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Class is in session! Raul and Toni constantly bring up different frameworks and acronyms in the SaaS revenue world. In this episode, they put on their professor hats and explain some of their favorites and go-tos.
In this episode you'll learn about:
- The revenue engine/factory
- The revenue formula
- How compounding works
- CAC Payback and CAC:LTV
In this episode you'll learn about:
- The revenue engine/factory
- The revenue formula
- How compounding works
- CAC Payback and CAC:LTV
Creators & Guests
What is Revenue Brothers?
What happens when a VC and a CEO come together?
– They nerd out about all things revenue. And they don’t always agree.
Raul Porojan of Project A Ventures and Toni Hohlbein of Growblocks are the Super Revenue Brothers. In every episode they dissect and debate current issues in B2B SaaS, and offer solutions on how to solve them
No matter if you’re an early-stage startup or a scaling unicorn – you’ll always learn something new.
[00:00:00]
Introduction
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Raul: It's not just conversion rate.
Raul: It's also that we have less deals. It's also that it takes longer to close them. And it's also that they close for less when they do. Suddenly we're making only 40 percent of revenue that we made last year.
Raul: And companies don't understand that, which is a very big argument, even for protecting your own cojones as a sort of revenue leader is, become literate in these numbers, right?
Raul: Welcome everyone classes in session. Today at the Revenue Brothers, we're gonna do a little bit of education, something I'm really, really keen on doing. and we're going to do an episode that I hope is going to be sort of, uh, and something we're going to reference back to. Toni, we're gonna do some education today.
Raul: What's, what's in class today?
Toni: So many people might not know this, but my mom is a teacher or retired elementary school teacher. So maybe I have some of that still in my genes. So when he kind of said classes and sessions, I was kind of chuckling a little bit. What we're going to talk about today, I would say a couple of concepts that you and I frequently refer to.
Toni: But I've never defined, I've never explained. And we currently, you and I [00:01:00] currently assume that probably you and I are talking about the same thing. So that's a good thing. But we just wanted to make sure that in everyone else's heads, those things are also pretty much aligned and maybe they can follow along, right?
Toni: So this is why. Uh, that's why this might be kind of a reference episode, almost like a glossary kind of piece where people kind of, wait a minute, kind of, what is that actually kind of, what's the definition of this one actually again? And we want to go through four main chapters or topics or, you know, items that we want to explain.
Toni: So one thing is the revenue engine or the revenue factory. We keep talking about this, you know, here and there, and people maybe don't actually get what this means. Number two, the revenue formula or the bowtie, , or the full funnel. There are kind of different ways to refer to this. Number three, the compounding effect of improvements in that funnel, how that actually works and why it compounds.
Toni: And then lastly, some efficiency numbers, CAC Payback and CAC to [00:02:00] CLTV. I'm sure everyone here has heard those words before, and they have kind of a concept in their head already when we say these things. We just wanted to clean it up today.
What's the revenue engine/factory?
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Toni: But let's jump right in there Roel. Revenue engine and revenue factory.
Toni: What's that?
Raul: Yeah. I prefer the term revenue engine actually. For a specific reason, by the way, because it's something that you can engineer and you can, you can sort of come at it with a, with an engineering mindset, but at the end of the day, a revenue engine is the machine that produces revenue, including an understanding kind of all the different levers.
Raul: And all the different inputs that, that lead to you producing a revenue at the end of the day. And this very practically, uh, could be kind of, I mean, it's, it's sometimes hard to imagine it only visually, but it's kind of, okay, what kind of activities are you doing? And what's kind of the conveyor belt that is, is used to, produce revenue?
Raul: That is if you want very funnel [00:03:00] centric. I do think for a revenue engine, there's a lot more that goes into that though. And so for me, it's hard to really make a distinction where it stops and where it ends, because I would even say a revenue engine kind of also consists of the internal processes that you have and what is being made, what is being done to, to produce revenue.
