The Transaction

So just so everyone knows, Matt was three minutes late.

Normally, I'm three to five late.

So like it was, I flipped it, made it a big deal, tried to embarrass him in front of Ray, who's just getting to know.

It's kind of cool.

And then Ray told us this story about GE.

You got to tell the audience, Ray, just to kick it off and then we'll do the formal stuff.

Yeah, this is truly old school and wouldn't work in today's environment.

But back when I was going through their executive management program, and this was in the 90s, we had a policy that meetings always started on time.

And in fact, my mentor had created a practice that at 8 a.m., which was our Monday morning meetings, he locked the conference room door and locked it.

And no one got in because if it wasn't important enough to to be there in time, then a meeting must not be that important.

Right.

So I still remember.

So wanting to be like my mentor, I started enforcing this policy when I was a regional sales manager.

Right.

So I closed the door at 8 a.m.

And the number one sales rep showed up at 8.02.

And she's banging on the door and we had glass door so as you could see her.

And everybody looked at me like, is he going to go through with this with this top performer?

And I'm like, if we're going to set the tone around this, we had to.

So it wouldn't work in 2024, but it worked well in 1991.

Yeah.

Can you imagine?

Actually, I would love to hear someone basically trying to pull that off today.

That might be one of the best stories told on The Transaction, by the way.

Yeah.

Love it.

Love it.

From ABM to PLG, from Meddic to Meddpicc, the world of business is constantly evolving.

We'll cover the who, what, where, when, why, and most importantly how you get The Transaction.

I'm Matt Amundsen and he's Craig Rosenberg.

Let's get started.

To the audience here, I am actually going to break the rule a little bit just because Ray is doing so much stuff and have him tell us a little bit more about all the different things that he's doing.

But I'll just give everyone some my high-level context of Ray, which is he actually worked when he was in, still doing go-to-market operator stuff, he worked with us at Topo.

That's where we're our early connections with each other.

Then Ray comes to me and he's like, man, I'm building this thing.

I just want benchmarks of SaaS metrics that we can reference.

He's like, that was my, he had this great story that was so, it just made total sense to me.

We're like, can we have the benchmark so that we really know how we're doing and where we need to go?

And from since then, since the time that I knew him as a go-to-market operator, he's been building out his benchmark data set.

He's got some of the best content out there.

He's got two podcasts now.

By the way, Matt, I don't know if you know, he's got one with Dave Kellogg.

I'm a subscriber.

I'm a subscriber.

Did I know?

Come on, let's go.

I knew I could find those two people who were subscribers.

Hey, we feel the same.

Ray, hopefully we'll pick you up after this one and we'll get to three on our side.

But Ray, just to do justice to the various things you have going right now, how would you describe the various things you have going on right now?

So my passion and now my mission is to allow SaaS operators to make better metrics informed and benchmark validated decisions.

By being able to look at performance metrics across every stage of the customer journey, acquisition, retention, expansion, what should my target performance metrics be for a company like company size?

My ACV, my go-to-market motion, is it PLG, is it sales led, is it hybrid?

With my pricing model, am I subscription-based, am I usage-based, am I hybrid?

So over the last three and a half years, we've conducted research, original benchmarking research with companies like Gainsight, Lean Data, SalesForce, SalesLoft, Pindo, and we've collected performance metrics data across 22 different categories from 18,000 SaaS companies and we have almost a million unique data points now that's creating those benchmarks.

So you can go to benchmark.ai and see that, but we wanted to really build more awareness of how really to use these benchmarks, because general benchmarks are pretty worthless.

If someone says, my NRR should be 110% well, is that for a company my size, single product, multiple product, usage-based pricing, etc.

So we started with a podcast.

We started with Metrics that Measure Up podcast.

One of the advantages of being around Valley for a long time is I hadn't pissed too many people off so I could get the founders and CEOs of companies like LinkedIn, DocuSign, Marketo and then Gong, Clary, SalesLoft, 150 kind of top-tier CEOs on the podcast and we're ranking in the top 25 every month on Business Management podcast.

So that was good.

But then I wanted to have more of a fun environment, not just kind of interviewing really successful people, which is fun and learning at the same time.

So a buddy of mine, Dave Kellogg, who's written the Kellblog for 12 years, kind of one of the OGs of SaaS Metrics and Marketing.

Yeah, legend.

Him and I decided to do something fun called SaaS Talk with the Metrics Brothers, because he's one of the other executives that really is passionate about the use of metrics to inform their decision making.

So we pick a topic, it's typically a metrics topic like CAC ratio or CAC payback period or the burn model, or we take industry reports like Iconic, just put out their 2024 go-to-market benchmark report, and we spend 20 minutes talking about what they said.

Sometimes we tear it down, and sometimes we agree with what the authors had to say.

So that's SaaS Talk, and Dave and I had been really lucky drafting off his popularity.

We're in the top 10 of all business management podcasts.

