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This podcast is about scaling tech startups.
Hosted by Toni Hohlbein & Raul Porojan, together they look at the full funnel.
With a combined 20 years of experience in B2B SaaS and 3 exits, they discuss growing pains, challenges and opportunities they’ve faced. Whether you're working in RevOps, sales, operations, finance or marketing - if you care about revenue, you'll care about this podcast.
If there’s one thing they hate, it’s talk. We know, it’s a bit of an oxymoron. But execution and focus is the key - that’s why each episode is designed to give 1-2 very concrete takeaways.
[00:00:00] Toni: Hey everyone. This is Toni Holbein. You are listening to the Revenue Formula. In today's episode, we are going to talk about why CAG customer acquisition costs is a terrible metric for operators and which metric you should be tracking instead. Enjoy.
[00:00:20] Mikkel: Are we gonna do this thing?
[00:00:21] Toni: Oh, you have the thing? Yeah. Yeah, that's fine.
[00:00:24] Mikkel: With the chili. So Ginger shot to start the recording. It's not too bad. It's a spicy,
[00:00:33] Toni: yeah.
[00:00:34] Mikkel: wonder if this was a mistake. Yeah, I mean, it's a nice pace of change from the beer we
[00:00:39] Toni: Wasn't this Ryan Reynolds? Um, this this demo video
[00:00:44] Mikkel: Demo video. Oh, yeah, yeah, yeah. With the chili,
[00:00:47] Toni: With
[00:00:47] Mikkel: with the Reba Chili
[00:00:49] Toni: Yeah. That was
[00:00:49] Mikkel: Steve-O That was hilarious. Yeah, that was hilarious.
[00:00:53] I mean, he's doing nothing but flipping billion dollar companies by now.
[00:00:56] Toni: No. He's basically taking his brand and attaching. So he is basically what Trump is doing just in a smarter way.
[00:01:03] Mikkel: Yeah. Yeah. That's true. Right? Yeah. Yeah. And he's
[00:01:05] Toni: taking his name. Yeah. Um, attaching it to whatever you think his name can benefit from. Yeah. And flipping it, he also kind of bought this, uh, soccer club.
[00:01:15] Mikkel: Oh yeah. Football, football
[00:01:16] Toni: Sorry. Football club. Yeah. Um, And they're like in second or third league in the UK or something like this. Yeah. He sold a, a docuseries to fx. He sold multiple sponsorship deals and blah, blah, blah, blah, blah. They take this money, buy more badass players, boom. Just got promoted to the next, uh, to the next kind of league.
[00:01:34] Right? I was like, uh, yeah, it fucking works. And
[00:01:38] Mikkel: I guess if there's one thing he isn't too worried about is CAC
[00:01:42] Toni: Wow,
[00:01:43] Mikkel: My segues are getting poorer and poorer.
[00:01:46] Toni: No, it's, uh, pure spice.
[00:01:48] Mikkel: No, it's, I.
[00:01:50] I told you, I'm not sure. It was a good idea. Yeah. Burning. Burning here. Uh, burning sensation. No. So we're gonna talk a bit about, uh, customer acquisition cost today. Yep. And, uh, it's not gonna be a dry one. It's not gonna be a heavy math one. We are gonna talk about actually a bit of the, a bit about the problems with CAC on his own as a metric and basically what you should consider using instead.
[00:02:17] Toni: Yeah.
[00:02:19] Mikkel: I, I'll go. Cool. So, um, I think first off, I listened to an episode of a podcast you were on, not this one obviously, uh, betrayed. And, uh, you talked about K and one of the things, you know, you got a question around what is the definitions really because, uh, this person, this listener, had a hard time finding a well established definition of.
[00:02:41] Yep. So it's like, let's start by just diving into, how would you define it? How should we go about it? Uh, just so we talk about, so people actually know what we're talking
[00:02:48] Toni: about. Yes. So customer acquisition costs, um, there's, by the way, two main conceptions around this. One say customer acquisition, cost meaning per customer.
