If you want to operate SaaS effectively - you need to know how metrics are constructed, and when to use them.
Sounds obvious, but many many folks struggle with this, so we walk through two simple frameworks.
Check out the definitive guide to revenue architecture here.
***
Sounds obvious, but many many folks struggle with this, so we walk through two simple frameworks.
- (00:00) - Introduction
- (03:08) - Pain with metrics
- (05:54) - The reality level
- (10:16) - It takes time to move metrics
- (14:58) - Metrics tree
- (18:27) - Higher up, more actions
- (21:07) - Don't just build what VCs want
- (24:17) - The metric pyramid
Check out the definitive guide to revenue architecture here.
***
This episode is brought to you by Growblocks. Finding and fixing problems in your GTM shouldn't take weeks. It should happen instantly.
That's why Growblocks built the first RevOps platform that shows you your entire funnel, split by motions, segments and more - so you can find problems, the root-cause and identify solutions fast, all in the same platform.
***
Connect with us
✉️ Newsletter: revenueletter.substack.com
Creators & Guests
What is The Revenue Formula?
This podcast is about scaling tech startups.
Hosted by Toni Hohlbein & Mikkel Plaehn, 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 Hohlbein from Growblocks. You are listening to the Revenue Formula with Mikkel and Toni.
[00:00:06] In today's episode, we are talking about some of the problems that you might encounter with metrics. and how to make them useful instead. Enjoy!
[00:00:15] It's actually funny. So, uh, both of my dads, so, um, father in law and, you know,
[00:00:26] Mikkel: I was like
[00:00:27] Toni: biological dad, are like really good handymen.
[00:00:31] Mikkel: Yeah. Somehow that didn't transfer.
[00:00:34] Toni: And it's like, whenever there's something that needs to be done in the house and stuff, you know, with them together, because like, sometimes like a project like this,
[00:00:42] extremely useless. I was
[00:00:47] riding the bike, I got like a like hurt there,
[00:00:50] Mikkel: No, I'm not surprised. I'm not surprised. Actually.
[00:00:54] Toni: I have one job. It's like money. Yeah. Making money.
[00:00:58] Mikkel: It's like we talked about. We got a phone booth for our part of the office to contain like the SDRs.
[00:01:04] Toni: Yeah.
[00:01:05] Mikkel: And I basically said, well, the way I can help is I can work from home.
[00:01:09] So I'm not in the way. And then I can dial in just to root for you. That's what I can do. I got to say though, it's a skill that can be learned. It's a skill that can be learned. Um, especially when you really, really need it when something breaks. So I don't have a great story
[00:01:25] Toni: I have my wife.
[00:01:26] Mikkel: Yeah, of course. It's like at our house, when my wife picks up the tools, it's either because I'm hung over, which is never these days, or it's because I've just not gotten around to doing that thing she wanted me to do.
[00:01:39] She's just like, nah, I'm going to do it.
[00:01:41] Toni: do
[00:01:42] Mikkel: And that's either the, that's the final breaking point where I'm like, okay, I'll do it now. I was like, fine, go.
[00:01:50] Toni: I think at home, I only come in handy when there's a spider somewhere.
[00:01:54] Mikkel: Yeah. Same. Yeah. Same.
[00:01:56] Toni: where, that's really my masculinity. Like that's when it shines all the other times. Like, no, you're the boss,
[00:02:03] Mikkel: Watching the car or like, let's say stupid work, stupid work, like cleaning it, like stupid work as well in the garden, which just, you don't have to think, you just have to. Do a lot of grunt work. Then it's like, yeah, let's put,
[00:02:15] Toni: that's a job for
[00:02:16] Mikkel: yeah, that's my job. That's why I host this show. There's, it's not about quality insights.
[00:02:21] It's not well researched. It's just like we hit record and then we see what lands.
[00:02:26] Toni: Yeah, exactly. It's like, people wouldn't know this, but one episode takes like four hours to record. We just we just throwing spaghetti at the wall and then
[00:02:36] Mikkel: no, that did not work. Yeah, no, just to, you know, put your mind at ease, dear listener. A lot of dedication does go into this show and it also does go into our sub stack where we at the moment have been launching a definitive guide to on revenue architecture. It's a four part series.
