Slides from the presentation I gave at SaaS Metrics Palooza which discuss how VCs and operators view metrics differently by drilling into CAC payback period as an example.

1. 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. 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.”
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3. What Does That Mean?
A. They like the company, but they’re scared by the CAC Payback Period
(CPP). Fix it and call them back. (Face value.)
B. 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.)
C. 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.)
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4. 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
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5. 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
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* List includes both current and former roles

6. 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)^
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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. 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
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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. What Does Good Look Like? CPP Benchmarks
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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
0
10
20
30
40
<$5M $5-10M $10-20M $20-50M $50-100M >$100M
CAC Payback Period, Balderton Universe
50th
75th
Source: Balderton Universe is set of top-
tier European startups who have
submitted data in conjunction with
possible investment

9. What Does Good Look Like, Observations
• So is good 6, 12, or 18 months?
• Depends on
• Definition of good (e.g., 50th or 75th 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 (75th)
• 18 months = good (50th)
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10. 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/
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See also: https://www.opexengine.com/calculating-saas-cac-what-not-to-put-in/

11. 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
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This stuff can get complicated, but investors generally like it simple

12. 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
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13. 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
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Manage this
tension

14. 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
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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. 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
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16. 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!
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There’s nothing like wearing the hat to understand the point of view

17. The Silicon Valley Supply Chain View
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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. 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
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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
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