Then the last thing that we do, which we're really passionate about here is something called SaaS Metrics Palooza.

It's the SaaS industry's only event dedicated 100% to the sharing of best practices of how operators and investors use both metrics and benchmarks to inform their decisions.

We have speakers like Jeffrey Moore and Byron Dieter from Bessemer, who just wrote the rule of acts, partner in charge of private equity and MA at Bain.

So we're lucky.

We have about 35 of the world's top thought leaders in SaaS.

We typically have 3,000 to 5,000 SaaS CFOs and COs and GTM leaders who attend and this year's events on April 8th and 9th.

So anyone listening to this, feel free to join.

It's free and you get some of the best speakers in the world sharing their expertise.

How about that?

Awesome.

Yeah, by the way, that was a, there was a lot.

That's why I had Ray do it.

So we forgot.

We normally, Ray, we do all the lead in, then we say, welcome Ray Rike.

Yeah, very nice, juicy, cold open.

I love it.

My God, man, that was great.

Okay, so we're going to start with our standard opening question and we kind of go, we go from there.

Okay, so what is something that the market thinks they're doing right?

Is it truism, the best practice, a way of working, an approach that they're actually wrong and they should be thinking about it a different way.

That's how we start the show.

So let's start with your answer to that and we'll see where we go from there.

Multiple answers are allowed, but you have to land the plane, as Matt likes to say.

If you say it's four, you have to get to four.

All right, go for it.

So in 2024, I think if one of your top three measurements of marketing return on investment is the number of top of funnel qualified leads that I generated, you're totally missing the boat.

How's that for a juicy hot take?

Spicy.

Dude, yeah.

I was watching, by the way, Matt with the incredible poker face on that.

You're rolling right up Matt's alley.

I mean, so like, let's.

I'll do the insert lead growth here, whether it's community led growth, media led growth, content led growth.

A lot of these investments in today's kind of marketing ecosystem, you can't measure primarily by the short term demand that you're creating, that demand generation that has demand captured the same time period.

An example is, hell, we're here in a podcast, right?

If you are trying to measure the benefit of doing your own podcast, sponsoring someone else's podcast, by the number of people who listen to the podcast, go to that Acme company backslash podcast name, and say, oh, I got 28 leads this month for sponsoring a podcast.

You've got it all wrong.

Now, a lot of people might ask, well, if we're not going to measure it, how do I get the CFO and CEO to let me spend that money, right?

There we go.

That was my next question.

So, three kind of primary metrics.

Can you imagine that?

I've got metrics to three, you heard that one?

That was actually the most surprising thing you've said so far, Ray.

I got to be honest.

So, number one, rolling five quarter basis at least, and maybe it should be nine, what percentage of our qualified pipeline came from inbound hand raisers?

Some people might call it direct, right?

Yeah.

So, because if you're doing a great job of creating awareness and thought leadership through media or content or community, you're going to see a dramatic increase in the number of inbound hand raisers.

So think about everyone's talking about outbound is dead or the SDR BDR organization is dead.

And what they're really saying is the effectiveness and efficiency of doing cold outbound is being reduced dramatically because of all the noise and automation and AI allows us to do things quicker and better.

So I as the target buyer, I'm going to get more saturated with content coming at me versus that I choose.

So the other thing I would say about inbound, if you don't have the metrics in place right now to measure cycle time, ACV and win rate of inbound hand raisers versus those who are from a cold outbound outreach, then you'll never know this either.

So you've got to measure the efficiency and effectiveness of outbound generated pipeline versus inbound.

So that's the first thing.

You want to drill on that or go to the next?

Well, I'm up to Matt because you raised his eyebrow.

Do you want him to go through all three and then come back or do you want to drill on this?

No, let's keep going.

Let's keep going.

So my favorite go-to-market efficiency metric is CAC ratio, customer acquisition cost ratio.

Now, the way that I recommend all of our partners and clients to use it is what is the sales and marketing expenses that we allocated to the pursuit of new customer ARR acquisition divided by the new logo ARR?

Do the same for expansion.

How much of my sales and marketing and customer success expense was allocated to the pursuit of existing customer expansion divided by your expansion ARR and then blended?

And blended is basically the inverse of what some people call sales efficiency, but all my sales and marketing expenses divided by new logo plus existing.

And right now, the benchmark is that's around $1.50 of sales and marketing expense for every dollar of new ARR from the combination.

I say that because now we want to take it down to departmental CAC ratio.

So marketing CAC ratio for me is the best metric to determine the efficiency of your marketing spend.

So you take your total marketing spend, including compensation, so it's fully loaded, and you divide it by the amount of both qualified pipeline and new ARR from inbound handraisers.

No attribution bullshit, not that because we know that today, if you're selling to enterprise customers, they may have hit 24 different pieces of content interactions with you.

And how do you attribute it to that white paper versus the webinar versus a trade show, right?

So, and then we recommend doing the same thing for sales development.