[00:02:56] So you should definitely go and check it out. If you care about growing the business in a you should go to revenueletter. substack. com and check that out.
[00:03:05] Toni: That was really long.
[00:03:08] Mikkel: Okay. Thank you. So today. What we're going to talk a bit about is actually, uh, one part of this series and something we enjoy spending a lot of time on and it's metrics.
[00:03:20] It is metrics, how to move them when they matter, all the good stuff. And as usual, we want to spend a bit of time on some of the problems with metrics.
[00:03:31] And I think one of the things, personal experience, that I've seen it being used as, it is a tool to whack someone in the organization. It's literally a tool that's like, you know what? I don't like Greg. He's not a great guy. I'm going to find a metric and then I'm just going to bully him really hard with that
[00:03:51] Toni: really hard with that metric.
[00:03:52] Yep. Um, that usually works great for sales. It works great for, uh, every, uh,
[00:03:57] Mikkel: Off boarding.
[00:03:58] Toni: actually it works great for everything. Um, because the logic is the following. It's like, we don't actually want to try and figure out why something isn't working. Uh, we just want to point to this one number and say like, it's behind you suck. And that could be MQLs are behind or, uh, you know, revenue closed is behind or whatever it might be. So it's, um, that's where it's, um, it's really the sledgehammer. And, and the beauty about this is that, uh, there's very little you can. Do about it once you're being kind of almost attacked and cornered with it.
[00:04:34] And that's why it's also being used so often because it's so simple. It's like when you're then trying to explain something, I was like, sorry, we're not interested in these excuses. It's like, well, I'm trying to explain why we are. Yeah. No excuses, please. Thanks. You're behind. Right. Um, so I think this is, this is one super unhelpful way to kind of use metrics.
[00:04:53] Mikkel: I think the other one I've experienced is, uh, it's kind of the false dichotomy.
[00:04:57] It's like, so this metric is bad. So the solution is either one or two. Or nothing else. It's one of those two. And now you need to pick and you're going to, but what about this other thing over here? It's like, nah, not on the table. It's one of these two. That's, that's how we're going to
[00:05:13] Toni: it. Is it other two options? You either fix it or you're fired?
[00:05:16] Mikkel: or you're fired? Sometimes. Sometimes. What
[00:05:18] Toni: What about just a little bit fixing? No.
[00:05:21] Mikkel: So, so I think there's, there's so many problems and I think you boiled it down When we worked through this series, uh, obviously a lot of thought, a lot of research went into it. And I think you boiled it down to a point where it's like, wow, you use a metric that's just totally disconnected from, I don't want to say reality, but from at least what the team can influence.
[00:05:47] And you had this analogy of yelling at the sales team to fix rule of 40 and everyone just going, what?
[00:05:54] Toni: Yeah, so exactly. So especially.
[00:05:57] Yelling things like, Hey, CAC Payback this shit, new SDRs, kind of fix it, um, or rule of 40 or whatever. I mean, so first of all, you can try. It's not going to work out. And number two, you shouldn't be, you shouldn't be yelling at anyone anyway. But so why, why is that something that might still go through your head?
[00:06:14] Well, let's just say you are Mr. CRO, Mr. CFO, Mr. Revenue Operations, or Mrs. of all of these, by the way. I got bashed for
[00:06:21] Mikkel: Yeah, I saw, and you, if, of all people I know, you really try to balance it
[00:06:26] Toni: good with this, usually. Um, anyway, if you're one of those folks, you care about those numbers. You care about CAC Payback, you care about CAC to LTV, you care about, uh, rule of 40, 50, rule of X, whatever it might be.
[00:06:40] and the reason is, uh, that you are, uh, talking to people that really, really care about it and, uh, uh, really important for the business. And those are called investors. And again, you know, this might be VC, PE or public market, whoever, you know, whoever, uh, People that own a stake in your company, they want to know those numbers because those are investment level metrics.
[00:07:04] Yeah. And, um, the thing is, and I feel sometimes, and I'm pigeonholing people now, but CFOs sometimes don't get that next part, which is just by you deciding that we want to improve CAC Payback, that's actually not going to improve CAC Payback. what's going to improve CAC Payback is once you deconstruct what CAC Payback is made of, Uh, basically kind of building like a, like a pyramid of things.