Raul: And so as an example, And we've worked on many revenue engines at Project A before, and we've sort of introduced revenue engines into companies. To me, part of a revenue engine is also the meetings internally. It's also the processes, and it's also the compensation, for the salespeople.
Raul: It's also the CRM. It's kind of like the different levers that you can, improve or kind of make worse to, include revenue, , And would have to boil it down to only four aspects, and it's a very, it's again, a very metaphysical concept. Maybe you can make it more graspable, but to me, four parts of revenue engine, people, process, data, and tech.
Raul: Those are the four parts that you kind of have and you can work on.
Toni: so I totally agree with all of that stuff. The reason why I started preferring factory [00:04:00] is actually An engine sometimes feels a little bit like a black box and everything is kind of, you know, cylinders in there and moving parts. , when you walk into a factory, what do you see?
Toni: You see many different factory lanes, not just one. You see people manning different, you know, work benches, working on these things. You see parts moving throughout the factory. Um, you see automations and robot arms and machines kind of helping you assemble that. whatever you're assembling. And, that for me is basically the sales marketing and CS floor, honestly.
Toni: And the things that are being assembled is the customer journey. It sounds a bit weird because in a Toyota plant, you won't have. Parts just flying off the conveyor belt all the time, like you have in a funnel. But that's kind of how I think about it. So in the top end, you have your leads coming in, they become opportunities, they become customers and happy customers and so forth.
Toni: And you have different teams at different parts of the journey working on that stuff. And you know, Part of, part of a successful team is not only what they're doing and how they're doing it, [00:05:00] but are they motivated? Are they incentivized? Kind of to, to your point, are they coordinating in the right way of the meetings?
Toni: And also kind of the robot arms. I think this is starting to be more than just your CRM, your HubSpot and so forth. It's starting to be way more like AI, kind of the, what I'm actually seeing right now, and at least in my head is all of that. revolution that happened, in, I dunno, 20, 30 years ago with all the automations in factories, kind of think about all of those yet they're always yellow robot arms, assembling stuff.
Toni: What happened there is actually now happening with AI, right? Kind of that is starting to kind of play a bigger and bigger role and so forth. And ultimately, this factory should churn out revenue for you. And it needs to do that profitably, or at least efficiently. And if it doesn't, then, you know, you need to shut down the factory.
Toni: So that's why I kind of like the revenue factory set up, here a little bit better, but ultimately it's everything that's going on in sales, marketing and CS and all of that, obviously need to work together really nicely. Your laughing Raul. Was [00:06:00] there, uh, was there something that kind of, uh,
Raul: Yeah, it's a completely off topic with the, with the robot arms thing. So one of the wonderful parts of my last job at Project A was that I saw 80 different businesses, man, over, I don't know, seven years. And, one of them was, , actually a robotics company, Micropsy. And they worked with robots, basically, and they gave them kind of hand eye coordination.
Raul: So it's AI for industrial robots. And the funny thing is when you say the yellow thing, is , there's sort of like, uh, four or five different producers of the big robot arms that all do kind of the same thing. And, they all have, they're very distinct, mostly by the color. So it's funny, like if you, one is the yellow brand, one is the green brand.
Raul: So for example, the yellow one we're referring to is called Fanuc, and the green brand is called KUKA. And then there's also a red one, which is, ABV. A b. B is probably the most famous one. There's kind of gray, red, and then there's also blue one, which is universal robots, which is the smaller ones and the ones that are used for whatever other purposes.
Raul: So completely off topic, but the funny thing is, and it made me realize this only now, when [00:07:00] you said it, like every single hanuk I've ever seen or a picture of that was yellow, every single cka was green. And that's the main way they do. They differentiate by each other.
Toni: So let's see if we leave that intersection in here, but, that, yeah,
What's the revenue formula?
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Toni: let's do the revenue formula and bowtie next. Should maybe I go first and then you kind of follow up?
Raul: yeah, what's the revenue
Toni: Uh, Main, main point here, this is a competing podcast, so obviously kind of the Revenue Formula is another podcast show that I kind of co host with someone here at Growblocks, but ultimately kind of why did we choose that name?
