1 of 19

�You Can’t Fix a CAC Payback Period�An Operator vs. Investor Perspective on SaaS Metrics

Dave Kellogg

Principal, Dave Kellogg Consulting

Executive in Residence, Balderton Capital

Author, Kellblog

Revision 2.3

10/11/22

2 of 19

An Investor Calls and Says the Following

“Kelly, it was so great meeting you and team. We love what you’re doing and really would like to lean into this one, but we just can’t get our head around a few things, like the CAC Payback Period of 22 months, so we’re going to have to lean back at this time.

But remember we love you guys -- so do stay in touch. We’re big fans of what you’re doing and would love to hear about your progress going forward. Let’s get a coffee in a few months.”

Dave Kellogg under Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International

3 of 19

What Does That Mean?

They like the company, but they’re scared by the CAC Payback Period (CPP). Fix it and call them back. (Face value.)

They are lukewarm on the company for several reasons (e.g., e-team, positioning), but the easiest one to blame is CPP. If you fix the CPP, they might well pass again for reasons 2 through 5. (Scapegoat.)

They can’t run away fast enough -- but want to keep the door open in case you somehow pull off a miracle and are successful. So they raise CPP almost randomly as the excuse. (Optionality preservation.)

Dave Kellogg under Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International

4 of 19

The Answer?

I don’t know, and likely neither do you, but …

In this session we will talk about this question at multiple levels

CAC Payback Period (CPP): what it is and what it’s trying to measure
Why I like to say, “you can’t fix a CAC Payback Period.”
The operator vs. investor perspective on SaaS metrics
How to apply the ideas presented to your work life

Dave Kellogg under Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International

5 of 19

My Background Gives Me a Reasonably 360° View

Independent consultant and EIR at Balderton
Former operator

CEO: MarkLogic, Host Analytics (Planful)
CMO: Versant, BusinessObjects, Alation (gig)
GM: Salesforce.com

Independent board director*

Alation, Aster Data, CyberGuru, Granular, Nuxeo, Profisee, Scoro, SMA

Advisor*

Examples: Bluecore, GainSight, Tableau, MongoDB, Pigment, Recorded Future

Angel / investor

Examples: Alation, Cube, Cuein, DataGrail, FloQast, Growblocks, Hex, Saurus, Skyflow

Dave Kellogg under Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International

* List includes both current and former roles

6 of 19

What is CAC Payback Period (CPP)?

Definition: months of subscription gross profit required to pay back the cost of customer acquisition
Formula*

My shortcut formula = (CAC ratio / subscription gross margin) * 12

Equivalent to 1 / (magic number * subscription gross margin)^{^}

Dave Kellogg under Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International

Source https://openviewpartners.com/blog/cac-payback-basics-what-it-is-how-to-calculate-it-and-why-it-matters/

* This formula appears to have a mistake, and should annualize the MRR to ARR. If you spend $2M in a quarter to get a net increase of $83.3K MRR, I think your CAC ratio is 2.0, not 24.0.

^ Provided you calculate magic number on an new-ARR and not on a GM-adjusted basis

7 of 19

What is CPP Trying to Measure?

What people seem to think CPP measures

Go-to-market efficiency

What CPP actually measures

Risk – like all payback period financial metrics
How long until you get your money back

It’s a risk metric, not a return metric
Example

Subscription gross margin: 80%
S&M, prior quarter: $1.00M
New ARR: $1.25M
CPP = 12 months

Looking good, yowzah – let’s invest!

Add churn: 100%

WHOOPS

We get paid back our CAC in a year -- but we never get anything else!
Argues for LTV/CAC, but issues there as well – see my SaaStr talk Churn is Dead, Long Live NRR

Dave Kellogg under Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International

Source: https://www.business-case-analysis.com/payback-period.html

See https://kellblog.com/2016/03/17/cac-payback-period-the-most-misunderstood-saas-metric/

8 of 19

What Does Good Look Like? CPP Benchmarks

Dave Kellogg under Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International

Source: https://www.thesaascfo.com/how-to-calculate-your-overall-cac-payback-period/cac-payback-period-benchmarks/

Source: https://www.meritechcapital.com/benchmarking/comps-table

Source: Balderton Universe is set of top-tier European startups who have submitted data in conjunction with possible investment

9 of 19

What Does Good Look Like, Observations

So is good 6, 12, or 18 months?
Depends on

Definition of good (e.g., 50^th or 75^th percentile)
Comparison universe (e.g., all startups vs. those raising from top-tier VCs)
Business segment (e.g., SMB vs. enterprise)

Also depends on

Growth rate (cost of carrying future capacity)
Company size, though to a lesser extent beyond $50M

In my (enterprise, VC-backed) world, I’d say

6 months = amazing (90th)
12 months = very good (75^th)
18 months = good (50^th)

Dave Kellogg under Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International

10 of 19

The Stunningly Slippery Slope of “Corrections”

Phase shift: how much to shift S&M relative to new ARR

One quarter (standard), average sales cycle length (period or trailing average), or none (common with annual calculations)

ARR type: new ARR or net new ARR (i.e., new ARR less churn ARR)
Customer success: are they included in S&M expense

Depends on what their job is when it comes to new ARR acquisition. Sometimes, they’re COGS. Sometimes, just excluded.