[00:07:32] Right. you basically need to go to the total bottom of that pyramid and that's where you can do stuff. And what is it that you can then do? Well, this is, this is called the reality down there.
[00:07:45] Mikkel: Yeah.
[00:07:46] Toni: That's the, the, the, the reality level. So, you know, CAC Payback, for example, um, would break down into, well, it's CAC.
[00:07:53] And it's, you know, revenue closed. Right. Um, and then CAC breaks down to sales and marketing costs and then breaks down to, um, uh, employees and ad spend and salaries and compensation and tools and what have you. And different roles, obviously, and then the revenue side breaks down into, well, how many opportunities and, uh, you know, ACV and conversion rate and all of that stuff, right?
[00:08:16] And you can, each of these things you can deconstruct even further, like, okay, opportunities, how are they built? Well, this is like, there's some ad spend, there's some leads, there's some calls, there's some SDRs and okay. once you kind of really get it all the way to the bottom, Uh, you might realize, Oh, um, actually, um, these SDRs need to book more meetings.
[00:08:36] And it might, that might be the thing. and then you might be thinking about, okay, what, what in the world could we do for them to book more meetings that might get you to, oh, we could get them maybe to, um, place five more calls a day, whatever. Um, and then, okay, how can we do that? Well, we just roll it out and tell them, make five more calls, whatever it might be.
[00:08:57] Um, and the thing is. Um, it's your job to go from rule of 40, 50 or CAC Payback all the way down to, okay, I think we need to increase the number of calls per day. Um, and, um, if you, if you now yell at the SDRs, hey, CAC Payback should do something about it, they're not going to know what that even means or what they should, obviously everyone knows that this is not, you know, I'm not serious But at the same time,
[00:09:28] Mikkel: it's
[00:09:29] Toni: also kind of important to.
[00:09:31] Make sure that when you then talk to the board. That you're not saying like, Oh, you know, we found the solution. It's, it's, it's five more calls per person per day.
[00:09:42] Mikkel: is really going to hit the phone.
[00:09:43] Toni: And then we fit, then, then we're done. Then we kind of, then CAC Payback is done. Um, you need to level match, obviously when you talk about what, um, but basically kind of number one, realizing that there's a hierarchy to those metrics, that there are different people at different forums that care about those metrics, um, and that they're all connected and the way you're going to change something is not by.
[00:10:05] Taking the, uh, the top end of the pyramid and moving it somewhere else. It's by, you know, going all the way down to the, uh, to the bottom of the pyramid, moving that over time.
[00:10:16] Mikkel: Yeah. I think the other realization that aren't being discussed, at least frequently, I think people inherently know it, but it takes quite a bit of time to move some of those metrics at the top versus at the bottom.
[00:10:29] Yes. Takes quite a bit of time. And I think we discussed what was, I want to say, NRR, that's probably going to be a year plus.
[00:10:35] Toni: plus. So NRR takes like a long time, but even CAC Payback,
[00:10:40] I mean, and, and there's, so the, the fastest we fixed CAC Payback, was in a matter of two quarters.
[00:10:49] and that was like drastic fucking stuff. This was like, we laid off people, moved them around, kind of did all kinds of these things. and that basically kind of brought down CAC Payback really quickly. but many of these plays have been executed, many of these moves have been done. so really you can't play around with the, quote unquote, easier stuff of just, you know, Slashing, uh, employee headcount, you need to do the harder stuff, which is like, okay, actually what these people are doing, kind of need to change that.
[00:11:17] and as that, as that, you know, it's being, first of all, you need to figure out what to do. You need to rule it out. Um, it needs to actually work, um, and it needs to stick over time. Um, and then if you think about it, if you, Go all the way to the bottom here. let's do the, the fricking calls per day.
[00:11:37] Well, now think about the lead time it takes from that change for a really important metric for CAC Payback, which is actual, you know, business close to go up, right? I mean, first of all, you need to roll it out. It's going to take you a week or two to figure it out and then, you know, make a stake. And then those additional five calls over time need to compound to 100 additional calls you made.
