Ben Murray on this episode
Ben Murray, The SaaS CFO, brings deep financial expertise to the revenue operations conversation, having worked across multiple industries and advised hundreds of SaaS companies on financial structure and metrics. In this episode, Ben unpacks the often-overlooked relationship between the CFO office and revenue operations, specifically diving into why customer success investments are so much harder to justify than new business spending.
The core tension is this: calculating ROI on customer success is exponentially harder than calculating ROI on new business sales and marketing. While a new business rep closing a $1 million deal against a $300,000 salary is straightforward math, customer success ROI requires isolating the impact of retention improvements amid dozens of confounding variables—product improvements, market conditions, support quality, and more. This opacity often leads CFOs to under-fund retention relative to acquisition, even when the unit economics of retained revenue dramatically exceed the cost of new logos.
Ben reframes the question by introducing a simple but powerful model: if your company retains $100 million in annual recurring revenue but loses $20 million to churn, a $500,000 investment in CS initiatives that improves retention by just one point (saving $5 million in lost revenue) pays for itself in one year and compounds for years. The math works. The hard part is proving the linkage and tracking whether your specific CS intervention actually drove that improvement.
The conversation also explores how CFOs evaluate customer success as a cost center—whether it belongs in cost of goods sold (COGS) or sales and marketing—and how segmenting your customer base (SMB vs. enterprise, etc.) is critical to understanding where CS investment has the highest payback. Ben emphasizes that good data infrastructure and proper expense categorization are non-negotiable; without them, even sound financial analysis falls apart.
What we cover in this episode
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1:51
Why CSS ROI Is Hard to Calculate Customer success ROI is harder to quantify than new business because retention metrics move with multiple variables: churn, expansion, contraction all simultaneously affect gross revenue retention.
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6:04
Where CSS Sits on the P&L Customer success belongs in COGS if focused on pure product adoption; moves to sales expense if the team carries quotas and closes expansion deals or acts as account management.
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9:48
Gross Margin as a Constraint SaaS companies typically target 70-80% gross margin, leaving only 20-30% for COGS line items including tech support, onboarding, customer success, and DevOps infrastructure.
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12:17
Simple CSS ROI Framework Compare baseline churn against projected improved retention under a CSS investment; the revenue saved minus the CS cost equals your incremental payback, which then compounds across future years.
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25:32
Gross Revenue Retention vs. Net Revenue Retention Expansion revenue inflates the denominator and can mask stagnant churn; isolating retention by cohort or customer segment reveals true retention performance without expansion noise.
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35:56
Capital Efficiency and Payback Period Shorter payback periods on CS investments mean CFOs recover cash faster and can redeploy capital more quickly, creating competitive advantage; compare against weighted average cost of capital as a floor.
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43:43
Segmentation as a CS Lever SMB, mid-market, and enterprise have different retention patterns and CS needs; understanding which segments benefit most from additional CS spend drives better capital allocation decisions.
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33:02
Data Quality and Attribution Challenges Go-to-market and finance teams lack perfect data; manual enrichment of expense categorization and attribution is necessary to move from accounting records to actionable financial insights.
The lines worth sharing
Customer success is now a function within software companies. But what exactly are they doing?
Ben Murray · 2:03
If retention improves by one point at $100 million revenue, that's a $5 million incremental payback that compounds over years.
Ben Murray · 29:11
We have to isolate these scenarios by cohort because you have so much impact in your MRR waterfall that the number is constantly moving each month.
Ben Murray · 26:01
A 24-month payback on CSS means I'm waiting two years for my money back; my competitor with a six-month payback redeploys cash faster and can grow more capital-efficiently.
Ben Murray · 38:01
Common questions from this episode
How do you calculate customer success ROI?
Start with baseline churn forecast (e.g., lose $20M of $100M revenue). Model how much a CS investment improves that (e.g., lose $15M instead). Compare the revenue saved ($5M) against the CS cost ($500K). If ROI exceeds your cost of capital, it's a valid investment. Track actual results against forecast.
Why is customer success ROI harder to prove than new business ROI?
New business ROI is simple: spend $300K salary, close $1M deal. Customer success ROI involves isolating CS impact from product improvements, market conditions, and support quality. All these variables move retention simultaneously, making attribution difficult without cohort-level analysis and clean data.
Should customer success sit in COGS or sales expense?
If CS is pure product adoption and health monitoring, it belongs in COGS. If the team carries expansion quotas and closes deals, it's sales expense. Many teams do both, requiring expense allocation. This categorization affects how CFOs evaluate CS payback and gross margin targets.
What gross margin should a SaaS company target?
Most SaaS companies target 70-80% gross margin, leaving 20-30% of revenue for COGS: tech support, onboarding, customer success, and infrastructure. If actual margin is 65%, the CFO scrutinizes each cost center for ROI improvement opportunities, and CS is often an easy target for cuts without proof of payback.
How does segmentation affect customer success ROI?
SMB, mid-market, and enterprise segments have different retention patterns and churn drivers. Understanding which segments respond most to CS investment allows CFOs to allocate budget where payback is strongest rather than spreading spend equally across all customer types.
What is weighted average cost of capital and why does it matter for CS investment?
WACC is the blended cost of debt and equity capital in your business. If your WACC is 10%, any CS investment must generate at least 10% return to justify capital use. Higher-risk investments should target higher returns. This is the financial floor CFOs use when approving RevOps budgets.
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Read the full transcript · 55 KB · Ben Murray
BEN0:00it. We know customer success is now a function within software companies.
BEN0:04you may call them customer success, but what exactly are they doing?
EDDIE0:08Welcome to go to Market Science, the podcast for crows and revenue leaders scaling mature B2B companies. There's an art and there's a science to go to market and we're obsessed with the science.
