How Pavilion Creates Over $10M ARR Through Efficient Growth & Extreme GTM Alignment

I'm Sam Jacobs and we're really going to be talking about uh this shift that I've been writing about on social media from growth at any cost to profitable efficient growth and what the tenants of profitable efficient growth are and how to achieve it for your business and a couple quick uh steps and hints because a lot of what we're doing and talking about we try to implement and embody within Pavilion the company in addition to Pavilion the community so raise your hand if you're familiar with pavilion the

community all right so Pavilion is uh the world's uh largest goto Market Community for high growth Executives in the world it's 10,000 members all over the world it's a paid membership organization so people pay to be members companies pay to be members and we provide education we provide peer-based support we provide incredible inperson experiences not uh dis similar from this and hopefully we help people accelerate their careers by giving them the tools they need need to be best-in-class go to

market operators so that's what that's what the business of Pavilion provides back to its members it's a recurring Revenue business it's not a software business but it is a recurring Revenue business paid for through primarily through membership dues and um you know again I've been talking my name is Sam Jacobs I'm the CEO and we've been in the shift from a world where investors were driving a lot of the value for organizations to a world where now customers are driving value because uh growth is driven uh for at least for us

through profit and so our journey it should say uh investor value on the left um but over the last couple of years particularly in 2020 21 uh you know investors were driving a lot of the value creation for for Enterprises and that's because when Capital was not constrained when there was free money it meant that people could invest in businesses and growth at any cost and that's where this phrase comes from growth at any cost was worth something and the reason for that is because of

not exclusively but because of interest rates because if you understand about the net present value and time value of money you understand that a dollar at 0% interest rates in 20 years is worth the same as a dollar today and as interest rates go up that Dynamic shifts it's not the only thing driving the compression of multiples in public technology companies and in private technology companies but it's part of it and we're not immune from that either uh I didn't think when I started this business that it would be a venture-backed business but it turned out three years ago that a

company called elephant Ventures got in touch with me and they wanted to invest $25 million and so even though uh you know I lecture and write about go to market alignment online uh we immediately fell victim to all of the mistakes that we comment uh other people embody and employ so we were growing very very quickly through last year when uh when the tech recession ultimately hit us and uh we're not immune right so since the uh since the summer of 2020 run growth rate of public SAS businesses

have been cut in half uh the cost of acquiring and this I just actually did a webinar today uh this is this is the mean right so on on average uh there's been a dramatic increase in the cost of sales and marketing spent to acquire one new dollar of annual recurring Revenue uh if you take out some of the best performing companies from the cohort that did this analysis which includes companies with Incredible net revenue retention like um like snowflake uh it's actually there's certain public

companies that are spending five and $6 doar in sales and marketing investment to acquire $1 of new ARR so we're in a dramatically different environment and the cost of getting somebody's attention and converting them to a customer has conservatively doubled over the last couple of years if not tripled or grown forx while net revenue retention has also declined and uh that's particularly problematic because all of these fundamental assumptions are assumptions

that underpin the idea from a couple of years ago that uh SAS businesses and software businesses are worth 10 times Revenue right and we used to hear that that was a conservative valuation and you could be M valued on a multiple of Revenue in today's environment the actual multiple is five to six times and that's provided that you have growth so even though we're moving away from a growth at any cost world to a world where efficiency is prized the reality is that growth is still worth 3x more than profit but even even in that environment it's not worth

anything close to what it used to be worth and that's because the technology sector but particularly the SAS uh industry has faced so many different headwinds so we're moving and again I'm sorry about the uh the formatting but on the left it should say investor value and on the right it says customer value so what do successful companies need to do in this environment and none of this is going to be uh rocket science but I want to make sure that uh uh it's 35 slides in in 14 more minutes so I want to make sure I hit the bid so that my friend guy Rubin can speak so what do

you do differently in this modern world and none of this should be rocket science but I want to underscore a couple things that you can do to align your business around profitable efficient growth what we know is that uh again no no uh nothing revelatory here retention drives all valuation for recurring Revenue businesses right and that sounds obvious and yet if we go into a boardroom most of the time historically we've been talking about the sales funnel uh all the way up to the point of sale we've been talking

about uh new business acquisition new logo acquisition as the primary driver of Enterprise Value but when we do the analysis we understand that actual Enterprise Value from recurring Revenue businesses is excl not exclusively but primarily driven through retention again that's not surprising but it is surprising that we talk more about the pre-sale funnel in most board meetings and most Revenue meetings than we talk about the entirety of the customer journey and so one of the things that we need to do is we need to build up a goto

