SaaS Interviews with CEOs, Startups, Founders
How we pivoted our customer experience map to hit 80% Gross Margin
22 Jun 2023
Chapter 1: What is the focus of this podcast episode?
I'm very excited to share this recording with you guys, which happened at our conference, sasopen.com, with over 100 speakers, all founders of B2B SaaS companies. We have a very high bar for what speakers share on stage, so you're going to enjoy this episode where we dive deep into revenue graphs, real tactics, and real growth metrics.
You are listening to Conversations with Nathan Latka, where I sit down and interview the top SaaS founders, like Eric Wan from Zoom. If you'd like to subscribe, go to getlatka.com.
We've published thousands of these interviews, and if you want to sort through them quickly by revenue or churn, CAC, valuation, or other metrics, the easiest way to do that is to go to getlatka.com and use our filtering tool. It's like a big Excel sheet for all of these podcast interviews. Check it out right now at getlatka.com. Morning. I'm Rory. I'm the founder and CEO of Trust Keith.
We help startup and scale-up businesses become and stay compliant with data regulation. We do that by combining or by giving them access to a dedicated expert backed up by software. We now support over 50 scale-ups. We're bootstrapped, and today I'm going to talk you through how we're solving for gross margin. We often hear about this 80% number. Here's how we're thinking about it.
Here's how we're working towards that. And hopefully give you a bit of a semblance of how you can go and achieve something similar in your businesses. So there's three parts I'm going to talk through. One, the actual mapping process that we go through and some tips on, some mirror tips on that.
Two, how we're solving for gross margin, but also just putting some context about why, why 80%, how we're thinking about that and what the market looks like for that. And then finally, how we're thinking about it in the future. So as we're scaling to this next revenue milestone from our perspective. So to give you a bit of context where we're at, we're just over three years old.
We are, as of this quarter, we're north of a million dollars of annual recurring revenue. And it's been a real slog to get there, as you can kind of see here. To give you context, our average customer value is around $23,000 per year. And that's a bit of a flavor. Next, just to kind of put some more context behind that is what our team looks like.
This is the structure we have really effectively as of March. We're a team of 12. It's all bootstraps. It's been very leanly done. The lighter color here is, the lighter color ones are like freelancers and consultants that we kind of lean on as well. We've very intentionally built the business around a book called Traction, which is a book by Gino Wickman.
It's really like an operational playbook that you can run in terms of customer values, accountability framework, the metrics and the scorecard, really at the rhythm of the business. And one core element of that approach is the functional approach. So we have three core functions, which you can see here. Ops, which is people, ops, and finance.
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Chapter 2: How does mapping the customer experience contribute to gross margin?
You didn't track it. Yeah. We know what good looks like, yeah. So I would define gross margin as cost of goods sold. And I'll give you an example just off this about how we kind of tally it up. And then additionally here on this next graph from the same index, we're seeing ARR multiples versus gross margin.
And all those blue dots are the top percentile ones and some classic brands in that space as well. In any case, ultimately, gross margin is just one of a basket of metrics that is going to get you to the high multiple, but it is definitely a core part. So was there a beginning to the, obviously, work on gross margin, right?
The question is, in a SaaS company, typically, there's a lot of fixed costs. You can have very high margins when you get to a point. But there must be other certain, you guys obviously did a great analysis, but there are certain costs that tend to be a big part of the revenue, marketing, or something. And there's both margins and just the direct costs associated.
Then, typically, some of the huge costs that all these companies have to spend? Is it marketing or something? Is there a cost like that? I think you're right.
I think the gross margin one, even if you're massively burning cash, you can probably still have quite a good gross margin because you're really only attributing the cost of goods sold or from a product perspective, even just like the maintenance cost of doing that, which is typically quite marginal. I think where most companies are then overspending is on the customer acquisition side of things.
Until they can get that, you know, you think about the customer acquisition payback period, I think for a lot of companies, it's sort of north of 12 months. No, not yet. But that would be useful. Yeah, agreed. But a quick snapshot of those players there. Next is then looking at determining dual gross margins. There's kind of two different ways that we look about doing it.
There's obviously the classic way, which is top-down, starting with your P&L, pulling out cost of goods sold. And then we might think of the team cost. For us, with our data protection officers, we might say, well, 75% of their time is billable, is customer-facing. 15% is just kind of internal stuff.
But useful from this perspective, but the more investigative way that we've done as well is going bottom up. So when we come back to those swim lane sort of experience map that we've got already, we can actually go in there and start attributing cost to each stage of these as well. So we can get real granular around what are the expensive parts to it.
And particularly, again, some of those customer value moments. What's the cost of delivering that kickoff meeting? whatever it might be along the adoption curve as well. So that's been really useful for us. And it's also a really good collaborative team exercise to get people bought into finding that 1% incremental improvements as well.
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Chapter 3: How is the customer experience map structured?
putting goals on an annual basis. And we're tracking on a monthly. So you can see our actuals were above where we wanted to be. And we're on track to that golden 80%. And this metric is owned by our director of customer experience. He sits down with our finance manager twice a month. And we're just keeping a real pulse on that metric. For us, it's a real north star for us.
And that's what we've been solving for. The next thing that we've been thinking about as well is understanding what our levers are for increasing gross margin. There's ultimately kind of two things to that. One is bringing the cost of goods sold down, and the second is increasing revenue. Ultimately, the cost of goods is a lot more controllable than the revenue, particularly in the short term.
So some examples for us on cost of goods sold would be the frequency with which we're reviewing our customer experience map to find those 1%. It's that internal culture of always trying to get the team to find that 1%. But as well, how we're solving for this next evolution of kind of product development.
Because there's a lot of things we're doing internally that we know at some point we can automate or productize. So for us, we're always keeping that back in mind of what would need to be true for us to achieve that. Next up is just increasing revenue.
I think there's a more controllable element of this in the first case, which is improving average customer value, particularly if you think about your existing cohort of customers, the efficiency of upsell and expansion. I talk to a lot of founders, and I often find that they're more interested or more focused on new revenue as opposed to growing existing revenue.
And I think we all know the power of good net revenue retention. That compounded over time is something that we've been solving for.
probably as a mutual priority just because we've already got access to those customers and that opportunity so the final thing then is how we align the team with our gross margin we keep this as a annual goal it's something that's shared frequently in the business and it's something that we report on a leadership on a weekly level, monthly at our all hands.
It's always present in our objective and key results and as part of our annual game planning process as well. So that is a quick recap of... how we're scaling our gross margin. And ultimately, this is what I've walked through over the last 20 minutes or so in terms of the mapping process.
And you've got the artifact if you want to do that workshop yourself, how we've solved for it in a couple of examples, and how we're prioritizing it going forward. But if you've got any questions, just let me know. You had your CX workshop screen up there for like 10 seconds. It should be. Nathan will probably distribute it. It'll be like one of the things. I'll get it out of there. Thanks. Yeah.
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