So know exactly how much you're spending in sales development fully loaded.

Divide that by the amount of qualified pipeline and new ARR from opportunities created from outbound SDR.

You can do the same thing for account based and do the same thing for channels and partners.

Now what you have is a causal relationship of an input metric marketing CAC ratio to your overall CAC ratio.

Yeah, really quick.

Did you say though, you're going to do qualified pipeline plus new acquisition that came from inbound?

The answer is yes, because I want to see what it cost to generate a dollar of qualified pipeline.

But ultimately, I want to know what it cost to generate $1 of new customer ARR.

So you'd look at those separately, right?

Separately, separately.

Oh, okay.

That's not a combo because I was like, no, not a combo.

Because think about it, people, five years ago, it's like, wow, we calculate cost per opportunity, cost per lead, qualified lead, MQL or cost per opportunity.

That's really nice.

But I want to know what the efficiency is because if it's an 80K ACV versus a 20K, hopefully we're spending different money to create each of those, right?

Right.

I love that.

Okay.

And then what time band are you typically recommending people look at on that?

Well, of course, you want to start tracking it right away.

But I like to look at rolling five and 12 month, I'm sorry, rolling five and nine month trends.

Because if you just invested $120,000 a year for your podcast, right?

You're not going to see top of final impact from inbound hand raisers for six, nine, 12 months.

It's kind of like entering the enterprise market.

The gratification is delayed, right?

That's why we always say, look at these metrics on a rolling five and nine quarters.

And to a CFO who says, well, if you're going to spend $120,000 on a podcast, I want to see this quarter how many qualified leads we got from it.

You're going to shut it off before the real value really happens.

Now, the third thing is, yes, you do want to do some variable cost return, like return on ad spend.

Because if the CFO comes to you as a go-to market leader and says, we need to generate another $20 million of pipeline above what we're already generating because our pipeline coverage ratio went from 3.2 to 4.1, which is a reality for a lot of companies in today's economy.

You do want to know on a variable basis, what some of your most productive channels are.

But you want to make sure you're measuring that all the way down to qualified pipeline and new ARR, not just qualified meeting or qualified lead.

Okay.

Question two, very tactical, but this was incredibly helpful.

In your example of like 25 touches and you said F this attribution stuff, by the way, you see that?

I didn't swear.

I didn't swear at Matt.

I use F, dot, dot, dot.

So if in the 24 touches, there was a website inbound lead, then we attribute to that number.

Well, it's an inbound marketing lead because someone said, I want to see a demo.

I want to talk to a salesperson.

If you're in a PLG motion, I signed up for a free account, for a trial.

What about a content download?

No.

We think, as my SaaS Metrics brother, Dave Kellogg says, attribution is fake.

We just made it up to get credit in marketing.

No.

Now, do you want to track that so you have some idea of where you're getting more engagement?

The answer is yes, but also you want to track it on a dollar out versus a qualified dollar in.

Okay.

So let me see if I've processed this all correctly.

The way you would...

So you're looking at two numbers for marketing, and we'll just zero in on marketing here for a second.

One, how much we're spending in a quarter, year, half year, something like that.

Maybe we need all those metrics.

At least quarterly.

If you're a low ACV monthly, but let's just say you're 25K and above and it's quarterly.

Okay.

You're basically going to want to look at a CAC ratio of the total spend over the total amount of pipeline that the marketing department was responsible for generating.

Then you also want one for total spend versus new ARR that you've generated as a result of those programs.

And then you probably want to look at things like return on ad spend, but every other channel or tactic you don't want to look on at an individualized basis because if we're throwing attribution out the window, having things like, well, I spent X amount on content and we generated this many opportunities as a result of it, because it's part of some blended attribution model, you end up with too much overlapping pipeline, too much overlapping close one, where the summation of all that ends up being more than your total pipeline number or more than your total close one dollars, correct?

Correct.

Because what you can't attribute is what created intent.

Yes.

Agreed.

Agreed.

You don't want to penalize things that are a part of a healthy customer journey like content, like a interactive element to your website and or any other touch points that you might have along that customer's journey.

Right.

Because to me, I look at the CMO, since we're talking marketing, she says, I want to spend $20 million.

And if I'm the CEO and CFO or investor, I want to look at her and say, okay, what am I going to get for that?

Yeah.

And I want to know in dollars and cents.

And then when we're doing planning for the next year, and the investors say, well, we want to grow 35%.

That means we want to grow $35 million this year.

How much do we need to spend in marketing?

Yeah.

Well, if you've got the cap ratio from the last 12 months or rolling four or five quarters, you can say with empirical evidence, well, if you want me to generate $35 million, here's how much I need extrapolating for what we've done over the last four quarters.

Then you can get in a debate about economies of scale and improving your economics as you go.

Yeah.

My brain immediately goes to, and I feel like this is what's hidden beneath the red satin unveiling sheet is, what does a good CAC ratio around pipeline look like and what does a good CAC ratio around customer acquisition look like for a marketing department?