market organization that is focused on talking about the entirety of the customer Journey that builds algorithmic customer Health scores that lead to retention so that we we can understand exactly the behaviors that are going to correlate to retention because retention is the thing uh that ultimately drives value so we are focused we were in a world where we got $25 million we spent it in a lot of different directions we lacked prioritization at the same time that we hit this Tech uh contraction and uh there's a big compression on Learning

and Development budgets and that's why you've seen uh some flatness in 2023 but now we're growing again and how are we growing we're growing slower than we were growing from 2020 through 202 uh 2023 but we are growing and we're growing profitably and efficiently so over you know this is uh uh you know not public information Al though it is being recorded that's okay but really since we raised money uh we were we were we were a business that during Co had 30% operating margins and was growing uh 3x

from uh 2019 to 2020 that growth slowed and we we weren't 30% operating margins we were generating significant amounts of cash from 2021 in February when we raised the round through last year we burned $8 million of capital um which we'd never done before uh now uh we are generating cash again and we are profitable again and we're growing so the question is you know what exactly uh did we do differently how do we do it um

some tenants about profitable efficient growth all of it fundamentally is about priorization and Alignment so I can speak specifically about the things that Pavilion did but the most important thing that that I would say up on this screen is cap Capital efficiency is prized in the current market and what that means is doing more with less so this year we're making we're on uh our Top Line has grown 15% this year and we have half the people uh that we had a year ago uh if you look at uh the some of the stats that Alina and Nicola

presented from chili Piper chili Pipers doubled their ACV uh cut their customer acquisition costs in half and also dramatically increased Revenue per uh employee up to $200,000 per employee all over the course of the last year so part of what efficiency means is prioritization and part of what efficiency means is really just understanding that you can do a lot of things with the same number of people using offshore resources using Ai and using automation that maybe you didn't think were possible so um a couple of

the things that we want to focus on and that I want to focus on right now uh as we go through this so first of all understanding and ensuring that the team understands unit economics so profitable efficient growth which is the phrase that you know I sort of pioneered but I was inspired ired by Joo from winning by Design profitable efficient growth doesn't mean no growth it means efficient growth well to understand if you have efficient growth you need to understand your unit economics so a couple and it's this is frustrating

because the fonts you can't see so um let's see if we can see uh what's next no dang it I'm sorry what you see here is customer acquisition cost gross margin lifetime value LTV to CAC payback period and churn right those are the the key metrics the point is um there's there's four fundamental assumptions that underpin uh you can't see anything it's a blank screen I'm I'm spinning a story here this is it this is the most

important slide that you will see over the course of the next three years in your career and it's all in white so uh here's the point there are four fundamental assumptions that underpin recurring Revenue businesses right you spend a certain amount of money to acquire a customer they pay you back over a certain amount of time it costs you a certain amount of money to uh to service them and then they stick around for a certain period of time and all of those fundamental assumptions are the reason why in any given period we can

spend more than uh okay oh it's good we're fixing it on the Fly there we go oh it's beautiful all right there we go there we go okay so the point is does your team understand how all of this works do you understand how to calculate customer acquisition cost many people say that they do but then they don't uh do the calculations properly or they leave critical things out do you understand how to calculate lifetime value it's gross margin contribution per customer it's not Revenue per customer

do you have an accurate assessment of lifetime value again what the the fundamental premise of profitable efficient growth is that you understand what efficiency is uh can we do the same thing that you just did for the subsequent slides before I click over to them there we go um not I know he's he's actually he's more he's quicker and it's less generic uh so the point is the first thing that we do is we publicize and we publish our unit economics to the company on an ongoing basis and we've got thresholds

that tell us when we want to invest and when we don't want to invest we're trying to solve backwards from 5 to1 lifetime value to customer acquisition cost David Scot the founder of Matrix Partners one of the early investors in HubSpot he talks about 3:1 being The Benchmark but the point is if your company doesn't know what your unit economics are if you don't know how much you're spending then it's really hard to drive efficiency because it can't tell you how to throttle forward or back the reason that uh unit economics are important is because they tell you can

you spend uh a certain amount of money on growth or not right if you have very very high Churn it doesn't mean that you're not allowed to have a company it does it just means you can't spend as much on sales and marketing as you would normally so higher retention the more you can spend on sales and marketing to acquire a customer again the fundamental premise of all recurring Revenue businesses is we can spend more on acquiring a customer because we have a point of view on how long they're going to stick around so if we don't have a point of view on how long they're going to stick around or we don't have any

predictability then obviously we can't spend as much to acquire them what they also tell you though is whether your business is in alignment with growth or not so uh I wrote this week you know growth is not a right it's the privilege of companies with good unit economics the point is your business will tell you when it wants to be invested in and it will tell you when you shouldn't be invested in anything below 3:1 LTV to CAC and in my experience again this is a little bit more controversial you see on the screen but this is payback period