[00:12:00] Which might get you to one additional meeting. which at that point, maybe it's an impact of four or five, six weeks from now. And then that meeting, you don't only need, you know, one, you need tens of them. And then a couple of them actually need to close further down the line. And it's like, you're looking like really, you're looking really far out here, right?
[00:12:21] and that's the reason why those, uh, why the, the pyramid moves so slowly. And, and that's also the reason why, many people that want to look for CAC payment improvements, they're trying to take a kind of a cheap shortcut. And then, you know, once they kind of realized, okay, the CAC side is done, let's work on the other side.
[00:12:41] So what they're doing is like, okay, let's go to the, basically the bottom of the, of my funnel, which still is the bottom of the pyramid. So they're not wrong about this, right? Kind of, it's people that are working on that stage and then they're saying, okay. Let's just improve our conversion rates. Um, you know, that's, that's number one.
[00:13:00] And then the first thing is like, well, why are conversion rates like they are? Right. Kind of, that needs to be the first thing. And it's like, it's not that, uh, all the deals that are already in negotiation, we will now have better conversion rate there suddenly because we're changing our behavior. No.
[00:13:15] Uh, usually the reason why something is dropping off is further up in the funnel, even in the sales process, right? Your discovery is off or something else is off. Uh, but in order to do that, you need to teach the people, et cetera, et cetera, et cetera. But in the spreadsheet, it looks like, well, but Toni, win rate is a, is a, is a bottom of the pyramid number, right?
[00:13:31] So if I just change that, then, you know, uh, you know, that will move really quickly. Uh, and the other one is obviously prices. And, and you know what? We had Karl Poyer on the show and he is right. I mean, this is one of the most potent ways to move stuff around and you can do it fairly quickly, um, but it can only do it so often.
[00:13:50] And if you, if you push that too much, then this magic lever that you want to pull then, you know, increasing your ACV, We'll just drop away. And by the way, many, many, many cases when people do that, um, they have usually not actually thought through the additional ripple effects caused by this. For example, your conversion rate might go down.
[00:14:11] For example, a fewer opportunities you're booking or longer sales cycles or whatever. Um, and that might to a degree, if you're messing it up and many people aren't messing it up, by the way. Um, and I think increasing prices is generally a really good idea, but if you don't think through these things, you might negate the positive impact that you had basically, right?
[00:14:30] Um, and again, all of these things need to happen before then eventually your CAC Payback moves before then eventually your CAC to LTV or Rule of Forty or whatever moves.
[00:14:39] Mikkel: And I think it's also like, I keep referring back to Dave Kellogg with this, well, for some of these metrics, it's multi year planning.
[00:14:46] That's, that's how you do it. Um, but I think fundamentally the understanding has to be that you need to get down to the level where it's actionable, um, and where you can actually have the highest leverage on the metric you're trying to move.
[00:14:58] And that's where one of the things we discussed was basically inspired by DuPont.
[00:15:03] They had this, um, I remember, forget what it was called, but a metrics tree.
[00:15:07] Toni: DuPont? What is that?
[00:15:09] Mikkel: it's like a business from the 1920s that still exists, by the way.
[00:15:12] Toni: So they're basically this chemical company,
[00:15:14] Mikkel: yeah, chemical company. And, um, you know, in the twenties they, uh, started deconstructing metrics to actually see how they could influence them. And I think it's kind of what you've done, uh, with a CAC Payback here, actually saying, well, what does it derive from?
[00:15:28] It's revenue and then it's CAC. And usually that's where folks will mentally stop and say, well, let's just cut, cut, cut, cut. Yeah. And then it's like, Oh, thank God. Now the metric is better, but then growth is kind of down, right? So what you want to do is you want to get, it's almost a first principles thing.
[00:15:45] At the end of the day, you want to get down and see then what are all the things contributing to the metric. And with just the MR piece, you have the whole sales velocity equation. You can use its opportunities, sales cycle length, ACV, and a couple of other pieces. All of a sudden you go from having two options.
[00:16:02] That, you know, even saying, yeah, we just need more MR conceptually is hard to, to manage if you're on the floor. Right. But you have more options to then discuss what is the best candidates here and how long will it take for us to then move the needle?