I know that you're looking across sectors and you're looking across segments, SMB, mid-market, enterprise, but let's talk SMB companies just because I think a lot of our listeners are operators at smaller businesses.

Let's say you're up to $20 million in ARR, that might be too wide of a band, and you've got a sales-led motion or product to sales-led motion, something pretty typical for what's in vogue right now in the valley.

What would a marketer hope to have from a spend to pipeline generation ratio and a spend to new ARR ratio?

First, I would want the people in charge of go-to-market to have a shared goal on that CAC ratio at the company level.

That's the head of sales, head of marketing, head of customer success.

So in the last 12 months, the blended CAC ratio for new and expansion was at median, at median, about $1.54.

So you should spend $1.54 of sales and marketing OPEX, fully loaded, to get $1 of blended, of new plus expansion ARR.

For new ARR only, from new logos, that went up to $1.61 last year.

Total population.

Now, what's very important to understand is twofold.

If you have a higher ACV, it's more than that median.

If you have a 100k ACV, and you're a $50 million company, believe it or not, it's more expensive than if you're a $10 million company.

Because they've entered new markets, they've expanded segments, and they're just not as efficient in some of those newer segments, or they have new products they're not as efficient at.

Now, so that's on a dollar basis.

Now, if you look at it on a qualified pipeline basis, first of all, you need to know what your pipeline coverage ratio is, so let's just use four, right?

Sure.

So if you're at $1.60 of CAC, you want on a pipeline basis to be 40 cents.

But now what you should really do is look at historic for marketing hand raisers because it's hand raisers now to see what it's been for the last rolling five and nine quarters and then do it.

30 to 40 cents is a good target right now for overall pipeline.

Then you need to wait to adjust that.

And I'm sorry, it's a little complicated because today in SaaS, it's still non-product led, sales led.

About 70% of that sales and marketing expense allocated to sales.

30% is allocated to marketing, right?

So you need to expense rate adjust what the cost is for the marketing budget for the qualified pipeline from inbound hand raisers.

Makes sense?

Yep.

Now, I will tell you, inbound hand raisers, inbound marketing leads typically close about 40% faster.

Yep.

And close on average, not meeting on average, about 50% faster.

So you need to know those numbers also, right?

Yep.

Because that's going to impact your CAC ratio over time.

Yeah.

Um, I lost my train of thought where I was going with that, but that's really important to know is inbound win rates and pipeline coverage.

Oh, I know where I was going with it.

SDRs.

Yes.

Go ahead.

Yeah.

Wait for you to tackle this.

So I often get called into companies when they're either raising money or the board has thrown up their hands and say, man, could you go and help assess their go-to-market efficiency?

Cause they don't get it.

And I can't get sales, marketing and CS on the same page, which of course they love to see me walking in when the VC or private equity firm says, talk to this guy.

They're like, what does he know?

Right.

But one of the things we do is we always look at pipeline coverage ratio and I force them to break it down by primary source.

I think Salesforce used to call them the four horsemen, inbound marketing, outbound sales development, direct sales and channels partners.

Yep.

This one company, number one, well, I'll just go with SDRs.

Sales development was generating 42 percent of their qualified pipeline.

Number one source.

And of course, sales development leaders like, look at me, I'm number one, right?

Because guess what?

The majority of sales development leaders aren't held accountable for closed one ARR.

Why?

Right.

I don't control it.

Sounds like the old CMO, right?

I don't control how we went.

So I said, yeah, but let's look at it from a pipeline coverage ratio and CAC ratio.

So where their pipeline coverage ratio for their entire company was 4.2 for outbound sales development generated opportunities.

It was 9.8.

They close over 58% less efficiently.

Yeah, of course.

Now, of course, now, and you did this kind of work at Topo, Craig, you know, because I've worked with you.

You can go and start looking at the process.

And often it's, okay, how's the SDR incented?

How does that SDR build a relationship with the AE?

Come on, just make that a stage one qualified opportunity because that's how I get paid or come on, take the call, right?

Yeah, because it's a sales qualified meeting.

And those all bias that.

But win rate and pipeline coverage ratio of sales qualified or sales development opportunities.

Can't bullshit that.

Yeah.

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What do you think, guys, or just poke at this?

If you guys, if you're operators and practitioners, what do you think of this orientation?

No, I think it's correct.

And it's illustrative of the way the market is going right now, which is like, it seems to me, I'm going to be a little selfish, live in my little bubble.

But for the most part, it's not that the outbound motion has stopped creating pipeline.

It is, and it's something that I've been talking about on this podcast for the last couple of episodes, is like, as a marketer, I'm looking further and further down the funnel than I've ever looked before, right?

Where, you know, before I'd say like, hey, what did marketing generate?

And SCR has often been a part of my remit as a marketer, although it's not presently.

What do we generate?