and you know we've been told for a long time that 24 to 36- month payback periods are acceptable in SAS I would posit you in a world of uh higher interest rates that really we need to be solving backwards from 12 to 18 months uh and so again we can talk about how to calculate that the magic number calculation is revenue really gross margin contribution in this period compared to sales and marketing spend in the prior period but the point of it is that we want to solve for payback period

we want to solve for LTV to CAC so what does that mean if you have a two and a half to one LTV to CAC or you're getting paid back in 36 months what it means is that you have a problem with your business that is manifesting in retention and what you need to do is slow down your growth investment so that you can fix the retention problem because fundamentally retention is what drives Enterprise Value so yeah sure uh payback period would be sales and marketing spend customer acquisition cost over average revenue

per customer right roughly and then you take that in a given time period it could be over a year it could be over 30 days what you would do is match it to the sales cycle typically so if you have a 30-day sales cycle how much do you spend on sales and marketing in that period customer acquisition cost over your average revenue per customer in that period right however much they contributed per per new customer right but it's it's it's really average gross margin contribution per customer so if you have 80% margins they pay you

$10,000 on average it's $88,000 in terms of gross margin contribution you compare that to what you're spending on sales and marketing and obviously again this is not rocket science and nevertheless many people don't do these calculations so let's say you're spending $8,000 on sales and marketing in January and you get uh $8,000 back from customers on average in February you've got a very good business there because you spent a

dollar you get a dollar back then everything that happens after that there's subsequent renewal periods all of that is free cash flow that contributes to your operating expenses right so what would be a bad situation a bad situation would be you spend $20,000 to acquire a customer that contributes $5,000 in gross margin contribution then it's going to take you four of those periods to pay get paid back now why is it and again this hopefully this isn't uh life-changing information but why why is it bad why is it bad to be paid back

over a longer period of time the first is it requ it ties up your capital in in that sales cycle right so it's bad for your balance sheet but it also requires a much higher predictability and point of view on what's going to happen in the future so imagine that you have a three a three-year payback period what that means is you put a dollar in at the top of the machine uh in 2021 and you don't get that full dollar back until 2024 well has the world changed from 21 to 24 I would think we would all rades changed a lot so the other problem with long

payback periods is it requires a point of view on the future in a world that is increasingly uncertain the benefit the other side of that equation is what happens when you put in a dollar at the machine and you get back a dollar very quickly it means you can accelerate growth because you can put that dollar back into the top of the machine again and again and again and that's why we like quick payback periods yeah how do you shorten it you shorten it by spending on customer acquisition

or you increase your average revenue per customer so those are the two ways so how do you do that well you know that's a story for uh more than three minutes from now so um we can talk about this and I'll Stick Around afterwards but the fundamental point because it's a a a condensed time period is do you know your unit economics if you don't know your unit economics you should calculate them the next logical question you will ask is we're a seed stage business we really don't we only have five customers is it logical to calculate unit economics the answer no not really at

that point but once you get past 10 15 paying customers you're approaching a million in recurring Revenue then it does become useful and important to calculate them but regardless let's have a point of view on it what you should see over time uh at the beginning because you're not paying yourself very much money if you're running a startup you've got a bunch of contractors you don't have an executive team yet you'll see very very high C LTV to CAC that'll come down over time as you staff up the team but what you always want to be do is monitoring it on a trailing 90-day basis to figure out am I in or out of

product Market fit because your LTV toac and your payback period those are indications of Min and product Market fit or not because they indicate whether the cohorts are renewing if your cohorts are not renewing then you're out of product Market fit okay so that's thing number one and that took all of the time that I have so I'll run over just a little bit to say the next thing we want to do because we're driving efficient growth and efficient growth is driven by retention is driven by retention so we need to map and analyze the customer

Journey this is the customer Journey that we have mapped and analyzed over the course of 12 months with a new Pavilion member a customer of ours you don't have to do it this way but you do need to do it and here's the point of the customer Journey mapping that I would encourage you to understand um we're looking for time to Value we're looking for the moments that uh light up and that drive uh delight and that lead to overall retention and engagement what you see there is the bow tie this is the good path again in all white so we'll

skip to the next slide but here's the point your customer Journey if I can leave you with one takeaway because somebody approached me in the hall and said that this Insight changed his business the last time I gave this presentation so here's the one takeaway you're analyzing your business you're looking for profitable efficient growth paths and you think that the issue is pricing and packaging most of the time it is not pricing and packaging right so most of the time the reason that you have the the easiest thing to solve for if you are solving for retention for

