, whatever you want to call, you know, the stuff that's scraping and scouring the web every day needs content in order to survive, in order to train the model, in order to make recommendations. My point is SEO might become agentic engine optimization or whatever. You know, everybody's competing to get the acronym. But the point is, putting stuff, putting text on the Internet is still going to be a very important part of all of our marketing strategies because agents will search those web pages even if humans don't.

Speaker A: Yeah. Interesting. Sam, thanks so much.

Speaker B: Uh, thanks for having me.

Speaker A: Important stuff, uh, fascinating take on it, and, uh, I appreciate it very much.

Speaker B: Yeah, sure. And if folks want to reach out to me, you can. Sam. Joinpavilion.com I hope to see if you're in the D.C. area at the Mayflower Hotel in two weeks from today, September 23rd through 25th. And, um, yeah, join Pavilion if you haven't.

Speaker A: Thanks, everyone for your time. Uh, hope you found it helpful.