Usually, it's the first gate.

Like, okay, did it get qualified as it hit pipeline?

And then what turned into ARR?

But I'm actually looking at like, how far does it get in the pipeline before it dies?

Right?

Like, if it's only getting to that first stage of qualification, like it's hitting pipeline, great, but it never moves into validation or whatever comes up next in pipeline.

I'm looking at that and saying, no, that wasn't very good.

Right?

If it's only making its way to, you know, I don't know, a technical win and then we're losing, then it probably has something to do with our pricing or whatnot.

But like, I'm looking at this much more thoroughly than I think I ever looked at it in the past.

And what I've seen in general, you know, speaks to, shouldn't come as a surprise.

Most of what's coming inbound seems to be what's winning.

I think the other big source of pipeline that turns into ARR is also partnerships.

And what I'm seeing really frequently now is like, the BDR team or the SDR team can actually generate pipeline, but it goes nowhere.

Right?

It just goes to qualified either under the, you know, the scenario that you were outlining earlier where it's like, hey, man, but like, please, like, this is how I get paid.

Can you please flip this off?

And then just just nowhere.

Right?

And so I think that there are plenty of organizations that are fooling themselves by saying like, hey, we're creating pipeline.

We have the coverage, when in reality, they don't have near the coverage that they think that they have, but they really don't know how to go get it.

And so they're like, well, at the very least, like our pipeline numbers will look good, that maybe that's good for the business.

Our sales reps are going to have a lot of meetings on their calendar.

They'll stay busy.

They won't feel like they're being starved to death by the organization.

But ultimately, if that pipeline is not turning into even the next stage beyond qualified, let alone getting it all the way to a close one deal, it's pretty useless and it can be a real inefficiency for the go-to-market function overall.

That's the marketing-tech ratio, right?

You can't hide it when you measure against closed AR.

Now, Matt, to your point, even though I'm up here in a less than an hour podcast, of course, as an operator, you got to drive into all of these efficiency and efficacy metrics, not only by segment, enterprise versus mid-market, US versus Europe versus Asia, but also you've got to look at this by stage.

To your point, you might be really good at getting people into stage two, but you run a shitty discovery process, you move them to stage three, and you got a much higher fall rate from stage three to four, or that's where the delay happens, right?

Yeah, yeah, yeah, yeah, yeah.

It could progress through the sales funnel quickly, but dies right at this point.

And sales reps historically haven't been great at stage progression in Salesforce, but if you can calculate that, and you do have faith in those numbers, it's almost always the best place to diagnose what's wrong with your product.

You're either, or what's wrong with your company.

You either have a product that's not really as product market-fitty as you think it is.

Maybe your pricing is way off and you're getting beat by competitors as you get to the point where you're starting to do proposals and whatnot, or you just have a lack of execution.

You have sales reps that aren't following up with the leads properly.

I have been encouraging marketers and go-to-market leaders writ large over the course of the last six months.

You got to get deeper into your analysis of what's actually happening in the funnel because if you have a product problem, you should be able to figure that out pretty quickly and go solve that.

Probably not quickly, but at the very least, understand what the problem is and go solve it.

You may have a pricing problem.

That's something that you should be able to fix relatively quickly, or you have a quality problem.

That's when things are just getting to qualify and they're not moving beyond that.

Either way, if you can look at the analysis of how things are happening in stage, you should be able to zero in on what your actual business problem is.

I'm going to zoom back out.

I'm going to say one more thing.

The data, it didn't surprise me, but it's really good to have.

One of the research projects we do is about go-to-market alignment.

I hate the word sales and market alignment, but there is a-

Join the club.

I believe that shared goals, i.e.

that are measurable by metrics, helps with alignment and even integration of go-to-market team.

In the latest research we did, and we did it with Sales Loft, we asked CMOs, CROs, and customer success, do you own the revenue number?

About 38% of CMOs said that was one of their primary goals, was the revenue plan, whether it was new ARR or the growth ARR, etc.

What was interesting was that 38% that owned it, they were almost all in the top 25% of growth companies.

There was a high, and we did some two-factor kind of linear regression analysis.

The companies that had CMOs and CROs both saying they owned new ARR were the top performers.

Coincidence?

I think not.

Yeah.

Oh, man.

Okay.

I got a couple of ones for you guys.

I'm going to zoom back down.

I like this theme.

We zoom up, we zoom down, we zoom out, we zoom in.

By the way, on the SDRs, I've never felt like SDRs converted better than, you know, inbound or channel, but I've always said, I'm not sure what else you can do.

So, like, at a certain point, you have to eat the high, like I used to view it by cost per opportunity, you know, or just basic lower overall conversion rates to wins.

Sales cycle time was always longer with SDRs.

I got that.

I was always, I always understood that.

I just wasn't, you know, in my opinion, you had to have them in the mix and you had to eat that because, like, there was no other way to consistently get in front of a particular target type.

