00:16 Hey, welcome back to the show. And today I'm so happy to have a fellow Dutchman. Jacco, will you please tell us who you are and what do you do?

00:24 Well, thank you for having me. I'm Jacco van der Kooij, born in the Netherlands, living in the US since 1998. And my job is to help companies go to market. I run a company called Winning by Design and have written a number of books on the topic, but the most recent one is revenue architecture.

00:40 Revenue architecture. Talk to me about that. What does that mean?

00:42 Well, Todd, what revenue architecture is about is understanding that the growth and all cost has come to an end and is replaced by a more scientific way. And what does that scientific way really means is focus on those customers that want to buy your product and keep coming back and you'll be all right. But if you keep focusing on targeting customers that most likely don't want to use and implement your product, then it's going to be tough sledding moving forward.

01:09 So what you're saying is continue to generate revenue from people who've already bought from you, like your service, like your company, and offer them new things that they might want to continue to buy from you instead of always focusing on new client acquisition. Is that what you're saying?

01:23 That's right. And the point here is that this happens thought this switch happens primarily somewhere between two and $20 million where the switch in a company needs to occur. And often it takes place right about eight to 10. And I can tell you in detail why that is, why that happens at that particular rate. How do you need to change it and whatnot?

01:45 Right, right, right, right. You know what, this is fascinating because a lot of our listeners on the show are in that exact range where they are thinking, okay, I launched, I'm making money, I may not be doing everything right, but I don't know how to get out of this rut. I'm kind of stuck in that $10 million range and I don't know what to do next. You're telling us that there is an architecture and there is a framework that allows them or helps them to get out of that rut. Where does it start?

02:14 Yeah, so to start is to understand that what gets you to six, seven, $8 million will hinder you to grow beyond that. That what makes you successful to that point will make you unsuccessful beyond that point.

02:27 I love that. I love that. And what do you mean? Cause I, I have experienced that, but a lot of people out there listening to me, what are you talking about? I'm making money.

02:37 Yeah. What makes you successful and generally is a few superstars that are really, that you've hired really well early on. And those superstars make a difference. They make a big dent on the number to help you establish the first customers, the first million. And so you keep growing on those people. But then as you started your business, you most likely prided yourself that you didn't apply process. You may have even hired people and said like, Hey, we don't have process here. We're just working closely together as it. Then when comes eight, 8 million dollar comes around and suddenly comes to the conclusion you need process.

03:11 Right, right. Isn't that a funny awakening?

03:14 It is a funny awakening. Typically what happens here, Todd, is the following. By that, when you see it's six, seven, eight million dollars in revenue, you start to hire people, you start to grow from about 20 people to about 50 people. So now you've got a huge influx of people. You got new people coming in, but you don't have a process established. And so what they're going to do, they're going to bring their processes with them from the previous company. And before you know it, it looks like an ugly kitchen drawer with all the tools that you know need and all the people, everybody doing their own little thing.

03:49 Right, you know, I've seen this a million times myself and I've actually experienced it myself where we were in that same rut. And I gotta tell you, it's frustrating because at the beginning of a launch, you always take so much pride in the fact that, hey, this is my buddy and they can wear any hat. They can do accounting, they can do marketing, they can do everything. But when it comes to scaling time, what is the difference? What do you actually need?

04:13 Okay, let me ask you the following question. You need to hit, think of yourself as a regular VP of sales, right? I'm not asking you to be the perfect VP of sales, I'm asking you to be the one that represents 90 % of the market out there. I'm telling you, Todd, that I'm gonna increase your quota for this year, and let's call it new acquisition quota. Last year you did $3 million, but we're on a rapid growth trajectory, so I'm going to ask you, I need six to seven million, maybe eight million more of you. What are you first, what are you gonna ask back to me? I'm saying it's like, hey, Todd, you're my VP of sales. I need you to do from three, $6 million. What are you gonna ask from me? 

04:54 Who can I hire and how fast?

04:56 Okay, you want to hire. Okay, now look at the following. Your growth is slowing down. You're not hitting quota. You know, the problem is, right, you look at your team. What is everybody in your organization? You got like six, seven, eight, maybe 10, 20 sellers working for you. You're not hitting quota. What is the first thing you're going to do when you miss quota?

05:14 Well, as a sales guy, you're going to say, well, our leads suck. We need to talk to the marketing guys. It's all the marketing guys fault. And then the marketing guys are going to say, well, the product guys aren't giving us what we need in order to sell the right product. And so you've got this ever never any circle of marketing sales and product guys all going like this.05:31 Okay, so we got leads falling short. Now, when the salespeople are not performing, when you notice that they're falling behind quota, what are you gonna do with the salespeople?