EDDIE0:18In this podcast, we share tangible, actionable playbooks from the trenches, from what we're learning, working as go to market strategy and DevOps consultants for our clients here at Union Square, Consulting and candid conversations with revenue leaders in the market that have been there.
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EDDIE0:41Welcome to another episode of Go to Market Science. Today we're going to talk about investing in customer success and how to quantify the ROI. ROI, if I can pronounce that correctly. Today a special guest is Ben Murray, the SAS CFO. Thanks for joining us today, Ben Ali.
BEN0:57It's great to be here. Look for the conversation.
EDDIE1:00I'm excited to dive into this. So here's the elevator pitch for our listeners out there. We all know that taking care of our customers is the easiest and cheapest way to generate future revenue. However, we also know that customer success is often underfunded and understaffed. I wanted to know why and I wanted to know how to fix it.
EDDIE1:18So I invited Ben onto the show to explain this today from the perspective of a CFO. So again, thank you for joining us. I'm so excited to dive in with you.
BEN1:27Yeah. Me too. Yeah. Looking for the conversation. I know a lot of topics we want to kick off with, but yeah, let's dive in.
EDDIE1:33So I'm going to start with like the bigger issue. You know why is cause sometimes are often understaffed and underfunded. The hypothesis I have is because it's harder to understand the ROI and investments in customer success. Why is that? Why is ROI and CSS harder to calculate the new business?
BEN1:51Yeah, it's really hard to see. And I know we kind of had a conversation weeks ago about this in customer. I know you don't see much about
BEN1:58it. We know customer success is now a function within software companies.
BEN2:03And it's I found from my CFO lens. It is difficult and even for me when I take my CFO perspective on this and try to put the math to it, it's like, boy, that was a hard exercise.
BEN2:14And I think personally, it's so difficult because it's something where the numbers are always moving. We think about a software company, subscription company, AI company, and we have our recurring revenue. We have our beginning balance of MRO or we have new MRO coming in. We have expansion contraction. Maybe we have reactivation churn. And then that's our ending balance.
BEN2:35And all those layers, those what I call layers of them are, are are moving each month. So we're calculating retention at a point in time. But then we have to figure out, all right, if we have a customer success initiative, what are their goals. Is it a gross revenue retention number where we're looking at, minimizing the churn and contraction layers.
BEN2:58But then what if expansion happens and that improves our number, you know, so that's why it's like the numbers are constantly moving and you have to make some assumptions around retention patterns and go forward numbers to, you know, to kind of squeeze out a difference to figure out, all right. If I improve retention or explicitly gross retention, say by one point, what would that do to my total revenue over the next 12 months to figure out if that change would see offset the investments that we make in customer success or any retention programs?
EDDIE3:34Yeah, it made sense to me, especially after I read your article and put the article in the show notes. So great article. I think you wrote it more for finance folks. As I was reading through it, I'm like, wow, this gets really deep in the weeds. I wonder if, like our CRM crows and crows that are listening to this and heads of customer success are gonna want to follow, like how you calculate bookings and forecasts and everything like that.
EDDIE3:57But I think it's really important for people and go to market to at least understand the high level, how CFOs are looking at these decisions. Because ultimately, if you're in a position where you're saying, look, I think if we did XYZ, we could retain more of our customers. You've got to have a conversation with your CFO to say, I need budget to do A, B, or C, and I think it's going to move the needle improving our retention or core.
EDDIE4:19How much? And is this really where we should be investing our money? And I think the challenges is when we compare this to new business, new business that gets all the love, all the budget, etc. the reason for that is it's so it's so much easier to understand, especially sales. I mean, look, if I'm a full cycle ag and I just bang the phone and make cold calls and I close $1 million of business and you pay me $200,000 or $300,000 or whatever it is for that, and then you tack on my overhead.
EDDIE4:46It's really simple and easy to calculate the ROI that investment. Then we loop in marketing, and now we've got this crazy attribution that's really difficult. But we can still just say, okay, this is how much we spend on sales and marketing and total, and this is how much new business we landed on. We could do some very simple math to figure out whether or not that math is math thing, but on the retention side, it's way more complicated.
EDDIE5:08And so I want to break down exactly what you just said and try to simplify it so our listeners can, can really like, take this home and think about what we do with this. And so I'll start by doing some very basic accounting. And I'm going to hold you back like by a long shot then. So you don't get too complicated for our go to market folks.
EDDIE5:27Let's just let's do like accounting 101. Where does customer success sit? In your article, you talked about two places on the the PNL or the net income statement that this could go. Where would customer success sit on the income statement?
BEN5:43Yeah, that's it's a great first thing we have to set some of the, the, the foundation here because one of my top coaching session with SAS companies is, is the proper software panel set up for you, whether you call yourself software SAS, I don't really care. It's about the revenue streams that you offer. Do you have subscription usage, etc. but do we think about SAS cogs versus opex?
BEN6:04And traditionally in Cogs we have tech support, we have services for onboarding, and we have customer success. We'll put an asterix there. For now we have DevOps. So like all the hosting cost inference costs, we may have hardware costs etc.. But then customer success. Then I teach this to my Kenny. But first, whenever I talk to a software founder or company, it's like, okay,
BEN6:27you may call them customer success, but what exactly are they doing?
BEN6:30You know, that's first because sometimes you see they're actually onboarding customers. They're doing actually a function. Then they maybe do a little customer success too. So first, what are they doing? You know, is it purely focused on product adoption, where I'd say, okay, let's leave them in Cogs. You know, where they don't have a bonus or, sorry, a quota or commission.
BEN6:51Now, if they're more like an account management function where, yeah, we help with the product adoption. But if Kupfer says, hey, I want that new module. Okay. Well let me draft up the contract customer sign this and I get commission out of that. Then I see that more as an account management or expansion function where they'll be down in sales.