Toni: So this is actually something that we felt we came up with 10 years ago. But everyone else also came up with it at the same time. So it's kind of, we don't own this, but basically the idea that, you know, in the simplest form, opportunities, you know, times conversion rate, times average deal value, times Times for sales cycle basically equals revenue and when you then look at this formula and [00:08:00] you want to optimize for you know, everything For the revenue piece, you basically look at this like, okay, how can we increase each of these items?
Toni: And for us back then we were like, you know, I don't know naive or not I'm, not sure we said like hey, we can't influence the conversion. We can't influence the deal size We can't influence the sales cycle you can by the way, but we did kind of didn't really want to. So we've started focusing to, you know, get opportunities up all the time.
Toni: Opportunities was the thing, you know, increase opportunities. That's what we need to do. And if we increase opportunities, we will increase revenue coming out, but you can actually also improve any of the other inputs here to get more revenue out. and that is the revenue formula from opportunity to close one.
Toni: What the bow tie actually is, is just taking the same logic and expanding that across, Everything from traffic to churn. So you have a visit on your website. There's a conversion rate in a very tiny time delay. that leads for them to go from, you know, being a website visitor to being a lead. Then there's another conversion rate and longer time delay to [00:09:00] go from lead to MQL.
Toni: And then there's another conversion rate and even longer time delay to go from MQL to OP or SQL, whatever you have. And only in the last step from opportunity to close. You add the ACV basically on top, right? And then it continues. It goes from, you know, close one to onboarding from, you know, this to that and so forth.
Toni: So basically it's a way to systemize and talk about in numbers about the process that you use in order to get from, you know, top end of the funnel to revenue across sales, marketing, and CS. Maybe you can clean it up a little bit, Raul.
Raul: No disagreement there. I think this is a and funnily enough for whatever reason It is something that many people come up with at the same time and that many people started to use and use actually to a lot of success the essence of it is As you said, is that, and I think many people still don't grasp it as obvious as I make it sound now, you can improve results by increasing or decreasing or [00:10:00] improving any of those four numbers.
Raul: And I think this is so funny because like when you talk to marketeers, they're like, yeah, obviously, whatever, like we can increase if we increase this one conversion rate by 10%, the whole funnel is improved by 10%, but it's really the same thing here, right? So you can theoretically make more money.
Raul: even if your conversion rate drops, because this is what everyone always focuses on, if your sales cycles increase, sorry, decrease by more amounts. So very practically, you could make more money if your conversion rate goes down 5%, as long as your sales cycle goes down 20 percent for whatever reason, or maybe you're able to handle 10 percent more deals at the same time.
Raul: And I think the one number that really is important here to understand as well, is It's the same four numbers, but just formulated around is the sales velocity and sales velocity. What I like about that number is I wouldn't always use it only as Northstar, but the nice thing about Sales Velocity is, it's basically one of these numbers divided by all the other three.
Raul: So it's the same four numbers that you're [00:11:00] toying with. It's that again, you can increase or improve sales velocity by working on any of those four numbers. And it includes the three numbers. The element of time, because this is what really matters in a startup, right? This also ties into something we're going to talk about later, which is CAC Payback and all these kinds of things, but what matters is not the absolute number, and this is maybe makes it more graspable as to why, like, really you can improve any of those four numbers.
Raul: It doesn't matter how high your conversion rate is if your sales cycle is too low, right? Because if it takes you seven years and by that time you've run out of money seven times, it doesn't matter how high your conversion rate is. It doesn't matter if you push through 100 percent of those leads. So if you go to the extremes, it's rather easy to understand, right?
Raul: And I, again, to make it really graspable, I think a lot of companies would really benefit in thinking maybe in something like sales velocity terms, at least at the leadership level.
Toni: think sales velocity is sometimes a very misunderstood concept because people think it's sales cycle, but it's not, it's actually its own term. And you kind of explained it right there. I think the, you know, [00:12:00] sometimes ways to bring this logic home is, you know, your CEO might say like, Hey, let's increase ACVs by 10%.