[00:02:59] Mm-hmm. Um, which is, Actually not what this is, then it would be CAG per customer. Um, customer acquisition costs in general means the money that you spend in a month or usually it's measured in a quarter, on customer acquisition. Haha. Um, and, and those, those costs are usually, Uh, sales and marketing. If you were to go into your budget or into your profit and loss statement and find the sales, uh, line item and the marketing line item, those two combined, that's usually roughly speaking your customer acquisition cost.
[00:03:34] Yeah. Now, uh, the sales line and the marketing line in your budget, there are some rules around that. You know, it's, it needs to be audited, needs to be according to US Gap or Danish gap or a German.
[00:03:48] handelsrecht
[00:03:50] forgot. Wow. I should know
[00:03:52] Mikkel: You've been away from Germany for
[00:03:53] Toni: Yeah. Yeah. Wow. and um, and uh, so they have like very specific rules around it, so you can't screw around for that.
[00:04:01] Yeah. Uh, not so much with CAC. No. CAC is kind of a thing that is a bit more flexible. Um, you can define things in, you can define things out. Uh, and this is what's creating lots of the confusion, uh, in the, in the market. And the reason why, the reason why people are a little bit loose with this is because it's a metric that a lot of investors are gonna be asking you for.
[00:04:23] And if you can tweak it a little bit. So the CAC side is the bad side, so you wanna take things out of it. If you can tweak it a little bit by, you know, defining things away, then it's gonna make, uh, you know, we are gonna get to this, your should look better. Right. and, uh, things that, uh, you should be considering including, but it's, you don't have to, uh, things like recruitment costs.
[00:04:45] Mm-hmm. Especially if you're running like an SDR setup with turnover of, basically. 80% a year. So that's an average tenure by the way. It's like 15 to 18 months. then you need to, you know, the cost of doing business here is to hire those folks to be in their seats, so that should be actually included.
[00:05:03] you can have a long debate whether or not cs, should be in here if they're running renewals and upsells, uh, upsells specifically. You can have a debate if account management should be in here. Uh, I've seen now setups where people put CS and even account management into. into general and admin.
[00:05:20] Yeah, so basically taking it not into cost of good sold, which is usually have revenue cost of good sold. Um, then you have a gross margin, then you have a sales marketing, then you have a few research and development, so product, and then you have, uh, general admin, and they're basically putting in general admin, which is like crazy, but.
[00:05:37] Can be done. and uh, you have all of that flexibility, and uh, um, but, but usually speaking it should be sent around, you know, your sales and marketing expenses. Yeah.
[00:05:47] Mikkel: I think one of the things you talked about is you can do so much complexity with this metric, but actually trying to keep it simple.
[00:05:56] Toni: I think that's, that's kind of, um, you know, once we dive into that and kind of see all the different additions to, to that metric, then, then it's a one thing.
[00:06:04] I think one, uh, main advice I have on that specific one is if you doctor it too much. Yeah.
[00:06:12] Mikkel: Yeah.
[00:06:13] Toni: it's, um, it's gonna lose a little bit more value for you on the operational side because so many things that are important aren't in there. Right. Yeah. But the other thing is gonna erode, erode, uh, your, your investor trust, right?
[00:06:25] If kind of, if you, if you go out, put, you know, a big number on your, on your slide deck on, Hey, our Payback is 10. Uh, what I often got, and it's not growblocks was kind of before that. Was, was the question Okay. CAC fully loaded or not?
[00:06:42] Mikkel: Yeah. Everyone ask
[00:06:45] Toni: that question. And um, and then you want to. You want to be able to kind of say yes, and not lie too much about it.
[00:06:54] They all expect that you kind of give it a haircut here and there and put something not in that maybe could be in. Um, but it's really about if you doctor it too much and you go out with that number, uh, and people then drill into that. You don't wanna, uh, suddenly kind of wake up one morning and be like, ah, actually it's, you know, Now we're at 15. Um, so, and I think that's, that's generally speaking my advice, keep it, keep it ideally as simple as possible on sales and marketing. Yeah. Um, and that's it.