What's your reaction to that?

I'm going to go first, Craig.

Matt was kind of nodding his head a little bit, so I was like, all right, I've got, I've got thoughts.

I'm happy to go.

All right.

Well, let's go.

Let's get the guest on.

Let's get the guest on.

Yeah.

So the best simulation models are constraint based, right?

You can only produce so many widgets in a factory.

You can only deliver so many burgers in a restaurant.

And that's going to translate into your economic performance.

Same thing with pipeline, new ARR and growth rates, and a non-capital constrained environment.

And I will call the last few years, well, in 2019 to 2021, very minimal constraint from a capital availability perspective, right?

So, man, if we wanted to grow that fast, it didn't matter if we did it by losing 20 cents or 200 cents per dollar.

It was okay, right?

In a cautious capital, capital constraint environment, unit economics and efficiency matters, Craig.

So the hard pill to swallow might be, I'm a $40 million company and based upon my segment, my product, everything, we're only going to grow at 21%.

So let's optimize all our investments, everything else around 21% and see if we can perform at that.

First thing, no, no, no, you got to grow 35% or you're not on your path to an IPO and god damn it, do it.

So then we got to have more pipeline.

That means we need to show more pipeline, right?

And we'll do it inefficiently.

So I think if investors like private equity firms say, I'm going to hold you to a 10% EBITDA margin or I'm going to hold you to this CAC ratio, and I know some 100 to 200 million AR companies now, which are swallowing a very bitter pill in the equity portfolio, it's no, EBITDA is your marching order.

And the only thing that impacts EBITDA is efficient growth, right?

So that's what I say, Craig, you got to change the goals.

Yeah, but if the blended rate falls in your $1.50, and marketing is taking, because they're, I mean, depending on how good they are, you know, they're taking the overall aggregate average into something palatable, then would you say we would still want to eat the SDRs?

Or they still, I mean, the SDR, the frankly poor performing metrics?

Yeah.

No, it's all about the blend, right?

If your marketing engine really starts humming and you're getting your marketing CAC ratio down to 35, 45 cents, right?

And the SDRs give you another top line growth of five to seven points, then you might decide to do it because your blended CAC ratio is still okay.

But you got to look at all those levers and decide, okay, marketing has got more efficient.

My ABM motion has got more efficient.

So I can be a little less efficient from the SDRs because it's still going to be those five points more of growth.

That makes sense, Craig?

Yeah, we're good.

It's a multidimensional, multivariable levers that you got to pull.

But at the end of the day, it's the high level CAC ratio for the company that guides you.

Yeah.

And in most cases, if you need to get it down, the SDRs are a good place to start.

I mean, let's be honest.

You know what I mean?

I love them.

They're my folks, but I get it, because it's always been like...

Except for there were momentary runs where the thing was just a machine and could come in economically.

But honestly, in most cases, that's just not the case.

OK.

I'll give you a simple example.

One of my favorite guys in the industry is Byron Dieter, Bessemer, creating a lot of the metrics.

I remember this was about eight years ago when I was a GTM operator.

I went to a board meeting and the board said, your CAC ratio is too high.

You went from $1.33 to like $1.48 or something.

It did.

It went up about 12 percent.

And I said, well, why do you think it's too high?

Well, because it used to be $1.33 and two years ago, it was $1.20, right?

And I said, well, but look at our growth rate.

We're growing 10 percent above the median for our company size.

Won't you trade off some lack of efficiency for higher growth rate?

Because if we grow faster, and I did the math and I showed them over five years how much more ARR and I did enterprise values, a multiple of ARR, and I said, I just added 28 million more to our enterprise value with this model.

Is that not what we want to do?

And that came from Byron because Byron said, hey, Ray, if you're growing 10, 15 percent faster than the median, I'll take a $2.00 CAC ratio.

Because at the end of the day, ARR size and growth rate have the highest correlation to growth.

And now I'm going way off the rails.

But that's what the rule of X is all about.

The rule of X, which is one of my favorite new SaaS metrics, I think should replace the rule of 40.

Because what the rule of X does is it creates a multiple factor on growth to free cash flow margin.

And if you look at all public cloud and SaaS companies today, and do a two factor analysis of growth versus free cash flow margin, growth has a 2.3 times higher on enterprise valuation multiples than free cash flow alone.

Now, there's borders around that.

You still got to have a free cash flow margin that send a 10 to 20% rage.

But if you're growing at 30% versus 20% with the same free cash flow margin, you can have a 6X higher enterprise value to revenue multiples.

So that rule of X is really important too.

Is growth more important than profitability?

That's awesome.

Okay.

So second part, I want to go back to the alignment, the shared.

That was an amazing finding.

Yes.

Except.

Caveat.

There's a caveat, which is, I just curate like, it feels like, so I think in the monastery, that's always been the better way to go.

I don't spend a lot of time in monasteries, though.

Yeah, no, I know.

I know.