Toni: That's kind of pricing. Let's just jack it up. And then the conversation in the room actually needs to be, okay, But how much do we think will sales cycles push out because that always happens, you know, if ACV goes up sales cycle will push out And by how much might the conversion rate drop because competitive pressure and so forth and maybe maybe yes getting higher ACVs You will be able to achieve that but will that mean more revenue and the answer sometimes is simply no a similar way that i've seen so many times and i'm just kind of tearing my hair out over this it's like Someone says oh benchmark is we 20 close rate.
Toni: That's benchmark. We need to kind of achieve that or 25, so what do they do? It's like let's just apply more scrutiny on the opportunities we even let into the pipeline, let into the funnel, basically. And see there, we're hitting our 20, 25 percent conversion rate. Hi5, AdBenchmark, everyone kind [00:13:00] of, gets a promotion, but actually you just made less money because you basically kind of, you also kicked out some deals that, you know, had a lower propensity to close, but maybe still would have.
Toni: And this is where this revenue formula or this bowtie really comes in really nicely. And I think the angle that's missing here that, we are working on winning by designers working on maybe we're even working on it together. let's see about that announcement but is kind of adding cost to that as well, right because Maybe it is a good thing to increase the ACV and, you know, have a little bit less revenue coming out of that.
Toni: If that decreases the amount of money to spend in order to, you know, run the cycle, maybe a few opportunities, fewer reps and so forth. So there's a lot of math actually going on, that is sometimes difficult to grasp. Right. But ultimately this is what we're talking about with revenue formula and bowtie.
Raul: side note here, super advanced, not actionable at all, but I think highly fascinating to me. I think three months out of university, one of the first things I tried was actually kind of trying to find like equations [00:14:00] for this and putting a graphic under this, and trying to find an equation for exactly that sweet spot.
Raul: Because, so my logic was there must be a sweet spot. As to how much it costs compared to, what you would get out of the funnel. And if you want, that's kind of an optimum that you can have is two graphs meeting, right? So super nerdy stuff. I didn't get there, but this ties very much into sort of this CAC Payback thing we're going to talk about later on as well, which is, more is not always better.
Raul: And I think this is something that you can take out of the revenue formula. If you approach these kinds of toying with these numbers and trying to improve numbers, more is not always better. And this also goes into the next topic, which is the compounding effects of improvements, right? So how do you actually improve in, in sort of commercial leadership?
Toni: Yes. So now, now that you kind of, now that we've explained the bowtie, right? And really the bowtie really is, lots of different steps in your funnel, , connected by conversion rates, time delays, et cetera. The thing now is math wise, if you were to write this out as a, sounds [00:15:00] so nerdy, but as a formula, right?
Toni: It's really, and it's simple actually, kind of, uh, you know, leads times conversion rate. That would give you, I don't know your MQLs, right? And then MQLs times conversion rate that will give you your SQLs and so forth. You can actually kind of skip most of those, volume steps in between and just have those conversion rates there.
Toni: And basically what's going to happen if you were to improve one of those conversion rates, that improvement would carry down the whole funnel, would carry throughout the whole funnel, basically. Where it becomes really interesting is if you're able to apply that in two spots, right?
Toni: Let's just say you are able to improve your conversion rate from lead to MQL and you're able to improve your conversion rate from opportunity to close one. And now the math goes just kind of, you know, showcase this for people. If you're able to find seven different spots that are obviously hanging together, but seven [00:16:00] different spots in your funnel.
Toni: to improve them by 10%. So meaning if you have a 10 percent conversion rate somewhere and you get it to 11%, so it's a one point, but it's a 10 percent improvement. You actually overall would double the output of your funnel, right? You find seven pieces in your funnel that you improve by 10%. You get to a hundred percent more output.