[00:07:20] Mikkel: So what are some of the, the common challenges with this metric? We kind of said in the beginning, we wanna talk about some of the problems we see with CAC as a metric.
[00:07:29] Toni: So, number one, CAC just by itself is pretty, it's pretty useless. Mm-hmm. Uh, you can't really. Use that for anything. So what are, what are people doing there?
[00:07:38] Basically compounding it with something else. Yeah. They're compounding it with, uh, maybe a Payback period. They're compounding it with, you know, l t v, they're compounding it with your gross margin and so forth. Yeah. Um, trying to take care of all kinds of different. Challenges that could be around it, right?
[00:07:54] Because, as you acquire a new customer, you don't really ask how long is the customer going to stay with me? So that's then the lifetime value of the customer that would then actually kind of play a role. if you only look at the acquisition side, then uh, you know, you might be. Uh, subject to some gaming that happens around it.
[00:08:12] So very much focusing on, segments that are easy to acquire, but have a high churn rate. Yeah. So where I've seen that is agencies, on, on the marketing stack, they're usually very, flaky, easy, easy to sell to, and also easy to leave again.
[00:08:30] Mikkel: Yeah.
[00:08:31] Toni: there might be things around, you know, the gross margin adjustment of it.
[00:08:34] Yeah. Um, so if you have, so gross margin made us gross margin. It feels like an accounting one-on-one here
[00:08:39] Mikkel: Yeah, pretty much.
[00:08:40] Toni: But, uh, you have your revenue line item. then you have a cost of good sold. Mm-hmm. This is all the costs that you need, to spend in order to service that revenue. Mm-hmm.
[00:08:49] and then you have gross margin.
[00:08:51] That's kind of the ratio between those two things. And ideally, your gross margin in, in SaaS should be around 80, 85%. Yeah. Yeah. So many people are 75 and above, and that's okay. Uh, but you know, best in class is 85% these days, which is crazy, but that's what it is. And, um, and basically then people say like, well, uh, if you need that much money in order to, uh, service, uh, service the revenue that you acquire, you kind of need to give the revenue kind of a discount.
[00:09:19] So let's just say you acquire a million dollars in, in revenue in that year or in that. Quarter or whatever, you actually need to adjust it by the gross margin. So you need to take a haircut of 15 or 20 or 25% depending, you know, it's the inverse. Yeah. 75, 80, 80 5%. Um, so you really only acquired, not 1 million, you only acquired 800,000, and now 800,000 needs to be, put into uh, you know, comparison to.
[00:09:44] The money that you spend and so forth, right? Yeah. So you kind of have that additional challenge in there. Um, and then usually what people, and this is really, you know, smart finance people and, and those folks, they basically, okay, cool. Figure it out. So what you do, you take CAC Payback, you uh, adjust it by gross margin and you add lifetime value to it, right?
[00:10:08] So it's basically. gross margin adjusted customer acquisition cost over lifetime value.
[00:10:15] Mikkel: I feel like we need to, if you're watching this on YouTube, we just need that up in writing, like
[00:10:20] Toni: some Bart.
[00:10:22] Mikkel: get to it
[00:10:23] Toni: part,Bart yes.
[00:10:24] Mikkel: Okay. Explain.
[00:10:24] Toni: So, I mean, basically it, it's a little bit of kind of what I just went through, right?
[00:10:28] So the customer acquisition costs. Okay, cool. I know that that's roughly the sales and marketing. Gross margin adjusted is, um, you need to, uh, either give a discount or an additional on top in terms of, you know, the cost that you need to spend in perpetuity to service that revenue.
[00:10:44] Mikkel: Mm-hmm.
[00:10:44] Toni: Um, and then you wanna put that into, you wanna put that into relation to not only the value that you've gotten from.