Well, let me invite you to mine.

All right.

So no, no, I'm actually stepping out of the monastery and saying, well, look, Dave sort of said the attribution was a BS sort of way for us to measure ourselves, but it has, for the time being, been a protection device, both good and bad for marketers.

Yeah, the good, right, is when, well, this is the good when it's bad news.

The good when it's bad news is that marketers can point back to some level of activity when we're not hitting either, whether it's an overall CAC number or frankly, growth numbers or whatever those things might be.

And the issues might be in sales and in a caustic environment.

Like, I get it, honestly, because those things often devolve into fighting.

And then it's bad if that's how you're measuring yourself when things are going bad and it's clear that you're not generating good.

You know what I mean?

So there's good and bad.

But I've always felt the conflict for the marketer, not for the sales leader.

I've always felt the conflict for them.

I've wanted them to get off leads, as you know, Matt, since 2017.

I've said, let's just dump the MQL number.

Because you do a lot of things.

That was always my point.

We're doing a lot of things and you're pointing everyone to this thing that in some cases won't convert and whatever.

So I've always been in favor of it.

But then I always had this thing where marketing gets the fingers pointed at them first, always.

Usually.

And it's usually this one.

Yeah.

Not number one for everyone listening on the pod.

But it's a single finger, but it's not number one.

And so that's always been the tough part of this.

What was interesting about what Ray said was that the best companies in the top 20 micro-scrummed growers, they share that big number.

Yep.

And what I think is more interesting, it's because it can't just be about sharing the number.

There has to be other, like, not operational, but even just like leadership type of things that happen there for that to work.

So I just got a whole bunch of shit, but the end is most important.

We totally agree.

Let me give an example.

How many chief marketing officers out there are saying, well, we have a closing problem, where sales organizations just not following up on leads quick enough.

They're not closing.

You ever heard that?

Ever saw that finger being pointed?

As Matt ever pointed that finger?

Oh, sorry.

Go ahead.

Yes.

Yes.

It's a similar finger.

How many of those CMOs get involved in the sales process, try to analyze what's going right, what's going wrong, and they feel like they can help?

Oh, well, maybe if we had had this content at stage three, maybe that messaging, I listened to 28 gong recordings in stage three, and this messaging is just not resonating, or our pricing seems to be a real issue at that stage.

But if you share the goal towards the ARR number, hopefully that means you have more commitment to the process of improving it.

And that's where I think the magic happens, Craig, is when that CRO and CMO are collaborating and they're providing feedback.

Hey, the marketing qualified leads, our sales teams isn't following up on them, but let's look at these.

Let's get you on the 100 SDR recording calls and find out why they're not qualified leads, etc.

But it's the collaboration of the process level that I think that helps promote.

Yeah, there's, I mean, so first of all, I completely agree with you.

Second of all, what I'll tell you, just from my own personal experience, the last three times I've been a CMO as an operator, I've taken as a part of my annual bonus, more than 50 percent is allocated towards our ARR number, right?

That's a place where I feel comfortable.

It shouldn't be 100 percent, it shouldn't, right?

It should be, but it should be the most important element because largely, I work for companies that are entering or are currently in a growth stage.

What I think I've always pushed for and I've never had a company actually do this is also including the pipeline number, which is obviously one of my remits into the CRO's number.

Even if they don't manage a BDR team.

The reason why I say this is because it is very, very easy to keep the pipeline number down if you want to, if the metric that you're being measured in addition to ARR is also win rate.

This is a shared, I think pipeline should be shared just the same way.

I think I'm willing to take on more of my annual bonus being related to ARR, but I want my peer and counterpart to also take on pipeline.

At the very least, we have an understanding of, these are the goals that we're both trying to get to and we have to get to them together in order to have a functioning business.

Part of the reason why I always talk about things like functioning business is part of what we talked about earlier.

If pipeline is being manipulated and it's not, I don't think that that's happening on a massive scale, but it can be especially like in, there's ARR, OKR for this quarter is to improve our win rate by some astronomical number, like 40 percent or something like that.

Usually in quarters like that, you see a pretty steep reduction in the amount of pipeline and a pretty hefty increase in the win rate.

If we're aligned on those two things together and we know these are the things that actually generate pipeline, this is what our actual win rate is, then we can learn from what's not working.

But if we manipulate those numbers, then we actually don't learn what's working and what's not working.

Totally agreed.

In fact, I have been a VP of Sales, and I actually went to my CEO and I said, I want a pipeline number.

I want it to be the primary part of my MBO, no part of my bonus, not the variable copies.

Sure.

Yeah.

And then I gave every AE their own self-directed pipeline number.

And it averaged about 20 percent, 20 percent of the deals they closed, the ARR had to be from self-directed pipeline.

And I paid a 2 percent commission spiff for deals that they created and they closed.

Now, you still have a little bit of making stuff up.

Was it ERD or not?

But you would be amazed at how much more time get allocated to AE self-directed dimension.