Toni: For, you know, that's how the, the, the magic goes, the same cost base actually, right? And understanding that 7 times 10 is actually 100 and not 70, that's kind of, this is, this is where the compounding piece actually kind of makes a big difference. And where I think a lot of people are, uh, you know, swatting this away.
Toni: Not realizing basically exponentiality, not realizing that's plays a role here and then not understanding how much money they could actually kind of improve or how much money they could save and how much improvement they could find and one last example here Doesn't really fit into [00:17:00] the compounding thing as well, but formula one kind of this is one of my favorite examples, right?
Toni: I think 50 60 years ago is when they started. They had a pit stop that was like one minute. Took them one minute to kind of, you know, change the tires and do all of that stuff. I mean, last time I checked and I haven't checked in a while, but they're down to like one and a half seconds or something like that.
Raul: Crazy
Toni: It's, it's absolutely insane. It's absolutely insane. Um, and, think about that improvement in your funnel is 60 X or in this case, maybe it's a 45 X improvement. in terms of efficiency. That's where the journey can go if you're really doubling down on those improvements.
Raul: by the way, this is the same rule So find seven improvements worth 10 percent goes the other way so you can also find 10 percent 10 improvements worth 7 percent It's kind of the the 7 10 rule, which maybe you learned like in financial literacy at school or something
Toni: no, I actually didn't. That's interesting. But the, the, there, there's one other thing, which is the dark side of [00:18:00] SaaS. Those compounding effects can also go the other way. And that's basically what we've seen in the last two years is, conversion rates are down, opportunities are down, ACVs are down, sales cycles are pushing out, and suddenly your whole go to market is fucked.
Toni: Um, because basically kind of that's what happened there, right? So be aware, you know, treat with caution. I want to say, but this can be extremely powerful if applied in the right way And can be extremely devastating if it happens to you in the wrong way.
Raul: and that's exactly what I was gonna jump into, right? so it goes both ways and I think a lot of companies are hurt by not understanding this very much and being funnily enough right now, maybe a lot of CROs are being actually treated quite unfairly because Maybe even the CEOs and CFOs are not realizing this are looking at the numbers and they're like Tony what the hell is happening?
Raul: We're not making any money anymore how can this be? It can't just be because conversion rate went down 17%. How can we lose, how can we half our business when conversion rate just went down 17%, [00:19:00] right? And the explanation is exactly what we just talked about. Well, it's not just conversion rate.
Raul: It's also that we have less deals. It's also that it takes longer to close them. And it's also that they close for less when they do. It's also that people don't renew for as long as they did, or they upsell less and cross sell less. You put all that together. Suddenly we're making only 40 percent of revenue that we made last year.
Raul: And companies don't understand that, which is an, again, a very big argument, even for protecting your own cojones as a sort of revenue leader is, become literate in these numbers, right? And then you can showcase it. And maybe that will open up a discussion where you're like, okay, you didn't just Icons Twenty percent below end money.
Raul: Here's a screen shot of earlier across the page, in front of it, So you can see it's like, 10, let me just double check here,
Toni: It's actually funny kind of you're kind of setting up a small plug that I just want to kind of do here. Was discussing this yesterday with my cpo co founder. Basically what we're doing is kind of making all of this Math accessible for people that don't have a math phd You Kind of [00:20:00] using Growblocks, right?
Toni: Kind of having all of that stuff there, understanding and pulling it up, making it easier to consume and, you know, for commercially just easier to access and so forth. Just wanted to throw this out there, that this is actually, you know, part of almost the, you know, core mission that we are on that, that stuff shouldn't be locked away in some expertise brain.
Toni: It should be accessible for everyone.
Raul: Yeah, and I think, so to my understanding, which is one of the reasons that I love the idea of Growblocks so much No, no plug for my side because no, no, uh, involvement there it is basically an operating system of a revenue engine Right, so it basically showcases you all these effects and, and how that revenue is being produced So if you're really interested in, in digging into that and if you're at that sophistication level Then this can really be what the doctor ordered, right?
Toni: Yeah. Yeah.