[00:10:53] Uh, the initial, acquisition, you wanna put it into relation to the lifetime value. Yeah. Which then really includes, also churn as a metric. Yeah. Uh right. Because then you basically said, okay, I acquired a million and I know I'm gonna churn 10%, uh, every year. So then that's gonna be, you know, my lifetime value of that whole thing.
[00:11:13] Yeah. Right. And that ideally should hit around four to five, you know, these days, you know, we'll get into benchmark in a second. Um. But that's, that's what people came up with. So customer acquisition costs cross margin, adjusted over lifetime value, uh, which basically means newly acquired and then divided by your, uh, average churn rate.
[00:11:32] Um, what do you do if you have negative churn?
[00:11:36] Mikkel: Yeah.
[00:11:36] Toni: I don't know. I think you're screwed in a good way. Um, but um, so that's, that's what people came up with and, and, uh, and the reason why people came up with that is because it basically takes all the. Um, or the criticism away, right? It's like, oh, well you're not, you know this and you're not that.
[00:11:53] Yeah. So well known. It's all in this number. Um, and, uh, and obviously finance people love and are having the whole go to market summed up in one number that they can track and goes up and down. Um, and they love it because the VCs love it because, oh wow, I need to know one single number and I can. That's all I need to say no to that, you know, deck here basically.
[00:12:18] And then the allow also like it for another reason because it's all ratioed out. Yeah. Everything is in here. I can take that number and say like, oh, my other 20 decks I got, they have a higher number than you have. Yeah, I'm, you know, at this point I don't even know if higher is better, by the way. I've lost track of that, but, uh, uh, and therefore, uh, no.
[00:12:39] Right. So basically can stack rank across, uh, you know, whole portfolio of companies with this one number.
[00:12:43] Mikkel: number.
[00:12:44] Toni: Yeah. So they love that really much. Um, Who doesn't love it are the people that actually need to deliver that number. So the operators, um,
[00:12:53] Mikkel: you came to me.
[00:12:54] So we need to improve the cut gross margin adjusted LTB ratio. Uh, okay.
[00:13:02] Toni: Mm-hmm.
[00:13:03] Mikkel: So guess I'm doing some ads.
[00:13:05] Toni: So the, yeah. Well, and, and the reason why, it's, why it's pretty useless, uh, in that sense for operators is, um, If you're the CRO and you own the whole thing, or even rev ops and you're trying to kind of, okay, what's the problem? Um, basically when you see this number trending in the wrong direction, what you would need to do is you would need to go on Slack, go into general to add here and say, All of you suck.
[00:13:31] You need to improve.
[00:13:33] Mikkel: Why not at channel? Like, sorry,
[00:13:35] Toni: Yeah, I know. It's because then the, yeah. Uh, so that's what, that, that's what that would be your process
[00:13:42] Mikkel: Yeah.
[00:13:43] Yeah.
[00:13:43] Toni: uh, not root cause analysis, but, you know, uh, corrective action basically. And obviously it's pretty useless, right? So it doesn't really, it doesn't really help you at all.
[00:13:52] Um,
[00:13:52] Mikkel: you haven't even talked about the fact that ltv, if you are early on, that you won't. Necessarily No, it's gonna change over.
[00:13:58] I mean, so you, we can go on forever,
[00:14:01] Toni: I guess. Yeah. Um, so, so those, those are kind of the issues with those one bulk number. Right. And it's really, um, it's really not helpful. and then obviously by the way, I didn't mention this year, but, uh, uh, what, what then CFOs do, and this is a little bit of a site note to kind of, you know, site jab to our, our finance folks listening, uh, they basically kind of take this number and then they, uh, build the whole model.
[00:14:25] To hit this number to exactly, you know, and it's like, oh, I need to churn just a little bit here. ACVs a little bit there. You know this, oh, we don't need so many people. And conversion rate goes a little bit. Oh, I'm at five x. Wonderful. Now we can sell this company. That's easy. Um, so they're basically kind of treating like an input.