BEN7:08Now sometimes you have very distinct teams and it's really clear. Other times you have mix functions where they do a little bit of both, and then maybe we need to allocate those expenses, you know. So it depends. Are they pure places where I'd say they're up in Cogs or are they actually just traditional account managers.
EDDIE7:25Yeah. And I want to dive into this because this is sort of a non-financial issue. But I think it's a really important one of what does CSW do now? I've been on every side of the spectrum here. I've worked in a startup where I was the first account executive covering new business only, and we had three people in customer success, quote unquote.
EDDIE7:45What are those three people do? This is a product that sat on top of Salesforce. Primarily. What they did was they implemented Salesforce for our customers. Secondarily, they handled customer support, tech issues, etc.. And then thirdly, they did what you would think of as traditional customer success of like helping customers to be successful, which is like very overlapping with doing the implementation properly.
EDDIE8:06And then fourth, I'm not sure how much this was happening. They would potentially upsell the customer on the complete opposite, extreme opposite end of the spectrum. I was at Salesforce while they grew from 5 billion to $10 billion in revenue, and I was an account executive covering new business and existing business, carrying a quota, carrying a bag, trying to close deals, calling into existing accounts, trying to grow those accounts.
EDDIE8:31In addition to that, we had customer support. You know, in the Philippines, we had, external implementation partners to implement Salesforce because for the most part, Salesforce didn't do that, especially with my customers. We had, to a limited extent, customers that were responsible for trying to get it counts healthy. And we even had dedicated renewals managers. Right. So when the company is big enough, you have all of these distinct roles.
EDDIE8:54And I think each of those roles, in my experience, was incredibly valuable. But I would also argue, and I'm curious if you have a different perspective on this or you've seen something different, either work or not work, I would I would make a strong case for moving to a place where you have someone in CSE that is solely thinking about making the customer happy and successful, and someone else that is not in that same person thinking about maximizing revenue from that customer.
EDDIE9:22And the reason for this, especially when we talk about expansion sales, is that I think it requires a sales skill set to create and close expansion sales. Now I've got people on my team that would prove otherwise. They'll say, we're not salespeople and they're okay. Keep landing all these expansion deals with our clients. I think they're maybe the exception to the rule, very senior people that say they're not salespeople, but they're pretty good at sales.
EDDIE9:50But I think, like, by and large, for most companies, you want that person that's carrying a bag and a quota selling to focus on selling and to not burn valuable selling time, trying to help customers out with things that aren't sales. And then you want the person. Even more importantly, it's actually trying to help the customer be successful, to be solely focused on that.
EDDIE10:11Because the second thing you start trying to sell to somebody, you lose trust. The second that I come in and I experience this, with our customers, a lot of times I call our customers and I'm trying to figure out ways we can expand them, and I can smell it from a mile away. And I can tell they're like, I just want to talk to Jerry on your team because he's just trying to help me out and make us successful, and he's not trying to upsell us even as a CEO in the company.
EDDIE10:34And it's just like, I can just tell that, like, that flavor, that different feeling that people have. The second that you, like, put your hat on and think like, how do I grow revenue with this customer?
BEN10:44Yeah, I totally agree because I think, as a CFO and me talking to sales reps say, yeah, it's like, what what angle is here? Are they just really checking in or do they want to sell me more product, which I understand, you know, I want my sales reps to sell my product to. But yeah, CFO, one company where we created the customer success function internally because, yeah, our account manager was existing.
BEN11:03You're going after expansion were also, you could say de facto see reps, you know, so if someone wasn't happy or they're checking on things, they're calling their account manager. And like you said that takes away from them. Sell it. So we want them focus on selling hitting their quotas. So we in that case it's like, all right, it's time for this company to create a CSS function.
BEN11:23It was coded up to Cogs. In this case it reported to the professional services managers just in this case or in support. But yeah, totally totally agree with that. That, yeah. You know, either if you're starting your CSS journey or just thinking about all the, like you mentioned before, all those roles within the company, are they?
BEN11:42And so as a new business, is it CSS? Is that onboarding and just SEO from CFO perspective? Like, yeah, we've got to make sure all those seats are hitting the right spots on our panel so we can have accurate financial analysis.
EDDIE11:54Yeah, I know, and add to that, like I think the real power here, like when I was at Salesforce and I would call our existing accounts, the first thing I would try to do is just bifurcate them. What are the accounts that are unhealthy and are going to need attention from CSS? And what are the accounts that are healthy that I can upsell?
EDDIE12:09When I was focusing on the unhealthy accounts, you know, I'm looking at this and I'm like, we've got a customer that's not using Salesforce properly, and it is going to take a lot of effort to fix that. What can I do as a sales rep with sales skills and a quota to to drive that forward? And I'm like, there's not much, but there's one thing like, I'm in sales, I'm good about kicking in the door.
EDDIE12:31So what I'm going to do is I'm going to call the CEO, the CFO, CXO, whatever. I'm going to kick the door and I'm going to say, I don't think you guys are getting as much value as you should. Can I set you up with a call with our CSM, with our implementation partner, with somebody that can hold your hand for the next six months and turn you into a healthy account.
EDDIE12:49If I had to do that myself, I probably would never make that phone call in the first place. And if I did, I'd never sell anything.
BEN12:55Yeah. Oh yeah. Yeah. Because, yeah, that's that's the whole, case in point for customer success and splitting out those teams that I always refer. And I pressure in this definition so much like Jason Lumpkin had a definition of customer success. A lot of people do. And, you know, just kind of focus on product adoption. A lot of definitions out there.