[00:16:16] Toni: Yeah. And what is sometimes a little bit counterintuitive, it's, um, it's a little bit, and a lot of people here that, you know, listening, they're also probably selling, um, And, um, one of the issues when you're selling and you want to sell into an ROI, for example, the further you're away from this ROI number that you want to impact, the less likely, or the more likely it's going to be that the prosperity is going to kind of call BS.
[00:16:39] You know, this typical thing from Gong is like, well, um, You're gonna, uh, improve your AE skills. That's going to improve your ACV and conversion rates. That's going to improve your efficiency and kind of people have seen this, right? But, uh, if you're further away from the actual metric that influences the business, then people are like, ah, it's a, it's a quite a lot of steps I need to believe in for this to work out.
[00:17:00] Right. And I think intuitively for all of us builders, it's kind of the same thing with this, with this pyramid actually, because, um, okay, CAC Payback, uh, I Uh, I can either decrease costs or I can increase revenue. Cool. Let's do that. But the further you go down in the pyramid, the more like, oh, wow, if we actually got those 10 more calls in per day, a lot of other things need to be right for that to actually have an impact.
[00:17:29] Like a lot of other things still need to, uh, you know, you need to kind of, you know, upgrade in a, go up in the pyramid step by step by step by step. And there's so many conversion points. where you could fall off and it's like, ah, it didn't work out. Um, and that's, I think where a lot of us operators that are not forcing themselves to think, uh, in that methodology, um, they're busy, they're busy like, ah, you know, this RevOps dude, he talks about 10 more, 10 more calls a day, you know, come Greg, go, go, go back into your corner.
[00:18:02] Please give me the report. Um, and, um, and this is, I think where we also ourselves need to be like, no, wait a minute. You know, maybe this is not the best play. Let's just kind of start there. It's probably not the best play for you, but there might be another play. Um, and those things might over time, you know, they compound and so forth.
[00:18:21] But as you execute all of those plays, there will impact the numbers that your investors are really looking at.
[00:18:27] Mikkel: I think it's also the, the interesting part here, based on what you're saying is also the, let's say the higher in the clouds, the number, the metric you're trying to move is, the more actions you actually need in the dirt, right?
[00:18:38] Those people executing, because, so let's take the example, we want to improve CAC Payback. We can work on optimizing the cost per lead in marketing, and we can probably improve that, let's say 10%, but that improvement is going to be fairly marginal when you start adding all the costs across the business to that number.
[00:18:56] So you will need a fair set of activities as well. That's, by the way, why we often end up saying, well, it's the processing metrics we want to improve because, you know, everything stays the same, but we just get more out. So, you know, the number improves faster.
[00:19:09] Toni: and yesterday we talked to Jeremy Donovan, uh, from inside partners, um, and he, I mean, this was a, like a funky episode actually. And I think everyone here is probably going to enjoy it a lot, but we started out with rule of 40. Let's just start there. And then he, I mean, he is also a previous professor at NYU.
[00:19:29] So New York, uh, New York university. Um, and, um,
[00:19:34] Mikkel: I mean,
[00:19:35] Toni: it's, there's everything in rule of 40.
[00:19:37] Mikkel: Yeah, yeah, yeah.
[00:19:38] Toni: Everything. The first thing you did was like, let me give you an accounting class. So you have cost of goods sold in there. Uh, you have sales and marketing there. You have R& D in there and you have general admin in there.
[00:19:49] It's like, Oh, thanks. That's the P& L. Thanks. But you have basically everything in there. Right. And when you then think about rule of 40. Well, you know, you could improve that by improving a CAC Payback. You could also improve it by firing R& D or by giving a CFO a pay cut, or by, you know, switching to another hosting vendor.
[00:20:08] It's like you can do a thousand things, right? When you kind of really think about it. and, um, the same applies even more so, well, not more so, but more so than CAC Payback, uh, you know, LTV2 CAC. It's like, Oh, wow. Everything that was part of CAC Payback, also part of, you know, CAC to LTV,
[00:20:27] Mikkel: but also
[00:20:29] Toni: everything on the CS side, also part of this now, right?