[00:14:42] Uh, but it's actually, you know, should be seen as an output actually. Anyway. Um, so those are some of the issues with that. So, uh, obviously, uh, okay, so we shouldn't use that number. So what should we be using?
[00:14:54] Mikkel: Yeah. If you're an operator and you need to operate business.
[00:14:58] Yeah.
[00:14:59] Toni: Um, I can only recommend using, uh, CAC Payback
[00:15:04] Mikkel: Mm,
[00:15:05] Toni: customer acquisition cost, Payback time, and leave it at that.
[00:15:10] Mikkel: You
[00:15:10] Toni: Sure, you know, you should be tracking churn or net retention rate on the side. You should be tracking, you know, finance will be tracking gross margin for you. You don't need to worry about this. Um, all of these things, you should kind of break them apart and what looked them in isolation. Um, but I think the one thing that really is extremely useful is customer acquisition, uh, cost, and the Payback there off, right?
[00:15:33] Yeah. And again, how that works is. How long does it take your organization to recoup the money that you have spent to acquire those customers? Yeah. You know, for those customers then to kind of pay you. Usually this is measured in month and usually it's, um, you know, in a naive kind of way, assumes that uh, customers are.
[00:15:56] Sending you, um, checks monthly for the monthly recurring revenue that they're supposed to pay you. Uh, that's obviously not always true. You might have upfront contracts and so forth, right? So that's different. I
[00:16:08] Mikkel: Dave Klock talked about this while if you have upfront payment, you know, for an annual, then probably your Payback is one. We can debate if it's one or zero, but anyway.
[00:16:16] Toni: Yes. Yeah, yeah. No, exactly. So, and um, uh, so again, in an E way, it basically assumes that it happens monthly. Yeah. But it's obviously not always true. Uh, but that is a great productivity measure. Efficiency measure, really. You spend a million and it takes you 10 months to recoup the million.
[00:16:31] So that's super straightforward, right? Mm-hmm. Um, and uh, obviously you can go into, um, some people add, again, let's make it more complex. Why not? Some people add, uh, cash recoup time.
[00:16:44] Mikkel: Okay. So yeah.
[00:16:45] Toni: which is, which is, uh, basically that means, okay, uh, we closed a million dollars in a r, um, and we have all upfront contract and it takes us on average 60 days to.
[00:16:59] You know, get the cash in. Yeah. Uh, so we are basically recouping the million within 60 days. Yeah. Uh, so that's pretty, that's pretty, you know, powerful because obviously this is what then SAS is trying to optimize for. It's like, okay, so we outlay the cash here Yeah. To acquire you and you're paying all of that stuff back within two months.
[00:17:20] Yeah. So that means I can take the same cash. That I used on you to acquire a new cohort. Right? Yeah. And that obviously makes you cash wise, extremely efficient. Right? And, um, uh, very much, an opposite tool. If you have monthly con, monthly, uh, you know, invoices coming in, it will take you almost a year to actually have that money back and then kind of, you know, re reuse it in order to generate new cash.
[00:17:45] Yeah,
[00:17:45] Mikkel: I think maybe it was, um, Or talking about you go through a cash trough a SaaS business because you do that upfront payment and then the more customers you add in a given quarter, you know it's gonna get even red and reder for that point of time.
[00:18:01] Yeah. Until you recoup the cash. Yeah, no,
[00:18:03] Toni: exactly. So this is kind of, this is a kind of good thing to, uh, to kind of keep in mind, but generally speaking, I think the CAC, Payback, uh, metric is also something that has been, know, there are lots of interesting stats around it and benchmarks, and we might get into this in a second, but generally speaking, right, what you should be moving away from is like, how.
[00:18:23] How big is my CAC or whatever that means because it doesn't actually matter. It matters. How long does it take you to recoup that CAC? That's the the real thing. if you run a, uh, sales marketing function, that is a. 20 million a year in terms of cost. that doesn't tell you anything. Whether or not it's better or worse than something that is a hundred million dollars no.