05:41 Just drive them hard, hard and say, look, 

05:42 Driving hard, but it's not working. 

05:44 Yeah, how do you deal with these leads? Yeah.

05:46 Driving hard, but it's not working. Okay, you have more and more, you have more and more people missing quota. What are you going to do?

05:53 Restructure and figure out what kind of leads we can build and what kind of leads we can generate and also really identify that we are working with the right client avatar. And on top of that, to your earlier point, I would try to define ways that we could repurpose or reengage with our existing client base, get them to buy more.

06:17 Yeah, here's the think talk. What is happening here is as follows. When things go right, you hire more people. When things go wrong, you either blame the people or blame the leads. This is a very typical example of a people -based organization. We blame the people, we hire more people. Whereas, where you should have seen, is you should have looked at as a process issue. Now you pointed out earlier already to the right solution is like, look, it's not about more leads, it's about better leads. It's not about that the people failed, it's that the process failed. So organizations, once they go beyond $10 million, instead of firing people, they need to inspect the process first. What is going right and what is going wrong? Now, the lead flow in generally, up to $10 million, you're very input driven, meaning twice as much revenue, I need twice as many leads, right? I need to grow faster, I need more leads. Input driven, more leads drive more output revenue. Beyond $10 million, at a certain point in time, your lead flow no longer works in a linear fashion. In other words, you can have twice as many leads, but it starts to create less and less revenue. Like you were having an issue.

07:42 More broad, right? More broad lead finding and less, you can't be as concise when you're going for that much volume.

07:47 Right. And now what that means is that you've got to start focusing on throughput performance, not on input performance. And throughput performance in generally in based on a process is based on three things. This is not like difficult to understand. Every factory works of this, every organization when they realize work on this. If I have input and throughput and I have to generate more revenue, input more leaves, throughput better performance, then in general there are three things. Number one.Is my process optimized? Number two, do I have the right tools to do it? For example, automation or AI. And number three, 

08:29 Right, your tech stack, right.

08:30 Your tech stack. Where your people get involved, do they have the right skillsets? And what you find today thought is that these three things are all under severe threat. They're all being pushed aside. And so as a result, people say, hey, I have not enough leads, well we go like, well you don't need that many leads. Folks, you get like 200 leads a week or a month, like you got plenty of leads, but you're not treating them correctly.

08:52 Right. Right. It's like a one contact attempt and they're done. Right?

08:58 One contact to them or a bad contact to them, are they applying the wrong process? They're putting an SDR on a roll of a $200 ,000 deal, right? You can't put an SDR on that. That's gotta be potentially even the founder calling that person back or something like that, right? 

09:13 Totally, totally agree.

09:14 So you're moving through this process by using the wrong process or using the right process, but you're executing it badly. Your seller has no skillsets or using the tool, you use automation tools to write the highly unpersonalized message back to them, right? All these things are bad execution. And this is really what happens when you go from before 10 to after 10. Because remember I said earlier, you are bringing in a whole lot of people without process. And so that is going to create a lot of variety. And what took you to $10 million no longer applies suddenly when you're hiring two to three sales team, you're having two to three access sales team size and they're not using process. They're all doing it their own way. Well, that's where your performance goes.

10:00 So how early is too early? You know, cause I hear what you're saying and I love what you're saying, but there's a lot of guys that are saying, well, we're doing great. You know, we're just, you know, they're at six, seven million and like, we're just going to keep this trajectory. We're going to run it all day long the way we're doing it. At what point you think it's 10 million, can it happen sooner? Can it happen later? Like what are some signs that you can see? where it's just getting to where you're limiting your bandwidth by the amount of leads you can generate.

10:30 Okay, we're going to use, and I hate to say it's science for this, right? 

10:31 Let's trust the science.

10:32 We're not going to use it. And so the science simply tells us, if we look at the conversion rates of the different metrics, it shows us that the conversion rate starts to show diminishing returns. And when that occurs, it is quite visible. And so it's easily visible when that occurs. Now note, that in most organizations we recommend, you know, like at Winning by Design, we've helped over a thousand SaaS companies, some of the largest in the world, right? Like we've helped DocuSign and Dropbox and we help companies all the way to about five or $10 million. And what we see again and again in that range, one of the early mistakes that companies make is that they have too many GTM motions too soon. So, they have, oh, we're selling to enterprise with two and we're selling a little bit to the mid market and SMB, but you got to stay focused.

11:30 Okay, so company comes in, they're generating some in smaller scale business, they're doing some in mid -size, they're doing some at enterprise level. Where do you tell them to focus?