[00:20:31] Um, and especially that number, it's even slower moving, even slower moving, you know, and you can, yes, you can break down in cohorts and all that good stuff. But, but if you have annual contracts, those cohorts will look flat. You know, in most cases, maybe some upside, I get it. But rarely you let people out of the contract.
[00:20:52] They will basically kind of doesn't, they won't give you the information you're actually looking for, for the first 12 months. So it's like, yeah. But it's a difficult thing we get when we have this conversation, just like the two of us are doing right now is
[00:21:07] Mikkel: Why are you trying to improve that number in the first place? What are you as a business trying to accomplish and achieve? And obviously for a lot of folks right now is we need more runway because harder to raise cash, so we need to default the live, whatever it is. But you kind of wrote a post not so long ago about, you know, founders build what VCs want.
[00:21:27] You know, there was a time where you built what the customers wanted. And I think that part of the conversation is actually also pretty important to keep in mind. So when you go and assess, then what are the activities and what are the options? You know, yes, you, you might want to influence the metric to become a desirable investment.
[00:21:46] That's part of it, but you also want to build a durable business.
[00:21:49] Toni: No, but and the, and the whole point of that piece was actually that, um, in the, in the last couple of years, we've been doing a lot of cheats in order to get to the right investment numbers, right?
[00:21:59] Which worked out, people bought it. So investors bought it and gave us money. Great. Um, but that, that doesn't stick anymore. Um, reality now is, Go back to where we started, because that's how this thing really works is, you know, build for the customer and see there it's, by the way, also really, really hard.
[00:22:20] It's not easier in any regards, but if you do that, you know what's going to happen. Your investment magic is going to look good. And really, really thinking about, you know, what is the reality? What do we need to do in reality? And then having a clear understanding, if it's in your head or in a tool like Growblocks or somewhere else doesn't matter, but things that you're doing on the ground, how are they trickling up and changing that metric over time and much more importantly, how are they going to improve or not?
[00:22:51] In a, in a predictive manner, I should kind of, okay, you know, I'm sitting, I'm doing these things, how will that impact my CAC Payback? Is it, you kind of have a feeling it's going to go down, but how much actually? Is it like a, is it a biggie, uh, that I'm kind of doing it right now that's going to really pull it down a lot?
[00:23:07] Or by how much is it actually, right? And, and I think this, And this way of thinking about, you know, the, the operating engine that you're running, um, and then trying to improve those overall metrics, which are by the way, super valid. We're not saying that they're irrelevant or something like that. Super core and key.
[00:23:24] Um, but do you need to operationalize them? Do you need to kind of find a way from the clouds to the mud or like a Jacco would say the other way around.
[00:23:33] Mikkel: Yeah.
[00:23:34] Toni: And, uh, and then you need to do the right things for that stuff to move.
[00:23:37] Mikkel: Yeah. So at the end of the day, those metrics at the top of the pyramid, they're a scorecard. They, they are an outcome of your entire organization that sits underneath and all the layers underneath, right?
[00:23:52] So at the end of the day. You know, you, you need to set the pace and the direction of where you want to go as a business, right? And then the metrics to your point will reflect how well you're operating against that. But maybe we should just cover briefly. What is the framework then actually look like?
[00:24:09] We've talked a bit about deconstructing a metric. I think that's all good. But on these, we've thrown out financial metrics and stuff like, what does it look like?
[00:24:17] Toni: go top down. So the investment metrics, uh, you know, good examples is CAC Payback. It's, LTV, so Customer Acquisition Cost to Lifetime Value.
[00:24:28] Um, it's Rule of 40 at the highest end. Those are usually numbers that are, all encompassing. Or trying to cast an extremely wide net over a fairly big chunk of the organization. Um, usually a ratios. Why is ratio good? Well, um, it allows you to compare across companies. That's why you want to have a ratio.
[00:24:52] Um, and, um, and, um, those are then also the numbers that the overall business is being assessed. So the scorecard, it's a little bit, you know, think about the scorecard really literally as. Um, you get to the end of your high school or something like that. And then you get, Hey,
[00:25:09] Mikkel: Here's where you rank.
