How Pavilion Reached 10,000 Members and 15% Growth While Cutting Headcount in Half (Interview with Founder & CEO Sam Jacobs)

Sam Jacobs Introduces Pavilion and the Profitable Efficient Growth Thesis

Sam Jacobs

00:03I'm Sam Jacobs, and we're really gonna be talking about this shift that I've been writing about on social media from growth at any cost to profitable efficient growth and what the tenets of profitable efficient growth are and how to achieve it for your business and a couple quick 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

What Pavilion Is: 10,000-Member Go-to-Market Community

Sam Jacobs

00:30raise your hand if you're familiar with Pavilion, the community. All right. So Pavilion is the world's largest go to 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 in person experiences, not dissimilar from this. And hopefully, help people accelerate their careers by giving

Recurring Revenue Model and Membership Dues

Sam Jacobs

00:58them the tools they need to be best in class go to market operators. So 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 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

01:23value for organizations to a world where now customers are driving value because growth is driven for at least for us through profit. And so our journey, it should say investor value on the left. But over the last couple of years, particularly in 2020, 2021, investors were driving a lot of the value creation 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

Shift from Investor Value to Customer Value

Sam Jacobs

01:53at 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 Because if you understand about the net present value and time value of money, you understand that a dollar at 0% interest rates in twenty 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

02:14the 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. 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 25,000,000. And so even though I lecture and write about go to market alignment online, we

Impact of Interest Rates on SaaS Multiples

Sam Jacobs

02:37immediately fell victim to all of the mistakes that we comment other people embody and employ. So we were growing very, very quickly through last year when the tech recession ultimately hit us. And we're not immune. Right? So since the since the summer of twenty twenty run, growth rate of public SaaS businesses have been cut in half. The cost of acquire and this is I just actually did a webinar today. This is this is the mean. Right?

03:05So on on average, there's been a dramatic increase in the cost of sales and marketing spend to acquire 1 new dollar of annual recurring revenue. 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 Snowflake, it's actually there are certain public companies that are spending $5 and $6 in sales and marketing investment to acquire $1 of new ARR. So we're in

Elephant Ventures Invests $25M and Pavilion's Mistakes

Sam Jacobs

03:32a 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 four x, while net revenue retention has also declined. And that's particularly problematic because all of these fundamental assumptions are assumptions that underpin the idea from a couple of years ago that SaaS businesses and software businesses are worth 10 times revenue, right? And we used to hear that

04:02that was a conservative valuation and you could be 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 three x more than profit. But even in even in that environment, it's not worth anything close to what

04:24it used to be worth. And that's because the technology sector, but particularly the SaaS industry has faced so many different headwinds. So we're moving, and again, I'm sorry about 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 gonna be rocket science, but I wanna make sure that it's 35 slides and and

04:48fourteen more minutes. So I wanna 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 wanna underscore a couple of things that you can do to align your business around profitable efficient growth. What we know is that, again, no no nothing revelatory here. Retention drives all valuation for recurring revenue businesses. Right? And that

05:12sounds obvious. And yet, if we go into a boardroom, most of the time, historically, we've been talking about the sales funnel all the way up to the point of sale. We've been talking about 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 exclude not exclusively, but primarily driven through retention. Again, that's not surprising, but it is

05:39surprising that we talk more about the presale 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 go to 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 can understand exactly the behaviors that

Returning to Profitability: $8M Burned, Now Growing Again

Sam Jacobs

06:01are gonna correlate to retention because retention is the thing that ultimately drives value. So we are focused. We were in a world where we got $25,000,000. We spent it in a lot of different directions. We lack prioritization at the same time that we hit this tech contraction, and there's a big compression on learning and development budgets. And that's why you've seen some flatness in 2023. But now we're growing again. And how are we growing? We're growing

06:27slower than we were growing from 2020 through 2023, but we are growing, and we're growing profitably and efficiently. So over this is not public information, although it is being recorded, that's okay. But really, since we raised money, we were a business that during COVID had 30% operating margins and was growing 3x from 2019 to 2020. That growth slowed and we weren't 30% operating margins. We were generating significant amounts of cash. From 2021 in February when we

06:58raised the round through last year, we burned $8,000,000 of capital, which we'd never done before. Now we are generating cash again, we are profitable again, and we're growing. So the question is, you know, what exactly did we do differently? How do we do it?

Tenet 1: Understand and Publish Unit Economics

Sam Jacobs

07:16Some tenets about profitable efficient growth. All of it fundamentally is about prioritization and alignment. So I can speak specifically about the things that Pavilion did. But the most important thing that I would say up on the screen is 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 our top line has grown 15% this year, and we have half the people that we

07:41had a year ago. If you look at some of the stats that Alina and Nicola presented from Chili Piper, Chili Piper has doubled their ACV, cut their customer acquisition costs in half and also dramatically increased revenue per 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

08:07the same number of people using offshore resources, using AI, and using automation that maybe you didn't think were possible. So a couple of the things that we want to focus on and that I want to focus on right now 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 I sort of pioneered, but it was inspired by Jocko from Winning

08:31by 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 of and it's this is a frustrating because the fonts you can't see. So let's see what we can see. 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

08:58the the key metrics. The point is, there's there's four fundamental assumptions that underpin, 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 here's the point. There are four fundamental assumptions that underpin recurring revenue businesses, right? You spend a certain amount of money to

09:28acquire a customer. They pay you back over a certain amount of time. It costs you a certain amount of money 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 okay. Oh, that's good. We're fixing it on the fly. There we go. Oh, it's beautiful. Alright. There we go. There we go. Okay. So the

09:53point 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 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