BEN13:13But of course, they can look for opportunities. That's part of the ROI discussion here, right? We want to improve retention. But also as Kes is talked to the customer, maybe there is some pipeline they're sitting there that then they can refer that over to them. And you know, so I've been situation places where you know, we're CSW is tracking also pipeline creation as part of their ROI.
EDDIE13:35Yeah. And it's like, if I could go back to that startup, I was one the only year. And we had like a CSS team of like three, I would just sit on the CTO like, let me sell into our existing accounts, let the three people in CSS focus on making customers happy and successful. Let me figure out which of those accounts are super healthy and which I can upsell, and let me go in and try to upsell them, and let these CSM continue to hold trust with the customer that they're not calling them to try to upsell them.
EDDIE13:59They're trying to call them that to help out. And this I think, sets a really good baseline for like bringing this conversation back to financials in ROI, because what you're saying in your article and what you just said here is if I'm selling, if I'm an account manager carrying a quota, then that goes into cost of sales.
EDDIE14:18And then we can just look at that and see, okay, well, how much do we spend on expansion sales and how much did we actually get back in expansion? You know, closed one bookings and then we can use cash payback, quick ratio, whatever. Like metrics we want to use are common knowledge and pretty easy to calculate to figure out whether or not that's working.
EDDIE14:38And that's an ROI on our investment
EDDIE14:40on the other side, the people that are truly doing CSS work that's going into cost of goods sold. And I want to break that down with you. You talked about DevOps and you talked about customer service and a lot of other things. I'm actually curious, just from a cfo's perspective, how do you determine all cost of goods sold before we break down actual like CSS, whether that's too much or not enough?
EDDIE15:02Because if I think about this, let's look at this through a private equity lens. Right. Let's say that I start my own private equity firm and I go in and I buy this hundred million dollar software company. Right. And I'm just going to, poo poo all over PE firms. And anybody that's listening from PE, please don't take this too seriously.
EDDIE15:19And my sole goal in life is just extract as much cash as possible out of this business. So I want to cut all costs. I'm going to fire the whole CSS team. You know, I'm going to fire the DevOps team. We're going to go I'm not like, I don't know how like, you, you support products or SAS products, like, I'm not the technical guy, but whatever it is we're going to go to like the cheapest server we can get, the cheapest tech stack we can get.
EDDIE15:40We're just going to cut costs ruthlessly. Right from the cfo's perspective, why would you push back on me and tell me not to do that?
BEN15:49Well, there are a couple things here because of course I love my P friends. But, I think of it this way if we think about cogs for SaaS companies and AI companies, we yeah, we've got tech support or customer support. We've got onboarding professional services. We have customer success. We have if we have hard expenses associated with usage revenue, we've got to bucket those there too.
BEN16:12And we've got DevOps, which could be, you know, I compute inference cost here of AWS servers, etc.. And traditionally for SAS companies we shoot for 70 to 80% overall gross profit. So that only leaves me as a CFO of of 20 to 30% of expense, as a percent of revenue to allocate towards all of those departments which see us fits into.
BEN16:36So. Right. If we look at, like you said here, you know, we just bought 100 million. They are a company where P or a we're looking at the financials. We're to look at least my open macro levers that are out of place here. You know, are they running say 65%. You know which it's okay.
EDDIE16:54That 65% gross margin.
BEN16:55Yeah. Gross margin. Now of course if they're going from 100 million to 200 billion that's a different story right there. Again that's all perspective here. We you know I'll give up gross profit because we're doubling at that size. That's amazing. But let's just say hey normal growth pattern. All right. That seems out of whack. I look up my opex profile and how much we're investing in sales, marketing, G&A as a percent of revenue and calculate your Co two market efficiency metrics and look for levers that can be improved.
BEN17:22But yeah, if we're running 65% gross margin and we have customer success, well what's out of whack here? Have we overinvested in any of these departments that hit Cogs. And you know customer success is an easy one to call out. Like DevOps. It's like, all right, that seems all right. Tech support, you know, so all that has to fit within that margin.
BEN17:43And if it's not producing you know, it's like all right we'll see us. All right. Is it actually returning. Are we improving retention. Do we have proof of that. And if it could be an easy one to cut if we can't prove out ROI because we know all these other departments. All right. We know we need hosting. We want to make sure it's aligned.
BEN18:01We know, all right our type of product. We need customer support, right. We need it. We can't just get rid of customer support. And that's why we we have to really I think a CFOs and CSW leaders really understand what's happening within CSW and their ROI to say like, yeah, we need this. It can't just we can't just cut it, you know, so that's that's the my kind of CFO lens or even P lens of like all right.
BEN18:24What can we improve to get to that next milestone. And you know that's why I see us is bucketed within those. And it's going to get scrutinized if, if things are out of whack.
EDDIE18:35Yeah. And I mean there was such a great and in-depth answer, I think I was in a way, I may have phrased it wrong or trying to just throw a layup here in the like. The simple answer is, well, we don't want to do that because then, like, all of our customers would churn and we would lose money and we would be you would have less cash to line your pockets.
EDDIE18:50Mr.. You know, p guy. And but what I thought was really interesting about your answer is, tell me if I got this right. What you're saying is you're kind of using a rule of thumb to say we really mostly want to stay between 70 and 80% gross margin, meaning that, cost of goods sold all the things you list off for 20 to 30% for overcharging our customers.
EDDIE19:09And the reason for that is because if we cut that too much, if we go below 20%, then maybe we're not providing our customers the experience that they're going to need to stick around. And if we're paying more than 30%, we're just running a really inefficient, unprofitable company.
BEN19:26Yeah. So like I said, I think sales so. Right. We've got CEC, we've got CEC, payback customer, our LTV to CEC, all these things to prove out the dollar that goes into our go to market engine, how much we get out. And that's why CSE is so much harder than if we're not running these calculations to show over time that we've improved retention.