[00:25:11] Toni: Um, uh, well, the way you got there is by doing a lot of work or not doing a lot of work, uh, and, and this is just the end result, right?
[00:25:20] So really those investment metrics.
[00:25:22] This is really just the end result of a lot of work, right? And, and based on that, then investors will be like, you know, do we like this guy or this company? Yes or no. And then they will kind of make the decision, right? Below that you have something that, uh, we would call financial metrics.
[00:25:39] Uh, and a financial metric, um, could be just CAC, for example, that's a metric and it's made up of real actual budget items, so sales and marketing. And, uh, the good thing about CAC is that it's, it's. Flexible, you can put stuff in there, you can take stuff out, but it's a financial metric. Another financial metric is, uh, how much booked AR did you bring in this month?
[00:26:01] Or this quarter? Or, you know, these kind of topics, those are all financial metrics, right? Um, and you can see here now how investment metrics and financial metrics actually work together.
[00:26:11] Mikkel: Yeah. Um,
[00:26:12] Toni: One, you know, in order to get to CAC Payback, you compare the cost versus what you got in and see that you have CAC Payback, right?
[00:26:19] So really, this is where this hierarchy idea kind of starts kicking in. Like, okay, we're now deconstructing this one number and putting it into two buckets and financial metrics. And I would say there's, you know, there's, there's, for me, there's, a good clarity, what differentiates those different layers, but everything can be debated a little bit, right?
[00:26:40] So just saying about this, right? So you would basically kind of go to the next one, which is financial metrics. And then below that, you will have something that we call go to market metrics. And those are things like, your, maybe your forecast or maybe your pipeline, or maybe.
[00:26:57] Mikkel: I
[00:26:57] Toni: I don't know, your velocity or a couple of other things, your gross retention rate, your net retention rate, those, those things would be under the go to market metrics, which, uh, to a degree flow into the financial metrics, right?
[00:27:11] As you add up, uh, the new business sign plus your upsell and so forth, you kind of get to the overall ARR and that then kind of rolls up into the overall CAC Payback, right?
[00:27:21] Mikkel: It's like the connected tissue between, um, financial and then the, the final layer we're gonna
[00:27:27] Toni: And, and, and all of these things, right. There, there's plenty of details and people can call me on and say, well, but Toni, this thing, I get it.
[00:27:34] Uh, but it's, it's, it's a framework. and then really below that you have the operational stuff, like the, the reality reality, and this is like how many meetings were booked, how many calls were made, um, how many deals didn't make it into, you know, as stage two and became pipeline, how many didn't make it into forecast.
[00:27:52] All of that, you know, conversion rates, ACVs, sales cycles, all of that stuff basically is on the operational layer. and the operational layer really is where you're going to be attaching your, initiatives to. Like that's really where it happens. Even if someone says we need to generate more pipeline.
[00:28:10] Well, what does it actually mean? You're going to, you're going to have more stuff happening on the marketing side or on the outbound side, on the partner side. Um, you're not going to just create more pipeline. You're going to do something else that leads to creating more pipeline, right? And basically the operation layer is the, this is what we do.
[00:28:27] in order to get one level up, right. And then I would argue, and this kind of falls a little bit outside of this uh, framework, but I would argue there's probably even one layer below. It's almost a data layer kind of that's, and you know, it doesn't need to be, you know, part of this necessarily, but this is really where, where does it connect to the CRM and the marketing staff and kind of, this is where.
[00:28:47] Uh, then a conversion rate is being calculated from, right. The, where the ACV is being calculated from. So this kind of, that's really the, the full on, not, not in the mud, but it's basically under underground stuff.
[00:29:01] Mikkel: It's the piping. But, but also I think the, the fundamental thing to understand about the hierarchy is when you go from, let's say investment to financial, the audience also changes, right? So investments will be the VC and, uh, the people doing due diligence and the CFO, CEO, et cetera. And as you move all the way to the bottom, you're going to end up having like a marketing manager or something else, right?
[00:29:22] So not only do you have more metrics at the bottom, but you also have more people involved. So again, when you want to move a metric at the very top, it, you know, the further down it has to go, the more people it involves and the more activities that it can involve, right?