your customers is Failure to Launch which means your onboarding is isn't designed properly so when we've looked at our business the original inclination was it's a bundle our membership business is a bundle add more stuff to the bundle maybe one of the things in the bundle will drive to will lead to higher retention what that did was create a lot of confusion and uncertainty about how to use the product and when we looked at how many customers were actually onboarded when they signed up and completed their onboarding Journey it was a very low percentage so one of the things you can do for your

business is just make sure does every customer not just get a assigned an implementation manager but do they complete an onboarding experience the purpose of that onboarding experience should be directly tied to an activity or action that you believe drives uh High customer engagement leading to Renewal so I'll give you a specific example from one of the great SAS businesses Salesforce so at first Salesforce had this idea right that all you needed to do was load your data into Salesforce and that would drive your

tension because they had they had all of your data they did a bunch of analyses and they realized that that's not what drove retention and what actually drove retention the quick time to Value was getting people to build dashboards in Salesforce that were then emailed out to key stakeholders so they redesigned their onboarding program to align towards that high value action which was getting somebody to build a dashboard as opposed to getting them to just enter the data into Salesforce so again map your customer Journey identify the high value actions and activities and then

make sure that you're driving your onboarding experience towards activities that you understand our different differentiators for your product and that will lead to high engagement post onboarding which would be you know the period from really 30 days into the customer Journey all the way up to the first renewal all right almost done last thing I will tell you is uh if you are an outbound driven or a human driven sales and marketing engine and you want to think about you know how do I make more money how do I lower my customer

acquisition costs one G sorry this doesn't work all right so um the point point is uh next year we'll do it better with black font uh here's how you do it you just understand raise your hand if you know what the calendar test is okay so the calendar test is before you hire any new reps open up the calendars of your existing account Executives and figure out how many meetings are they having with external parties every day

or week and the answer is if they're having fewer than 15 and it doesn't have to be net new meetings but if you imagine that to do a really good job you're using some kind of tool to do meeting transcription and followup action items like EPA or otter or something like that you can probably have about three good highquality meetings with external parties uh every single day that's about 15 a week so if your reps don't have 15 meetings a week then what that means is one of the ways that you can drive improved deficiency is by reducing the number of reps I'm

sorry uh to be callous like that but the point is great companies are routing more resources meaning their best leads to high performing reps and what you'll realize when you do the math is that you can actually generate more money because there's there's a compounding effect from routing U more leads to fewer reps the first is improved win rate so if you have a rep that has a 10% win rate and a rep that has a 15% win rate obviously that's every time you send a $10,000 average deal size you're losing uh five

500 bucks uh every time you send it to the lower performing rep the second thing that happens though is that better reps tend to have higher average deal sizes as well so they have higher close rates higher deals average deal values which means that that compounds to a much it's probably something like 50% greater productivity or 75% greater productivity from a higher performing rep than an underperforming rep so again what does all of that mean and there's companies like Zoom info that pioneered um almost like a Champions League idea

of relegation and promotion where to get the best leads you need to perform at a certain level and if you perform under that level then you you go down to the tier B you get B leads until you can demonstrate that you're achieving a certain level of performance to get to the a leads but the point is just understand if if you look at your sales team you even it can be true for five people 20 people or three people you open up their calendars and you say there's capacity in this system there's capacity because again a great person that does all the follow-up does all the

meeting prep has a really engaging conversation with a 30 to 45 minute Discovery call that person can do about three calls a day that's 15 most of the time when you open up your meeting and you ex out all of the uh you open up the calendar for your reps and you ex out all the internal meetings maybe it's 2 3 4 You know in a world where cost of acquisition has dramatically increased it's because it's harder to get somebody's attention that means that every lead that we have is even more precious and that means we need to Route them to the people with a higher win

rates and um and the uh the higher average deal size so let's see that's not going to do that I will send these slides out to everybody afterwards and make sure that they're not written in all white but the point is Clos rate and AC c v Drive the engine uh and you can have much better experiences with a smaller sales team routing all your leads to those people so the three things I would encourage you to do again remember that the first thing is make sure that your company uh understands unit economics and that you understand

where your unit economics are your unit economics will tell you if you're in or out of product Market fit as you approach at least a million in ARR all the way up to a billion in ARR right so that's the first thing the second thing is Orient map your customer journey and figuring out where where do you need to align activities that create the highest engagement for your customer so that that can lead to retention because retention drives recurring impact which drives recurring Revenue right so and and the specific tip I would give you is don't assume that everything is pricing

and packaging assume let's start with onboarding let's start with making sure that we're clearly explaining how our product works and we're orienting the customer around high value actions that we think will lead to Renewal and the third thing is you can probably make more money with fewer salese that's it thanks very much [Applause]