Raul: I think it's a classic that almost every CRO underestimates both ways. Because it's, it's the one thing that's not intuitive, right? Or that's not intuitively, well, it's intuitive [00:21:00] that obviously it's good to increase your conversion rate.
Raul: Yeah, but it's not intuitive in how strong it can be. And people are always surprised by how these things happen and they always overestimate how much is needed. In every single aspect to really double your revenue or to half it, right? So I think this is be something if there is one takeaway from this that's really actionable is do not Underestimate those little 10 percent here 5 percent there and again 10 percent I think I it has to be spelled out It doesn't mean you go from 10 to 20 percent conversion rate It means you go from 10 to 11 And I think this is really what people need to understand like a 10 percent improvement in conversion rate is from 10 to 11 not from 10 to 20
Defining CAC Payback and CAC to CLTV
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Toni: Let's do the last one CAC Payback and CAC to CLTV
Raul: You go. This is, this is yours, Toni. You love that one, obviously. I do too, but I think this is your child.
Toni: so CAC means customer acquisition cost and Mostly with some changes It is sales and marketing cost that you have right kind of all the salaries all the ad spend tooling commissions all of that [00:22:00] stuff and the idea here is You This metric is trying to say how long does it take for the investment that you made in sales and marketing in a given quarter?
Toni: For that investment to be recouped by the money or the MRR the ARR the customers that you signed Using those resources, right? So a very simple example if you spend a million dollars in a quarter in order to Acquire, let's just say a million dollars in ARR, that's going to take you, you know, according to this logic, 12 months to recoup that.
Toni: Right? Yes, your invoicing might be there, Finn, and let's not talk about that stuff, but in that logic, it would take you 12 months, would take you 12 installments of 86, 000, you know, dollars per month. Okay. to kind of recoup the original million that you kind of spent. If that number were different and it was, um, you know, you spend [00:23:00] 2 million to acquire 1 million, that now would actually look like more like 24 months of time for that to be recouped, right?
Toni: Meaning all of these customers need to renew one more year to even break even. Right. Kind of, that's, that's kind of the problem here. And the reason why I like CAC Payback a lot is not. You know, just having CAC Payback on the high level, that's kind of boring. What you want to do is you want to use it broken down into different segments.
Toni: You want to have a segmented CAC Payback. You want to understand, what's my CAC Payback for a specific region or what's my CAC Payback for a specific motion. And once you know those things, what you can do with it, you can make investment decisions, kind of moving money from an inefficient region to a more efficient region, for example, right?
Toni: And ultimately CAC Payback for the sales and marketing side only. So this is not including CS. We're going to get to this in a second. Basically that number is the end all be all for how efficient is your [00:24:00] revenue factory up until that point? You can mess around with conversion rates. You can mess around with everything in between, and ideally it should, you know, improve, but the ultimate measure is how efficient is this thing, right?
Toni: Which basically kind of goes back to this, Hey, there, there needs to be an optima from like, you know, processing and costs. You kind of pay for this, CAC Payback encapsulates all of those things. So if you're able to kind of get that down, that's fantastic. So that's a CAC Payback sign. And now, every time I talk about CAC Payback, people are like, Oh, Toni, but you know, it's not including the CS side.
Toni: And that's right. So that's why we're saying CAC Payback is one piece. The other one is CAC to CLTV basically saying, okay, you have a, you know, you have an investment to acquire a specific set of customers. And now what you want to know is not how long does it take to break even you want to know how profitable was that investment?
Toni: What's the return of investment of that? You know, 1 million that you spend in sales and marketing. And that's then, you know, basically kind of put into [00:25:00] relation to your customer lifetime value, CLTV. And let's just say you have, an average customer spends four years with you. So I'm simplifying this down now.
Toni: So you spend 1 million, in order to acquire 1 million ARR with customers, and they spend four years with you, meaning you will end up at a one to four ratio, which is good. You want to be between, you don't want to be between three and five years, with that specific ratio. And as you get that ratio up, that now means that both, you probably might be getting more efficient on the CAC Payback side, but you're probably also improving your gross churn, your net retention, all of these other wonderful things, that can be defined into this metric.