[00:29:36] Toni: And by the way, I want to give a quick shout out to Jacco who's you know, inspired us for this thing. I think he calls these things slightly different and so forth.
[00:29:44] Um, kind of roadblocks this whole thing. And then on top of that, actually, um, I think in a first goal, this seems pretty straightforward.
[00:29:56] Mikkel: Yeah, but it's not.
[00:29:58] Toni: No, but you have your CAC Payback and then this and that, I get that. And ACV, Toni, I get that. Right. but first of all, at the bottom of the pyramid, I think this is already overwhelming complexity that happens right there.
[00:30:10] Um, with all the time delays and if I tweak this, what actually happens, right? Kind of that, uh, either you have it in your head or it's going to become extremely opaque for you. Um, but then the other thing is actually, um, you know, and this is not because we want to make everything more complicated. Um, this is simply how you're going to operate your business in a better way, which is, well, I'm actually not interested in the overall CAC payback number.
[00:30:33] I'm actually interested in CAC Payback here versus that. and whatever, right? You want to segment that stuff out and suddenly you don't have one pyramid. Suddenly you have four pyramids. And those look different by the way. Because in the inbound pyramid you don't have two pyramids. calls for SDRs in there anymore and so forth.
[00:30:52] Right. And it's, um, I think that's what's creating this, um, thing that kind of looks so daunting where people just like, you know what, actually,
[00:31:02] Let's just don't do it. I know theoretically, This is how it should be done, because I listened to Toni and Mikkel now for a really long time, and I read Revenue Architecture from Jacko, and kind of did all of that stuff, but it's so daunting, I'd rather not do it, and, uh, and I believe actually, you know, we as, as, as running businesses here in SaaS, I think the time is kind of over for us to have the luxury to not do it.
[00:31:28] I think this is where we're kind of moving towards. I think we're kind of having a new sophistication stage that we reached, um, where we need to start looking at those
[00:31:36] Mikkel: But I think it's also like the utility to a degree is also knowing Who are you going to talk with? You're going to present a report. What are you going to include? And how do you tie it down to operational metrics? You know, if you're going to talk with, let's say the CEO or CFO, you know, they're going to care about something in the financial level and your job is to tie it down.
[00:31:55] Versus if you talk with the VP marketing CMO, it's going to be different, right? And I think being able to quickly codify What really matters and how do we move some of the metrics as a business through marketing or whatever, whoever you're talking with. That's where it starts getting, uh, really
[00:32:11] Toni: And I think actually on my previous point, um, I don't think it's like a, Oh, wow. Let's get more sophisticated because that's cool. Um, it's, it's not about that actually. It's, um, um, from what we are seeing from our vintage points, talking to Jacco on camera and off camera, talking to Sangram on camera and off camera and kind of all of those guys.
[00:32:33] The, the, the question really is, with this massive shift that has happened and is ongoing, can you actually afford to run and operate a business like SaaS? Without that newer sophistication level. It's a little bit like, Hey, you know, a hundred years ago we, uh, built cars and Ford was a really smart guy and kind of, he had this thing and kind of, that's how we assembled that stuff.
[00:32:58] Well, if you think about how that has happened a hundred years ago and how it's happening now. It's, it's a very different sophistication level. Right. And if today you're building cars like Ford did, you're not, you're not even going to compete. I mean, you're going to be dead on day two, basically. Right. and I think the standard of this is what you need to do in order to be successful in this industry, in this category, I think it's basically been pushing up over the last couple of years.
[00:33:26] Right. So we're actually saying, don't do it for sophistication sake, which many RevOps people like by the way, it's like, oh, you know, we are gonna do it because it's cool. Yeah, no, I think, I think companies need to do it because otherwise you're gonna be dead. Yeah. So I think it's really good that we ended on a high note here,
[00:33:45] Mikkel: Yeah, as usual, as usual. Again, if you haven't seen, read any of the Revenue Series posts we're doing, go to revenueletter. substack. com and check it out. There's more details, visuals, a whole lot of stuff for you to dive into. And, uh, then I hope it's going to be super helpful for you.
[00:34:05] Toni: That's it. Thank you, Mikkel. And thank you everyone.
[00:34:07] Mikkel: Thank you. Bye.