BEN19:46We're creating pipeline. Then if PFC are bought out by, you know, I will pay PE, but if you're bought out or anyone strategic clear right. They're going to assess this and it's like yeah can we get a couple. You know if we unlock five points of gross profit that's a huge cash flow unlock a huge cash flow lever.
BEN20:07You know, and we have to be prepared to have those conversations to say, why did they see us? Should stay.
EDDIE20:12Yeah. Especially if you're. You know, doing six, eight, ten, EBITDA multiple, like, $5 million suddenly becomes 40 million, $50 million is a lot of money. And that's exactly what PE firms are trying to achieve. So that's a great answer. It's also just kind of interesting to me. You say like, oh, we like we can't just cut, you know, customer support.
EDDIE20:34And I'm like, oh, let's look at Salesforce. Granted, I know Salesforce hasn't necessarily been performing well lately. It's just so easy to like, poo poo all over them, right now. But it's like even when I worked there, which was a long time ago at this point, like, we always felt like the customer service was just terrible. And then now, like, they're like, yeah, we like fired, like half our customer service agents who just implemented AI.
EDDIE20:54And I'm wondering, how good is that service is? We still deal with Salesforce a lot. It's like it's not exactly like great a customer service, but maybe they can get away with that. They have a sticky product. But I think like, you know, their CFO is obviously looking at these things every day and trying to understand, like, do we pay more or less for customer service, for customer success?
EDDIE21:15For all these other things that are going to determine our, our retention rate. This leads me into my. Oh, sorry. Go ahead.
BEN21:21Oh, I was going to say that's a great point. You know, because customer success definitely an function that you're seeing a lot of AI infiltration. And that's why I think it's so hard. You know, it's like the magic number, which is, you know, quarter over quarter revenue growth times four annualized divided by previous quarter sales, marketing spend.
BEN21:41People use that as it go to market efficiency number. But it's it's hard. It's more than that because it's you're looking at revenue. You've got churn in there. So who is impacting say churn. You like you said, what if we have a horrible customer support function and sometimes I forget I, I can't get my answers. I'm done with this application.
BEN21:59I'm going to find their competitor. You know, it's hard to prove those linkages. And so yeah, that's where yeah. Maybe half the support as I know, for measuring that. Are we losing customers for that? That's that's harder. That's where it's like kind of the the you're getting back to see us. Can we prove out the ROI versus just anecdotally?
BEN22:22You know, I reminds me of Office Space, or the guy who was a he's like, hey, I'm good with customers. I talk to customers, you know, trying to, you know, validate his job function. You know, you know, and that's why I'd say, yeah, if we can have some, some hard math behind it, it helps.
EDDIE22:37Yeah. I mean, and I want to get into, like, this hard math because it's actually a lot simpler than I thought it was going to be. I mean, I reached out to you because I genuinely, genuinely wanted to know the answer to this question. And now that I know it, I'm excited to share with the audience. But before we get into that, I think you bring up a really good point.
EDDIE22:53You talk about the magic number. I tend not to think about that too much. Maybe I should, but I really like just to go to market efficiency ratio, or I would really love to just think about things in terms of margins that go to market. We have something we call the go to market efficiency margin, where we just take the ratio and just multiply it by, gross margin percentage so that I can see, like, how much did our entire gross margin grow from last year to this year, and how much did we spend on sales marketing in CSS in order to drive that number?
EDDIE23:22That, to me is like a very high level barometer alongside like the rule of 40, for example. And then now we can see like, how is the business performing overall to throw a magic number in there? If you want a couple different ways to look at how is the business performing at the highest level, then we break it down in new business versus, net revenue retention.
EDDIE23:40And for new business is really straightforward. You've got, payback, you've got LTV to calc, you've got a few metrics that give you the idea of like, how much are we spending and how much are we getting back in terms of new business when we go into cost, this is where it gets really murky. And I wanted to paint that picture because I'm excited to dive into this.
EDDIE23:58This formula with you. But the way that I'm looking at this is like, I want to know, like overall is my business business performing okay, great. Is new business doing well is and are doing well and keep drilling down until I get down to like the minutia of oh wow. Like we really have a problem with like our enterprise inbound.
EDDIE24:17And if we do XYZ, either from a financial perspective or an operational perspective, we can make a more valuable, profitable company. But if you can't even figure out, like how do we evaluate customer success, you know, we're still at like the second highest layer. We can't get down further. That was a bit of a ramble. I'll give you an opportunity to react to that if you have any thoughts before I go to my next question.
BEN24:40Yeah. That's why if we think and I think that's why I see us, you know, really needs to understand the calc. You know, how gross revenue and maybe, you know, everyone does. But I teach this at my academy or how you calculate gross revenue retention, how you calculate customer retention, how you calculate net revenue tension correctly, what layers to use because you think about it, think about them.
BEN25:05Our waterfall, which is beginning our new major expansion contraction term in why this is so difficult because you think, all right. If Mike's team is focused on gross retention, that's our Northstar metric. You know, and this is where we are, we're looking at aggregate retention. Do we have cohort retention just for Mes, x assign certain customer accounts.
BEN25:28But say our account management team is doing a great job of expanding our customers, you know, and but our contraction and churn profile has not changed. So basically they're adding more expansion more, which is increasing our total MRO number. So, you know, this is where it gets into the math of like all right. The denominator gets bigger and bigger, which then ultimately helps our gross revenue retention number because those numbers are getting smaller in relation to our total MRO number.
EDDIE26:01Because you know that $10 million of churn, but 10 million over 150 million instead of 10 million, over 100 million.
BEN26:07Yeah.
EDDIE26:08Is better.