Raul: that's what I like about that too as well, by the way. So that it does include churn. I always wondered about this and I know that intuitively people say that it's not in there, but I do think churn also belongs into CAC Payback. Because like to, to be a realistic number, it should be in there.
Raul: Like, otherwise it's not really actionable. It's, it's sort of a fantasy [00:26:00] number. However, I do understand the value of sort of having this model of what is actually a good customer and what are we striving for. And, how long would that even be? And how long would we have to sign them for to make this an attractive business?
Raul: So I'm a bit torn between that one. But at least for CAC to LTV, like that's the point of that is that it includes churn and it includes the actual reality of things, right? So I think I'm fine
Toni: If you're a math nerdy, I mean, literally. That's the difference between those two numbers. Sure. Because the way you get to customer lifetime value is, you divide it by churn, right? Kind of, that's, that's how you get there. So it's, it, that's basically the difference between the two.
Toni: Sorry, being, best servicer here, on that end.
Raul: no, I think, and, and the beautiful part I got about this. As with the revenue formula, as to some extent with the revenue engine, and maybe even with the compounding effect, is that you have many levers, how you can influence this. It is two numbers divided by each other. So the outcome can be on a very simple level increased by either increasing [00:27:00] the number at the top of the line or the number, decreasing the number below the line.
Raul: And, this is the beauty of things, right? And again, As simple as it is in reality, not everyone's thinking about that. And even today, revenue leaders are almost always thinking 90 percent of the time about funnel and maybe 10 percent of the time, unless they're thinking about other things too, about churn.
Raul: And, I'm not saying it should be 50 50 because maybe also the effort taken, to, to produce one outcome is not the same, but, it's always good to have the top of your mind. What do we do with those customers once we have them in there and how to make sure they stay for a long time because it's being repeated all over again.
Raul: Making sure that someone renews after one year and stays for five is much more revenue and a much bigger effect on CAC2LTV than signing them up for six to 12 months. And I do think, especially in software as a service, it's one of the things that people don't think about enough and we're not going to go into that too deep.
Raul: It does tie very strongly into compensation. So when you're [00:28:00] really thinking about kind of the cashflow of your business and what compensation you can afford, that's too technical, but it is something that you tie in there.
Toni: no, and I was about to go there actually. And, you know, at first I was like, Hey, you know, how does that look on the CRO level? But on the, just think about on the AE level, you know, let's just say you have two AEs and, you know, over their first year, they're both generate 1 million ARR and they both get the same commission.
Toni: But, you know, one of the AEs ARR is actually has 110, 150 percent net retention. Yeah. And the other ones has maybe 30 percent churn, net churn. Why would you pay them the same thing? That doesn't make any sense actually. And yes, there are some caveats and how to achieve that. It's difficult. I totally get it, but, that's almost all you need to think about.
Toni: If sometimes when you take a problem down to the individual, Suddenly it's so much easier to solve than when it's up there in the clouds, right? But ultimately right we kind of talked about the revenue engine slash factory We talked about the revenue formula slash the bowtie We talked about the compounding effect throughout and then we talked about the you know, [00:29:00] almost the ultimate Efficiency metrics kind of governing the whole thing.
Toni: And yeah, if there's one aha moment here for folks, I think it needs to be There's so many different ways you can tweak those numbers with that methodology in mind of the of the revenue engine the bowtie and so forth and even small gains that it can make stick that can compound to a lot of money for you over the long run So those are really the two main things and otherwise it really was a hey Let's have an explanation for those four different concepts here, kind of episode.
Raul: And I think that's really what should be the message. Don't be overwhelmed, but see the opportunity in things.
Toni: So if you like this and don't want to miss out on more content, hit the subscribe, follow or like or whatever button. And otherwise, uh, thank you Raul and thank you everyone else for listening.
Raul: Thanks, Toni. Thanks everyone.
Toni: Bye bye.