[00:18:43] Or $2 million. There's no, you know, there's no difference between those, uh, numbers really from a, from an efficiency perspective. The difference comes in once you start talking about, okay, what are they producing and how long does it actually take, uh, to kind of recoup that, right?
[00:18:58] Mikkel: And the
[00:18:58] Toni: idea is if, if you have, CAC, but you actually don't sign up, so many customers.
[00:19:04] It will take you longer and longer and longer to recoup, recouped and money, right? So this is then, you know, less efficient. And, um, I think where some of that stuff, comes in like operationally useful is you want to start, uh, and we talked about this before, but you want to start, uh, breaking out your different areas in the organization, into their own little CAC Payback streams.
[00:19:28] Mikkel: Mm-hmm.
[00:19:28] Toni: Uh, you wanna understand. In a very simple way, efficiency of Europe versus efficiency in the US Yeah. So markets or regions, uh, could be Germany against the UK or whatever. you might also wanna understand your efficiencies between outbound and inbound. Yeah. Or, you know, sales lab. Product lab and so forth, right?
[00:19:52] Then, you know, whatever you're using, you want to kind of understand what is working, what is not working, and you might even wanna understand them in combination, right? And this is where it gets a bit complicated, but at the end of the day, you would then wanna know, okay, outbound in Germany versus outbound in the uk, what is more efficient?
[00:20:08] Yeah. Uh, and this then really is something that I would say is, is a, uh, the core point of being data driven. It's not that, okay, now we know that those numbers are different, but now I basically have a signal that can isolate for me where I need to dig in order to get better. Right? So the next step is an, okay, UK outbound isn't working, apparently.
[00:20:27] Why is that? Right? And you kind of dig into it and might be that you just hide a bunch of new reps that are ramping. Or it might be that, uh, your conversion rate is different, or it might be whatever the, you know, yeah. Whatever might be, uh, you basically kind of, if you're data driven in the sense you always wanna, um, You always want to isolate and isolate and isolate the problem until you get to, oh, this is probably the real issue.
[00:20:50] and then you can start digging into the real world, right? So, uh, you go from the top, okay, CAC Payback, um, heat map, if you will, you know, double click on this red thing. Then, you know, it expands. You understand what's behind that. Yeah. And then you see, oh, it's really the conversion rate. That's the problem here.
[00:21:06] and then you can jump into, okay, why, why is that? And that then leaves you, that then usually brings you, uh, potentially outside of the data realm. Yeah. Into the real world. And you have some conversation with people. Yeah. Now why is that? Why is it not working?
[00:21:19] Mikkel: I think we, we saw a pretty good example. I'm not sure if we can share it, so let's, maybe it gets edited out, but that's fine.
[00:21:24] Um, we ran a QBI for someone and they basically discovered different efficiencies between two markets and they realized they were missing some essential features. In a market that their competitors had. So their win rates were, were lower, right? And, um, they could then start calculating the business case on the back of that.
[00:21:43] And that's, again, if you go deeper and deeper down and then end up with a conversation and actually sit down and talk with a rep who's closing deals. And so why are you not efficient in this market? It's like, well, look at this competitor here. They do these two things, which, you know, is quite essential for this market.
[00:21:58] Yep. Boom.
[00:21:59] Toni: And, and you know, this is, this is then, in this case is where usually the Delta realm stops. Yeah. Right. Uh, you need to add that conversation in order to figure out that. This feature against this competitor, whatever. Um, but really having the ability to have that specific targeted conversation in the first place, that's kind of the key here, right?
[00:22:18] Yeah. Um, and you could obviously argue that all of this all gone and, you know, recorded and transcribed and, you know, yeah. We know everything usually isn't like that. It's like, you know, it gets you so far and then go, go talk to the actual person around it.
[00:22:30] Mikkel: So what is a good CAC Payback then? We've talked a bit about you use, you can use it for resource allocation and optimization in terms of your priorities.
[00:22:38] So if you've started establishing CAC Payback as one of the core metrics to operate the business, what you know, what should you be gunning for?
