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A CAC Payback Period Correction
All sales cycles need to be bound by a dollar and time frame that make sense.
I love a $20 deal; but it’s gotta be over by the time you finish reading this newsletter.
In the same vein, companies realized the math wasn’t mathing on 36 month CAC Payback Periods when the customer would either fail to expand, or bounce after two years. And we’re finally seeing an inflection point, a reversion to the mean if you will, in the first quarter of 2024.
For seven consecutive quarters, median CAC Payback Periods steadily rose.
Many of you may be wondering why this didn’t actually happen sooner. Why was the inflection point in 2024, and not, say, the first half of 2023, when we knew the climate was changing? Didn’t a bunch of people get fired?
Well, it takes a while to unwind a Go to Market motion that you mistakenly staffed to produce 800 HP once you realize it’s only getting 8 miles to the gallon. Yes, you can go fire a bunch of sales and marketing people. But you still have to demonstrate you can close net new deals. New revenue is still part of the equation; you just now have to find a strategy to do it cheaper.
And we heard lot’s of leaders talking about those strategies to acquire new customers more efficiently in recent earnings calls:
In their Q1 2024 earnings call, Uber highlighted their efforts to manage CAC through more efficient marketing and leveraging their brand to drive organic growth.
In their Q1 2024 earnings call, ServiceNow's CEO, Bill McDermott, discussed how they have been able to lower their CAC by leveraging their platform's automation capabilities. He stated, "Our continued investment in AI and machine learning has enabled us to streamline our customer acquisition processes, significantly reducing costs and improving efficiency across our sales and marketing teams."
During their Q1 2024 earnings call, Shopify's CEO, Tobi Lütke, mentioned that by leveraging data analytics and targeted marketing, they have been able to reduce customer acquisition costs. This has resulted in higher conversion rates and a more efficient customer acquisition process
Zscaler's CEO, Jay Chaudhry, during their Q1 2024 earnings call, emphasized the importance of efficient sales processes and strategic partnerships in reducing customer acquisition costs. The company has been able to streamline its customer acquisition efforts by focusing on high-potential markets and leveraging existing customer relationships to drive new business.
So we’re off to the races, albeit driving new sales in a very different car.
(BTW, did that $20 deal close yet? If you appreciate that I spent 30 minutes this weekend fitting Leonardo DiCaprio into a CAC Payback Period graph, plz upgrade your subscription!)
TL;DR: Multiples are FLAT week-over-week.
Top 10 Medians:
EV / NTM Revenue = 12.3x (flat w/w)
CAC Payback = 23 months (flat w/w)
Rule of 40 = 48% (flat w/w)
Revenue per Employee = $398K (flat w/w)
Figures for each index are measured at the Median unless otherwise stated
Average, Median, and Top 10 Median are measured across the entire data set, where n = 113
All margins are non-gaap
You can find the list of companies within each sector here.
All definitions and formulas can be found here.
If you’d like the specific company level performance benchmarks used in these reports book a benchmarking consultation with Virtua Research
Revenue Multiples
Revenue multiples are a shortcut to compare valuations across the technology landscape, where companies may not yet be profitable. The most standard timeframe for revenue multiple comparison is on a “Next Twelve Months” (NTM Revenue) basis.
NTM is a generous cut, as it gives a company “credit” for a full “rolling” future year. It also puts all companies on equal footing, regardless of their fiscal year end and quarterly seasonality.
However, not all technology sectors or monetization strategies receive the same “credit” on their forward revenue, which operators should be aware of when they create comp sets for their own companies. That is why I break them out as separate “indexes”.
Reasons may include:
Recurring mix of revenue
Stickiness of revenue
Average contract size
Cost of revenue delivery
Criticality of solution
Total Addressable Market potential
From a macro perspective, multiples trend higher in low interest environments, and vice versa.
Multiples shown are calculated by taking the Enterprise Value / NTM revenue.
Enterprise Value is calculated as: Market Capitalization + Total Debt - Cash
Market Cap fluctuates with share price day to day, while Total Debt and Cash are taken from the most recent quarterly financial statements available. That’s why we share this report each week - to keep up with changes in the stock market, and to update for quarterly earnings reports when they drop.
Historically, a 10x NTM Revenue multiple has been viewed as a “premium” valuation reserved for the best of the best companies.
Efficiency Benchmarks
Companies that can do more with less tend to earn higher valuations.
Three of the most common, and consistently publicly available, metrics to measure efficiency include:
CAC Payback Period: How many months does it take to recoup the cost of acquiring a customer?
CAC Ratio is calculated as: (∆TTM Sales * Gross Profit Margin) / TTM S&M
CAC Payback Period is calculated as: (1 / CAC ratio) * 12
Note: Some may measure CAC Payback using the change in last quarter’s revenue x 4, but I believe this overstates a company’s progress if they are growing fast, and the output can be volatile due to quarterly sales seasonality. That’s why I look at it on a Trailing Twelve Month Basis.
Rule of 40: How does a company balance topline growth with bottom line efficiency? It’s the sum of the company’s revenue growth rate and free cash flow margin. Netting the two should get you above 40 to pass the test.
Rule of 40 is calculated as: Total Revenue Growth YoY % + Non Gaap Operating Profit Margin %
Non Gaap Free Cash Flow is calculated as: Net cash provided by operating activities, minus capital expenditures and minus capitalized software development costs.
Revenue per Employee: On a per head basis, how much in sales does the company generate each year? The rule of thumb is public companies should be doing north of $450k per employee at scale. This is simple division. And I believe it cuts through all the noise - there’s nowhere to hide.
Revenue per Employee is calculated as: (TTM Revenue / Total Current Employees)
A few other notes on efficiency metrics:
Net Dollar Retention is another great measure of efficiency, but many companies have stopped quoting it as an exact number, choosing instead to disclose if it’s above or below a threshold once a year. It’s also uncommon for marketplaces and fintechs to report it at all.
Most public companies don’t report net new ARR, and not all revenue is “recurring”, so I’m using annual change in TTM revenue timeframes as a proxy in my calculations. I admit this is a “stricter” view, as it is measuring change in net revenue, rather than gross revenue additions pre-churn.
Operating Expenditures
Decreasing your OPEX relative to revenue demonstrates Operating Leverage, and leaves more dollars to drop to the bottom line, as companies strive to achieve +25% profitability at scale.
The three most common buckets companies put their operating costs into are:
Sales & Marketing: Sales and Marketing employees, advertising, demand gen, events, conferences, tools
Research & Development: Product and Engineering employees, development expenses, tools
General & Administrative: Finance, HR, and IT employees… and everything else. Or as I like to call myself “Strategic Backoffice Overhead”
All of these are taken on a non Gaap basis and therefore exclude stock based comp, a non cash expense. SBC is still an important figure to track for total comp and dilution purposes, though.
All benchmarking data provided by Virtua Research.
Book a benchmarking consultation with them here.