Basis: cash or GAAP

For example, do you un-amortize sales commissions?

Segmentation: blended vs. new logo vs. expansion CPP

Ability to accurately allocate costs, particularly marketing, is limited

Gross margin: subscription or blended

Some public companies may only release blended, so beware public comps

Quality of receivables – is it really payback if it becomes bad debt?

See: https://www.opexengine.com/payback-period-calculations/

Time value of money on the payback

See https://www.thesaascfo.com/cac-payback-period/

Dave Kellogg under Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International

11 of 19

So What Have We Learned Thus Far

We took one ostensibly simple metric
Discovered multiple definitions (and a potential formula error)
Discussed potential confusion about what it actually measures

Efficiency vs. risk vs. return

Observed a wide range of data on good/better/best comparables

Is 6, 12, or 18 months good?

Found a veritable sea of potential “corrections”

That all have a potentially large impact on the calculated value

Dave Kellogg under Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International

This stuff can get complicated, but investors generally like it simple

12 of 19

Why You Can’t Fix a CAC Payback Period

It’s a compound metric
A long payback could be due to

Sales inefficiency
Marketing inefficiency
Inefficient (or sub-scale) service delivery costs (subscription gross margin)
High onboarding costs (if bundled as part of SaaS service)
Underpricing (or competitive price pressure)

Tell me your CPP is 36 months and I barely know where to begin

Tell me your CAC ratio is 1.8 or subscription GM is 60% and I do

Dave Kellogg under Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International

13 of 19

Investor vs. Operator Perspective on Metrics

Investors

Like compound metrics
Like standard metrics
Are making investment decisions
Are in screening mode (1 in 100-200)
Benchmark against top SaaS companies (Ivy League applicants)

Operators

Like atomic metrics
Like “corrected” metrics
Are trying to improve operations
Are in prioritization mode
Benchmark against all SaaS companies (everyone who took the SAT)

Should like everything investors like because they want their money

Dave Kellogg under Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International

Manage this tension

14 of 19

Investors and Compound Metrics

CAC ratio, new-ARR-based

Measures S&M efficiency

CAC ratio, net-new-ARR-based

Measures S&M efficiency as well as retention/churn

CAC ratio, GM-based

Measures S&M efficiency as well as service delivery efficiency (like CPP)

Magic number ( = 1 / CAC ratio)
Rule of 40 score

Measures balance of growth and profit

Dave Kellogg under Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International

All great for screening investments, less great for improving operations

With public companies you are generally forced to use net-new metrics as there is no breakout of new ARR and churn ARR

15 of 19

Operators and Atomic Metrics

These are the individual levers that drive the business

ARR growth 🡪 overall growth
CAC ratio, new-ARR-based 🡪 S&M cost of a $1 of new ARR
Net dollar retention rate 🡪 cohort-based net expansion rate
Subscription GM 🡪 Margin after SaaS service delivery costs
Expansion ARR as % of new ARR 🡪 growth from installed base
Gross ATR churn rate 🡪 dollars renewed of those up for renewal, before expansion
NPS 🡪 customer satisfaction
ARR/FTE 🡪 overall employee productivity
Rule of 40 score 🡪 (above $20-50M) balance of growth and profit

Dave Kellogg under Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International

16 of 19

Think Like a Fish

Dave (operator)

VCs show too much academic elitism in their investment decisions
VCs can be so fad-driven in pursuing new spaces and technologies
VCs shouldn’t care what other VCs are invested in a deal
VCs pattern match too much

Also Dave (angel investor)

The cofounders dropped out of the Stanford CS PhD program?
It’s a new space applying differential privacy to the enterprise?
Roger Ehrenberg and Matt Ocko are in the deal?
It’s like Okta for consumer
You’re holding a piece for me? I’m in!

Dave Kellogg under Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International

There’s nothing like wearing the hat to understand the point of view

17 of 19

The Silicon Valley Supply Chain View

Dave Kellogg under Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International

Universities

Entrepreneurs

VCs

Investment Bankers

Public Markets

Your company is in a supply chain.

Assume people in a box know a lot about the box to their right.

18 of 19

How To Apply These Thoughts

Understand the difference between the operator and investor POV

You are using the same metric in different ways

Track both investor and operator metrics

Feel free to “correct” the latter, but not the former
Drive OKRs off atomic metrics

Develop a deep understanding of the key metrics you track

What are they actually measuring?

Benchmark against appropriate comparison set

Examples: public companies, best-in-class startups, all startups
Cut by size and growth rate where possible
Don’t just cherry-pick the one that makes you feel good

Dave Kellogg under Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International

19 of 19

How To Apply These Thoughts, II

Wear the investor hat

Trade appropriate amounts of SaaS stocks (or slices) for learning purposes
Read earnings releases, earnings call transcripts, and investor decks
Read financial analyst research (have lunch with a banker to get access)

Beware that investors sometime use metrics as excuses

Dig for underlying reasons over a debrief coffee
Ask bankers and advisors for their opinions
Ask friendly, non-considering VCs for their take as well

Understand your company is part of a bigger supply chain

Dave Kellogg under Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International