[00:22:47] Toni: Yeah, it's a good question. So we're now kind of entering the realm of benchmarking.
[00:22:51] Mikkel: Mm-hmm.
[00:22:53] Toni: we recently saw a,
[00:22:55] Mikkel: recently
[00:22:55] Toni: On like a LinkedIn post that got a lot of likes, but also a lot of flack.
[00:22:59] Uh, which was basically if you b2b, your CAC payback should be ax if you b2c, your CAC payback should be Y. Right? the, the reason why that advice was poor and or useless is, um, guess what? The reason, the real reason, if you plot it out, the real reason why those two things are different is that B2C are smaller ticket sizes.
[00:23:20] Mikkel: Mm-hmm.
[00:23:21] Toni: So in order to be efficient, uh, you just don't have, you know, that much time to kind of pay that back. Um, and, uh, if you are, um, if you're selling higher ticket sizes, then you know you can do that differently. So, if you plotted out on an ACV range instead, what you're gonna be seeing is that if you are on the below 1000, uh, Euro range, What you might be shooting for is three to 12 months.
[00:23:46] Mm-hmm. You know, it goes up to 12 months, eight months being the median. Here I'm reading this offer chart from our dear friend, Ray Rike from, uh, rev Square. Um, and it goes up to, um, you know, above a hundred thousand dollars, uh, on the top end. It's 35 month Payback. Yeah. The median is 22 month, uh, CAC Payback.
[00:24:06] The overall median for the whole set here is 16 months, by the way. And now, Question to you. and we can edit this out, of course. Um, why, why do we see an increase from CAC Payback, you know, this is all a ratio, this all should be, you know, why is there difference between, uh, the a C V levels and the CAC Payback that people are comfortable with?
[00:24:32] Mikkel: Well, it takes longer to close a higher ticket size.
[00:24:34] Toni: That has nothing to do with that.
[00:24:36] Mikkel: Damnit, edit it out.
[00:24:39] Toni: Yeah. So the, um, uh, and this is an hypothesis. I discussed it with the Ray once, um, and with Ben Murray actually, the hypothesis is, uh, churn. So what we have seen and pretty consistently so is that the smaller your tickets are, the higher your churn rate will be.
[00:24:58] Mm-hmm. Yeah. Um, and if you are selling a ticket for half a million dollars, your churn rate will be very low. Yeah. which basically then in, in essence means that, uh, the LTV here, Would probably, you know, uh, and, you know, don't wanna complicate the picture, but your ltv, if this was all LTV adjusted, you would probably see them, uh, being fairly similar.
[00:25:22] Mikkel: Mm-hmm.
[00:25:22] Toni: Whatever that number then is. I think it would be three to five or something like that. Um, but that's probably what you would be seeing. And the reason why, then the, um, high ACVs. Uh, would be coming down and, you know, being also very efficient over time is because obviously their churn rate is much lower.
[00:25:39] Yeah. Right. So they, uh, yes, it takes 35 months to recoup the money. Uh, but those companies will stay with you for 10 years anyway. Yeah. So it's fine. And in, and b2c, for example, an annual churn rate of, uh, 50 to 60% is deemed good.
[00:25:58] So that means you have no other choice than to recoup that customer in six months.
[00:26:04] Otherwise, otherwise it's, you know, it's done. Yeah. Uh, and in order for that to, you know, turn a profit, you basically then need to say, okay, really I need to recoup it in the first three months. Mm-hmm. So then I kind have a two x on this thing on top, right?
[00:26:16] Mikkel: right? Yeah.
[00:26:16] Toni: Um, and if you kind of, you know, now we cut in, in the, in the, the, the small range.
[00:26:21] Now it said like two, two times profit. For that customer and the enterprise. You know, it takes you three years to recoup, but they're gonna be with you for 10 years. So you're talking three years, right? It's a two to three range here. Right. And, and generally speaking, obviously what you want to hit is 45 in that number.