BEN26:09Yeah. That's why it's this is so hard because you really have to isolate these scenarios or cohort, because you have so much impact in your MRO waterfall that you know that the number is constantly moving each month. And that's why, you know, my blog post explains in my blog post, do you have an Excel calculator? You can download it, and just run through some of this math.
BEN26:33And it will I do think it's it's a very hard numbers look at it. But it also gets to the heart of, you could say ROI, where it's like, all right, if retention improves so much, you know, is that covering my costs? You know, but also it gets harder here to add because you think, all right, I'm not just saving.
BEN26:53Like if I save some customer accounts, improve retention, increase them or not. This this year that I improved them are like it's that lifetime value to like that more stays for maybe another couple years, which also, you know, gets into ROI. You know and this this gets into now present value of cash flows and all that stuff. But that's why I think you don't see a lot of this math published out there.
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EDDIE27:42let's break this down because I want to simplify this. Right. And I think the, the way you did this in your article after you went through a lot of really complicated accounting stuff, it was relatively simple. So let me explain it. And you can react to let me know if I got it right.
EDDIE27:55So what you're doing is you're saying, okay, like we change nothing, let's forecast what our gross retention will be. So let's say we're at $100 million in revenue. We're going to churn 20% of that. So we expect to retain $80 million in revenue next year. If we if we just do everything status quo,
EDDIE28:10then you say, okay, we're going to do XYZ and cost to improve that.
EDDIE28:13Maybe we're going to hire a few systems. We're going to ask them to do covers, monitor health, do XYZ to try to help these customers be healthier so we can improve our retention rate. All right. How much is that going to cost us? We're going to get three customers plus x y z I don't know half $1 million hard cost in a year.
EDDIE28:32All right. Now we look and we say, well I think that if we do this instead of churning 20 million, we could churn 15 million. So that's an incremental $5 million of additional revenue. In addition to the new business revenue and the expansion revenue, and also in addition to like, we now have that $5 million of additional revenue that we could potentially retain next year and the year after and the year after that.
EDDIE28:55Now I'm comparing a $500,000 spend to a $5 million return on my spend. That's a pretty strong ROI. Is that the right? Did I summarize the the way you're looking at this?
BEN29:11Yeah, yeah, that's the gist of it, right? Yeah, exactly. If we're horribly narrow, we're going to lose 20 million. Let's just say, you know, we're we're retaining 80% of that offering, you know, can we improve that by a point? Two points, five points, $5 million. And yeah, that's that hard ROI. That's the math of like, all right, we need to invest 500,000 to save 5 million.
BEN29:33You know, incremental. Right. These were incremental changes then. Yeah, we would take that all day long because we save that 5 million this year. And then maybe we save that for another couple of years.
EDDIE29:42Now let's let's roll play for a bit. Let's say I'm running go to market, go to market ops one of the other both. And you're the CFO. And I come to you and I make this case. How do you evaluate that? There's a lot of assumptions baked in, right? I see two challenges with this challenge. Number one is I'm making the assumption that if you give me this half $1 million, I'm going to be able to give you $5 million back over the next 12 months.
EDDIE30:04That's a big assumption. The other assumption is that this $500,000 spend is actually going to impact that, that we're not going to get that $5 million because the product team over here made the product better, or, you know, DevOps made, like, I don't know, the the the product faster and more reliable and less downtime or like so many different variables or the economy changes, for better or worse.
EDDIE30:28How do you look at that as a CFO?
BEN30:30Yeah, that's where it gets it gets much harder because we have the investment, we have the retention improvement. But like you said, can be attributed to us. And I think it's just like we had a discussion like, hey, I want that, that deal, as a new business rep, but maybe they were just, you know, feeling good that day or whatever.
BEN30:51Who knows? Maybe it was a B. So. But you're right. Maybe our product team is doing a great job with the roadmap and in in fixing things that improve our retention, you know, the whole philosophy or product roadmaps. So it is you then? Yeah. There are a lot of influences there that we would never be able to quantify.
BEN31:14But I think in this case, you know, we have to you know, it's like I think back to business school, it's like sometimes like the old professor didn't give me perfect data to work with. It's like, what I hear, I'm missing data. Like, what's going on here? I can't do this. And that's. But that's real. That's real rope.
BEN31:28You know, business cases where it's like you don't have perfect data and you have to make some assumptions there. So I think it's also just make it, you know, if we're presenting these cases, other considerations that people should think about, you know, when we run these analyzes.
EDDIE31:43Yeah. And I think what I'm hearing is we've got to make a lot of assumptions. And at the end of the day, like a CFO, you're going to make your best judgment call and you're going to say, okay, like you're pitching this $500,000 cost for a $5 million payback, to what extent do I believe that and how much do I think I can back that?
EDDIE32:00And also, do I have the $500,000 to spend? Like if you've got the P firm breathing down your neck to maintain 30% EBITDA margins, like you might just not have that 500 K full stop period, right?
BEN32:09Right right. Yeah, yeah. And that's that's where even it feels like. All right. You know invest in Chrome a 500 K. And if you can. And I see retention improve by 500 K in the first year I will break even. But we know all right. That will compound over time. So I think it's yeah putting those numbers on the table makes sure the analysis is clear.
BEN32:31And you know then be able to track it, you know, then this gets to it's good metrics, good tracking, good data. Because this is a point in time we're saying, all right, here's how we perform today. Here's how we think we're going to be performing. And we've got to measure that difference.
EDDIE32:43Are you trying to just give me a layup to like pitch the raison d'etre, for my belief system or I'm going to market because like, of course in accounting you're going to want to have good data. And in your article, you know, you lay out like this is exactly how to think about bookings. A lot of stuff that's over my head, thank God I don't work in finance anymore and have to worry about all that stuff.
