Sri Batchu: evaluation

Transcript context

…Speaking of metrics, I have this note here that you're a big fan of payback period for measuring investment ROI versus CAC. Can you talk about why that is? Yeah. CAC obviously gets thrown around a lot and a lot of people are like, "Okay, you have to be reducing your CAC, CAC, CAC, CAC. " There's a fundamental flaw to it which obviously is that you're focusing on cost and not the value derived. And so when you focus on CAC and reducing CAC, what tends to happen is you actually might be doing something very damaging where you're succeeding in reducing CAC, but you're actually bringing in customers that are less valuable because those are the ones that you're able to attract with a lower CAC. And so reframing it away from CAC towards LTV is helpful and that's better. So thinking about for better customers that are bigger, we want to spend more. So you might think, okay, well, LTV to CAC might be a better way of looking at that. I think the challenge with LTV to CAC especially for a lot of, even Ramp, it's only four years old, is it's really hard to predict LTV. It's like a DCF, it's extremely assumption laden and it's hard to know what the final value will be. And especially if you think your churn is low and your LTV is very high, you might end up spending a lot of money because you're like, "Oh, my LTV to CAC is great." And then a year or two into the business, you realize actually your churn is higher than you thought. Your initial customers aren't representative of your long-term retention and all of a sudden you've destroyed a lot of value by looking at LTV to CAC, which is why I'm a big, big fan of payback period and actually being really thoughtful about that using contribution margin, not revenue or gross margin, like how long of contribution margin from this customer does it take to payback their cost? And setting this obviously is typically a mandate from the executive and board level on what is the payback period that we're comfortable with, and then just orienting everybody towards driving that blended payback period down as much as possible. For folks that aren't familiar with the concept of payback period or contribution margin, could you just briefly describe what those mean for listeners?…

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