[00:26:39] And, um, uh, I guess we need to ask Ray to kind of, you know, figure out that would look like here. But, but that, that fundamentally is probably the reason. Now, another question to you, Mikkel. Oh boy. That one we
[00:26:53] Mikkel: been? Yeah.
[00:26:54] Toni: that one we prepped.
[00:26:55] Mikkel: So we we're gonna keep it in. Yeah, we're gonna keep it in
[00:26:57] Toni: one we prepped. Um, so, uh, let's just say you and your competitor, you have the exact same CAC.
[00:27:06] Payback.
[00:27:06] Mikkel: Mm-hmm.
[00:27:08] Toni: But your CAC is higher than your competitors. Which company is going to win
[00:27:14] Mikkel: The last one That's cheating. So my original answer was the, was the first one. Right? Because like, oh, CAC is lower. That sounds great. Yeah. Um, but so why is that actually, why is it the, the higher CAC?
[00:27:27] Toni: Yeah. So if you have, uh, the same CAC Payback, so let's just say you're both equally efficient.
[00:27:34] Yeah. 12 months. Yes. What it really means if one, if one party has a higher CAC than the other, what it really means, and that's why it's a bit of a tricky question. Uh, what it really means is that one of them has, um, either higher ACV.
[00:27:48] ACV Or, uh, much better conversion rates. Yeah. That's, you know, one of those two.
[00:27:51] That's it. Yeah. , and, um, and the reason why that matters is you can basically, bid more on all your acquisition channels. Yeah. Uh, think about it on a very small scale. If you sell a product for a thousand dollars, the money you can spend on Google to acquire that lead can only be, I don't know, a hundred dollars or something like that.
[00:28:12] I, I don't know the, the numbers right now, uh, because obviously not every lead is gonna close. That means you spend like $300 on an opportunity and then the opportunity still needs to win, and then you're gonna get to a thousand, right? However, if, you are selling a product for 10,000 euros, Suddenly you can, in the same equation, spend maybe $500 per that lead.
[00:28:33] Yeah. Right. and that gives you a lot more, places where you can spend that money and, uh, and where you can out outbid your competitor. Right. Uh, and in some cases you can basically make it prohibitive for that competitor to even enter that marketplace. Right. Yeah. So basically on Google, it's like you always, always outbid.
[00:28:51] You're always second or third or fourth rank. Yeah. and, uh, who's then gonna win? Well, the one that basically can afford the higher CAC. Uh, because of a higher acv, better conversion rates or whatever it might be. that's, um, that's the reason. Yeah.
[00:29:07] Mikkel: It speaks, it speaks sign kind of to the unit economics, right? You can run certain motions.
[00:29:11] Even outbound might be in play depending on ticket sizes and all that stuff where competitors can, so it limits them even. Yeah. okay, so CAC pay Payback is really the way to go. Solved. Solved. Easy, easy. Next metric.
[00:29:25] Toni: metric. If someone, no, but this could be a good one. If someone has a question or a metric that they want have explained or deep dived into, um, they can send an email to.
[00:29:36] Mikkel: to podcast
[00:29:38] Toni: podcast@growblocks.com.
[00:29:39] Mikkel: roblox.com, roblox.com,
[00:29:41] Toni: Um, and uh, you can also send praise there. You can say for example, Mikkel, you look very beautiful.
[00:29:47] Mikkel: Yeah. Thank you. Yeah, totally. And I mean, the only cost of thing we ask in return is, you know, of number one. Great question number two. Please give it a review.
[00:29:58] Toni: Oh yeah, that's right.
[00:29:59] Mikkel: give us a review.
[00:30:00] Toni: Now we're not gonna get any emails to the podcast
[00:30:02] Mikkel: No. They're just gonna review us. Yeah.
[00:30:04] Toni: yeah, that's right. Wonderful.
[00:30:07] Mikkel: Thank you so much, Toni,
[00:30:08] Toni: Thanks Mikkel. Thanks everyone. Bye-Bye.