EDDIE33:03But on the go to market side, it's like, well, how do we measure this stuff if we don't have a baseline for understanding? Like, okay, we're going to have all these csvs do all these queries, but we don't even measure that whether or not they did a QBR. There's so many things in go to market that unfortunately, like us have to be manually inputted or we have to like sync calendars or do something to get that data.
EDDIE33:25I may be like, maybe grass is greener. I was just assume bend that on your side of the table. You guys have perfect data because it's happening. But it is very frustrating. And they go to market side like it's hard to form these hypotheses and test these hypotheses. If you're just looking at absolute junk data on the go to market side.
BEN33:41Yeah, yeah. I mean, yeah, your financial data hopefully is locked in pretty good. Yeah. Depending on your stage. But you know other things. Attribution very tricky. You know, like all these revenue retention schedules and schedules and different segmentation and you know, that gets, you know, and that's a big discussion today with AI, right? I will only do a job with that data if we have good structure, even in the history of data.
BEN34:05You know, which is a whole nother discussion. But, yeah, I mean, we also financial data hopefully pretty good, but now it's getting to metadata. All right. You know, I did some debits and credits, but we have to enrich that accounting data. Otherwise we can't do much with it. You know if it just says we spent $55,000 on this.
BEN34:24Well okay. That was a marketing spend. But what was it for? Okay. It was, you know, social ads. Okay. Which platform? You know, which campaign was a tie to. So all this enrichment, you know, and that's where controllers are getting, I think much more sophisticated now is like, we've got to start just like we always thought, you know, go to market enriching data, interesting contact data.
BEN34:43The same thing on the finance side is a rich enriching all that data we work with.
BEN34:48you bring.
EDDIE34:48Up a great point. Like it's like I look at this, and I think it's funny because, my wife does, or she doesn't do it anymore, but she's been doing, accounting for a number of years. We've hired somebody else to do it, but it's just like when we're trying to build a process. Like, I was just so anal about all these little things, like, for example, client travel.
EDDIE35:05Are we driving to the client because, like, we want to do it on our own dime. We want to try to upsell them or improve a relationship or whatever. Are we doing that because they ask us to come and they're going to reimburse us? Well, for me, it was really important to have those two very distinctly separate line items on the PNL.
EDDIE35:20And one thing is kind of a sales activity. And another thing is it's not even a cost because we're getting reimbursed. So, you know, if I didn't have that data and I just, I just said travel. Well, then what am I supposed to do with that?
BEN35:34Oh, yeah. Travel is a big one. Yeah. I mean, that's really a lot early stages that reimbursable billable travel that we're going to charge for. Is it sales travel going to the sales cost center. Yeah. Like early stage sales. You see just like this big bucket of travel. Yeah. It's like okay we've got to get a little bit more sophisticated to you know, so if you're 100 millionaire you Private Nield maybe not, I don't know.
BEN35:53But travel internal use software. Yeah, it's kind of it's kind of follow people who are who are, you know, actually spending it.
EDDIE35:59Yeah. So let me bring this back to the CSR question. Where would you set the bar. Right. So like we've got a rule of thumb with PAC payback. We want to be, you know, 12 months or less. Meaning that, you know, if we spend, you know, $30 million on on new business sales and marketing, we want to get $30 million of margin back.
EDDIE36:20Right? Did I mess that up? Sometimes it's hard to do the math in my head. And if we've done that, then we've got a really profitable new business engine. And if it takes us two years to get that money back because we spent 30 million on sales and marketing and, you know, we only sold $20 million and we have 75% margin.
EDDIE36:35So we've got $15 million. So it takes two years to get that 30 million back. That's not necessarily the healthiest new business motion. Hey did I get that right? And then B is that how you you're looking at the same question about investments in CSS?
BEN36:50Yeah. And that's where I guess, you know, I wish we had a customer success payback period where you just, like, lay back and look at all right, then investment. And then how many years does it take to pay that back. So if we are investing so much in customer success, how much does that improve your retention? You know, that's like the era that we're landing and we don't expect one month payback.
BEN37:15Plus we're plg or self-service baby. But we expect that over time, you know, so you can kind of think about that same way, you know, exactly like the incremental 500,000. Well, maybe that only, you know, improves retention by 250 K of IRR, you know, and now we've got a two year payback on that customer success. So we can kind of think about it the same way.
BEN37:39But there are no benchmarks out there. But what I want people to think about is this gets to working capital. And how capital efficient are we? Because I always say, like for tech payback, this is like that in our business. So I give you, Eddie, your $100,000, to say get 50 K of IRR and let's say not gross margin adjusted.
BEN38:01That's a two year payback. Well, now, as a CFO, Eddie, I'm waiting for you. In month 24, I want you to come into my office and give me my money back. Right. And that's where it gets to capital efficiency. So if I have a 24 month payback. But my competitor over here has a six month payback, and they're returning that cash back to the Cfo's desk faster, I can redeploy that cash faster within my business.
BEN38:24So it's I'm going to be more I'll need less capital on a status quo basis with you to grow faster, you know, and it gets same thing was cuts was just customer success, you know. So I think that's how CFOs are thinking about it. Is this then really affects the cash flow economics of our business.
EDDIE38:46Do you ever have a bar for like, like a rate of return or anything like that? Like I think about this like, okay, let's say I'm the CFO of a company and we've got some free cash. I could just go buy T-bills with that. Right? Guaranteed money. I don't know what T-bills are paying right now. 3 or 4 or 5% whatever.
EDDIE38:58And I get that money guaranteed, right? I could go lend it out and it's not guaranteed, but I'll probably get that money back. I could go invest that in the stock market and maybe get a 10% return. If I'm investing it in my business. As an individual business, inherently, that's riskier than like just going and investing in the S&P 500, one would think.