Yep.

Yep.

That does not surprise me.

It does not surprise me.

We're starting to run out of time.

And I do have Craig, may I ask a question?

Of course you can.

I was just reacting.

I thought that was really great specificity there.

I totally agree.

Yeah, I totally agree.

And I think we all agree that specificity wins.

So my question for you, just because we're starting to run out of time here, is like, of all the metrics that you've been measuring, and we're all sort of existing in this post-COVID era, what is the one thing that's changed most dramatically, and whether or not that's surprising to you, or what your reaction is when you think about what's changed the most?

I'm going to tell you, but my caution is never be a slave to a single metric as an operator, right?

Yes, yeah.

They're interdependent levers that you pull.

But this is a metric that only 18% of companies that we've conducted research surveys with, actually measure, and it's expansion-cac ratio.

It's how much sales, marketing, and customer success expense you allocate to the pursuit of cross-sells, upsells, expansion.

Yeah.

This was a metric that Dave Spitz of KeyBank Capital Markets fame created, and I think they started surveying this back in 2014.

Back then, it was like 32 cents of sales and marketing expense to get $1 of existing customer expansion ARR.

In 2022, well, I started measuring it in 2021, and KeyBank continued to.

We both said it hovered around 61 to 69 cents of sales and marketing, and the OPEX portion of customer success for creating CS qualified leads, et cetera.

So 61 to 69 cents of expense to create $1 of expansion ARR.

In 2023, we over indexed as an industry towards retention and expansion of existing customers, because it was so damn hard to get new logo ARR, right?

Yeah.

So we reallocated more CSM time to pursuit of expansion.

We may have not had AEs doing upsells and cross-sells.

Now they are.

Or we hired some or moved people from one function to AMs to do upsells and cross-sells.

For those 18% of companies who measure expansion, CAC ratio and went from 69 cents at median in 2022 to $1.

That's a 42% increase.

I cannot tell you how many times I got into vigorous discussions and debates with my clients about the importance of measuring this.

How on the hill do you measure it?

We have people doing the same thing, right?

I'm saying, do a simple survey.

I'll do it for you.

Mr.

CSM, how much of your time do you spend on onboarding, engagement, support versus pursuing upsells and crowdsells?

Do the same thing for AEs.

Let's get SDRs doing a little bit of upsell, crowdsell identification and generation.

It's just too hard and we all know it's easier.

We all know it's easier.

I've never knew how to run a business based upon something I knew from my gut without being able to measure it.

Imagine that.

That's my biggest surprise is expansion ARR is a lot less efficient today than it was even one to two years ago.

Wow.

That is surprising.

Yeah.

That is a great...

That was a really good question, Matt, first of all.

Thank you.

Yeah.

And then number two, that was a perfectly surprisingly answer to deliver at the end.

And one thing I'll combine with that, I'll ask you guys this question, so I don't mean to do a gotcha.

Across the entire SaaS population, what should be the split of growth ARR that comes from new logos versus existing customer expansion?

What do you think?

70-30?

That is kind of like the old rule of 40.

70-30 was the model for years.

Starting two years ago, it went to 65-35, so up 5%.

But what's amazing is start breaking that down by company size.

Once a company hits 50 million, the median now is 49% comes from existing expansion ARR.

Above 100 million, it's 51%.

So you need to really think about at what stage am I at and where am I really going to point my sales and marketing investment to get my most efficient ARR growth?

Wow.

Yeah.

I remember at Topo when we had expanded outside of cool kids SaaS and we were talking to the IBMs and some of these big companies.

The number for expansion revenue was like, I mean, it was bigger than what you're even talking about for these big, I mean, because they talked to everyone.

It was like 85%.

Oh, yeah.

For the really big behemoths.

Yeah.

Yeah.

So that's a really good point to end on.

All right, Ray.

Good job, man.

Yeah.

You bring in a metrics guy and you're like worried about, but I've known Ray so I knew this wouldn't be the case.

To combine it with actionable how you get there was that makes it perfect.

So that was exactly what we wanted out of the show.

Unbelievable.

Ray, I know this is us meeting for the first time, but I'm so blown away by you.

You're awesome guests.

What a great episode.

Yeah.

You go out to lunch with Ray, you leave your stuff, but you're exhausted because he's got so much going on.

He and it's like metrics based.

I don't know how he remembers them all.

That's one thing.

I mean, I got to give you that too.

Yeah.

You asked me a question I just answered two days ago and I couldn't, I went blank.

So thank you, man.

I hope you had fun too.

I love to, as you can tell how passionate I am about this.

It's so important.

And if we have one or two things that a listener can take away and say, I'm going to go at least think about it and analyze it, then I'm glad we spent this hour together.

Yeah, us too.

All right, guys, that's The Transaction.

Thanks for joining us for another episode of The Transaction.

Craig and I really appreciate the fact that you've listened all the way to the end.

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