10:16you understand what efficiency is. Can we do the same thing that you just did for the subsequent slides before I click over to him? There we go. Good thing he's not an AI bot. I know. He's he's act he's more he's quicker and it's less generic. 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

10:40us when we want to invest and when we don't want to invest. We're trying to solve backwards from five to one lifetime value to customer acquisition cost. David Scott, the founder of Matrix Partners, one of the early investors in HubSpot, he talks about three to one 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

11:01because it can't tell you how to throttle forward or back. The reason that unit economics are important is because they tell you, can you spend 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

LTV to CAC and Payback Period Benchmarks

Sam Jacobs

11:24on 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

11:44is whether your business is in alignment with growth or not. So 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, it will tell you when you shouldn't be invested in. Anything below three to one LTV to CAC, and in my experience, again, this is a little bit more controversial you see on

12:05the screen, but this is payback period. And, you know, we've been told for a long time that twenty four to thirty six month payback periods are acceptable in SaaS. I would posit to you in a world of higher interest rates that really we need to be solving backwards from twelve to eighteen months. And so again, we can talk about how to calculate magic number calculation is revenue, really gross margin contribution in this period compared to sales

12:31and 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 2.5 to one LTV to CAC or you're getting paid back in thirty six 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

12:49growth investments so that you can fix the retention problem because fundamentally, retention is what drives enterprise value. So What's the count again for payback period? Can you slow down on that? Yeah. Sure. 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 thirty days. What you would do is match

13:13it to the sales cycle, typically. So if you have a thirty day sales cycle, how much do you spend on sales and marketing in that period, customer acquisition costs over your average revenue per customer in that period, right, however much they contributed per new customer, right? But it's really average gross margin contribution per customer. So if you have 80% margins, they pay you $10,000 on average. It's $8,000 in terms of gross margin contribution. You compare that

13:40to 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 $8,000 back from customers on average in February, you've got a very good business there because you spent $1 you get $1 back. Then everything that happens after that, there's subsequent renewal periods, all of that is free cash flow that

14:10contributes 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 life changing information, but why why is it bad? Why is it bad to be paid back over a longer period of time?

14:33The first is it ties up your capital 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 year payback period. What that means is you put a dollar in at the top of the machine in 2021, and you don't get that full dollar back until 2024. Well, has the

14:56world changed from '21 to '24? I would think we would all agree it's 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

15:16that dollar back into the top of the machine again and again and again. And that's why we like quick payback periods. Yeah. How

15:25do you shorten it? You shorten it by spending less 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 more than three minutes from now. So we can talk about this, and I'll stick around afterwards. But the fundamental point, because it's a a condensed time period is, do you know your unit economics? If you don't know your

15:49unit 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 is no. Not really at that point. But once you get past ten, fifteen paying customers, you're approaching 1,000,000 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

Tenet 2: Map the Customer Journey and Fix Onboarding

Sam Jacobs

16:10should see over time at the beginning, because you're not paying yourself very much money if you're running a start up, you've got a bunch of contractors, you don't have an executive team yet, you'll see very, very high LTV to CAC. That'll come down over time as you staff up the team. But what you always want to be doing is monitoring it on a trailing ninety day basis to figure out, am I in or out of product

16:29market fit? Because your LTV to CAC and your payback period, those are indications of, am I in 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

16:50efficient 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 twelve 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.

17:11We're looking for time to value. We're looking for the moments that light up and that drive 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

17:36the 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, 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 isn't designed properly.

18:00So 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

18:22was 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 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 high customer engagement leading to renewal. So I'll give you a specific example from one of the great SaaS businesses, Salesforce. So at first,

Salesforce Onboarding Example: Dashboard as Time to Value

Sam Jacobs

18:47Salesforce had this idea, right, that all you needed to do is load your data into Salesforce and that would drive retention because they had act 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

19:11align 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 are differentiators for your product and that will lead to high engagement post onboarding, which would be, you know, the period from really thirty days into

19:36the customer journey all the way up to the first renewal. Alright. Almost done. Last thing I will tell you is if you are an outbound driven or a human driven sales and marketing engine and you wanna think about, you know, how do I make more money? How do I lower my customer acquisition cost? One it's ugh. Sorry. This doesn't work. Alright. So the point is, next year, we'll do it better with black font. Here's how you

Tenet 3: The Calendar Test and Routing Leads to Top Reps

Sam Jacobs

20:04do 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

20:27really good job, you're using some kind of tool to do meeting transcription and follow-up action items like Ebsta or Otter or something like that, you can probably have about three good high quality meetings with external parties 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 efficiency is by reducing the number of reps. I'm sorry

20:50to 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 a compounding effect from routing 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,

21:13that's every time you send a $10,000 average deal size, you're losing $5,500 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 and 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

21:39underperforming rep. So again, what does all of that mean? And there's companies like ZoomInfo that pioneered 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

Compounding Effect of Higher-Performing Reps

Sam Jacobs

22:02the point is, just understand, if you look at your sales team, 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 thirty to forty five minute discovery call, that person can do about three calls a day. That's 15. Most

22:25of the time when you open up your meeting and you x out all of the you open up the calendar for your reps and you x out all the internal meetings, maybe it's two, three, four. 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

22:43with the higher win rates and and the higher average deal size. So let's see. I'm 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 close rate and ACV drive the engine. 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.

Summary: Three Steps to Profitable Efficient Growth

Sam Jacobs

23:07Again, remember that the first thing is make sure that your company 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 do you need to

23:29align 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.

Nathan Latka

23:53And the third thing is you can probably make more money with fewer salespeople. That's it. Thanks very much.