EDDIE39:14So I'm guessing the bar is higher, but I've got this figure of 25% stuck in my head. I was like, well, if I can't get at least a 25% return on my money by investing it in my business, if I think that I'm going to put this money in and take all this risk and like most likely scenario, I get like a 10% return, why would I take that risk?
EDDIE39:34Do you think about it this way as well?
BEN39:36Well, when I used to work in the airline industry, we did a lot of PV analysis on CapEx investments in different investments. So, you know, we're very disciplined there. And of course, you know, what's that weird average cost capital you're using that's, you know, highly sensitive, just like churn, just like LTV with that true number in the denominator.
BEN39:52Same thing with weighted average average cost capital. But I think with software with our businesses, it's like if I'm not going to reinvest back in the business, why am I even doing this? Why would I go park it in a t-bill like it, but right from a treasury function, if I have excess cash, I don't need to deploy in my business.
BEN40:09Yeah, we may go parked that somewhere and and earn rather than sitting in our bank account. But yeah, that's the thing. It's like, all right, we could calculate wax and cost, the return and all this stuff. But why are we in business if I'm not going to reinvest and I don't think I'm going to get some return there?
EDDIE40:24Yeah, that's a great point that I overlooked in breaking on weighted average cost of capital, if I can remember 25 years ago and I learned this in school, is basically just taking like, well, okay, we borrowed this money from the bank at this rate. And, you know, the equity that was invested into our company is expecting this kind of a return.
EDDIE40:39And we average that all out depending on how much we have from each. And this is our weighted average cost of capital, which to your point, if we're in a mature business, specially like a public company, and our weighted average cost of capital is say, 10%, then if we can't get a 10% return on investments in the growth of the business, then we should just return that money back to our investors, right?
EDDIE40:58Like that's the minimum bar.
BEN41:00You know, I think for financial sponsors, financial buyers, PE firms, you know that. Yeah, they're going to be much more disciplined looking at internal rate returns or right. Because yeah, they're putting money to work and they need a cash on cash return, you know. So like if I'm not going to get that well maybe I'm just going to sit on the money or maybe I should park it somewhere because it's all about the unit economics of that dollar in.
BEN41:20And what am I getting now in five years or whenever they exit on that company? So I think it's good. You know, if you're in that PE realm to understand those, those economics, where it's on their side. But as a CFO operator, I'm looking to invest, you know, in initiatives, you know, based on corporate priorities and objectives that, well, you know, if our growth, our goal is growth of our goals, efficiency, whatever it is.
BEN41:45But less so looking at cost cap, of course, that's a that's a consideration.
EDDIE41:50Yeah. And so bringing this back to go to market if I'm a CRO and I'm coming to you as CFO and I'm asking for money, for example, for these three seasons, essentially what we're looking at here is like, what kind of a return do I need in order to justify that? Like, are you like, given all of that risk, are you just kind of looking at this against weighted average cost of capital?
EDDIE42:12Or are you saying, wow, it's really risky. Like I want to get at least A2X return because I assume it's probably really not going to pan out that way. Like, what's the bar I should be thinking about? If I'm thinking I need to go to my CFO and ask for more money, assuming we have it, what's the bar that I need to say?
EDDIE42:26I think that we could get this back in a year to justify that investment.
BEN42:31Yeah, I think if, if say something came see us later and said, hey, I want to continue to invest in X, you know, it's I'm going to look into WACC or cost capital. I'll be all right. I'm gonna look at my retention patterns. You know, with the cost function, has our retention improved over time? Gross revenue retention and also, are we at a point where actually gross revenue retention is a good number?
BEN42:53We're at least median performance, or maybe we're top quartile performance. Then it's a matter of I'd say coverage. You know, as we scale with revenue and customer coverage versus, oh, we have to make a dent in gross revenue retention. So one, what's the historical pattern or gross revenue retention hasn't improved over time because we've had a cost function of it has not improved or it's static.
BEN43:18Well how do I know that's going to. Well, I could just maybe not do anything. And we continue to stay at these same levels, you know. So I'm going to kind of look at those historical patterns. How do we perform right now. And also for a decent size. Right. You've got to segment your customer base SMB versus enterprise PG customers versus SLG customers.
BEN43:37Like what are those retention patterns, you know, and how to see us impact those different segments of our business. So I think it's going to actually actually be more a big picture looking and seeing if if this makes sense and if the the overall trends and numbers justify that, that investment.
EDDIE43:58That's a really important point. I'm such a big fan of segmentation. I mean, I look just in our own business, we did that segmentation on this exact situation in our own business. So we just realized, like companies of a certain size, we were just having so much trouble with. And the second thing we just pulled back and said, look, let's just stop trying to attract those companies.
EDDIE44:17All of our metrics improve drastically, including retention.
BEN44:21Yeah, that's a good point, right? What what types of customers are requiring? Are they the right ISP? Maybe no matter what size we we put push at them. It's a that's not going to prove because we're just we're getting those customers from the wrong channels or they just don't fit our IQ.
EDDIE44:34Yeah, well this is awesome. Like a lot of math here. Like I said before the call, like somebody who's driving on the freeway trying to, like, you know, listen to all this. And they haven't heard weighted average cost of capital or magic number before. It might be a lot to digest. But this is great. Then, if people want to learn more, we'll put the link to the article I mentioned in the show notes.
EDDIE44:55How else can, can people find you?
BEN44:58Yeah, definitely. That will take you to my blog. I've got tons of content, different concepts or topics that I cover there. Of course, a bunch of templates that you can download and then, yeah, yeah, if questions come up, you of people can email me, then at the cfo.com.
EDDIE45:12Awesome. Well, thanks again for joining us or joining me.
BEN45:15Thanks, Eddie.
EDDIE45:15There's no us. It's just me.
BEN45:17Yeah. I just love joining you. Yeah.
EDDIE45:19Awesome.
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