11:37 We tell them to focus where they are most, where they're dependent on two things. You can either grow the fastest or grow the most efficiently. In other words, generate the most profit. Independent, you know, like if you grow really fast and you can continue, but it's costing you a lot of money and you don't have the funding to support that, then you got to start growing a very efficiency. Growing fast is called scalable growth. Growing efficiently is called sustainable growth. And so you got to pick. Now, if you had 18, $20 million and you have multiple GTM motions, one may grow very scalable, AKA very fast, but cost you a lot of money still. And one may be very sustainable. They grow slightly slower, but they generate more profit. And then if you get around the funding, you can say, which one am I going to spend it? Well, that's the decision that you should be making in an educated way, whatever suits your needs.

14:10 So just to back up on that and kind of reiterate what you just said, there's a lot of companies out there who don't understand the difference between fast scaling and sustainable growth like what you just talked about. I really feel like we could dive into this a little bit more because I want people to understand that there is a difference. Why does it cost more to scale fast than to be slower growth and more sustainable? What is the cost that they're not seeing? Because in their heads they're thinking, I want a hockey stick this thing no matter what. You know what I mean? What do they got to watch out for in that?

14:45 So first of all, scalable growth is based on two particular variables, inputs and throughputs. Every scalable growth comes on that. Now, in the beginning, you can grow really well on inputs. As it forms diminishing returns, you switch to throughputs, right? Now, in order to improve inputs and throughputs, you have three things. Improve the process, make sure you have the right process and execute it well. Make sure you use automation wherever possible. And third one, make sure that you manage the skills. That tells you everything you need to know about scalable growth. Sustainable growth is all about cost efficiency. How many dollars do I need to generate revenue? Now, in generally, there are three significant costs that you need to deal with. The cost of acquisition, the cost of retention, and the cost of expansion. And I simplify it here in these three. Cost of acquisition, what you generally need to do, you cannot exceed 40 cents on the dollar for the revenue acquired in the first year. So if a seller brings in a million dollars a year, I cannot spend more than $400,000 on acquiring that revenue, total comp in this case. 

15:59 Okay, I like that. That's a good metric.

16:00 Okay. Okay. And as we see this again, again, if you're over 50%, you enter the world of unsustainable and that is of totally acquired revenue. Okay. That still needs room for about 10% of that revenue needs to go to lead acquisition. So you need to have leads. So the total cost in the first year, 50 cents on the dollar acquired.

16:21 Okay, so let's talk about that just for a second. 50 cents on the dollar to acquire. This is not talking about fulfillment costs. This is talking about acquisition costs of the client. Is that right? Okay.

16:30 That is right. Okay. Then beyond that, you've got the cost of expansion and the cost of retention. Obviously there's also the cost of onboarding, but in most cases, the cost of onboarding is marginal and we just, for this ease of understanding, we roll them into retention. Now, the cost of retention and the cost of expansion is not that much in year one. In year one, that is relatively low, but as you start to aggregate that and accumulate that year after year after year, you find that at the end of, for example, five years, five, six years, the cost of retention expansion is as much as half the cost of acquisition.

17:15 Okay, fair enough. That's just re -engagement with existing clients, with existing buyers, re -engaging them to try and get them to come back and buy more product. That's what you're saying, okay?

17:25 That is right. That's what I'm saying. And generally, obviously you're not going to retain every customer you offer. You're not going to expand every customer. So there are subsets of that. But what many people don't realize is how much that adds up over the years, that cost of expansion. What we all have been growing up on, we've been growing up on the cost of keeping a customer to be one sixth of the cost of acquiring a customer. And that in SaaS is no longer the case because in SaaS we need customer success managers. We're organizing customer events. We have customer advisory boards. We have customer use case meetings. I mean, like we need to put a lot of effort to retain those customers, right?

18:04 So you're talking about 20 % of your cost to, okay, 20 % of your revenue from existing client base should be applied towards retention and re -engagement with clients. Is that what you're saying? Yep.

18:20 Okay, yeah, now here's what I'm going, here's what I'm going, and I want you to think along with me here for a second, okay? Imagine I am buying hardware, okay? I'm buying a pallet full of routers, right? When, as the buyer, I'm buying that and you're my seller, who takes on all the risk of the purchase, the moment in time that the purchase gets made? 

18:43 The buyer.

18:44 The buyer, all the risk. Now, I amortize that risk over years, right? So, you may recall it, but how many years does it take to amortize hardware? 

18:52 2 3 4?

18:54 There's two numbers really, seven years for telco gear, for typical broadcast gear, and five years for like router style, okay? 

19:06 Interesting, okay.

19:07 Now software, software, perpetual software, I amortize that over three years. Why? Because as a buyer, I take all the risk, and so financially, I spread this out over the years, right? Now with SaaS software, you're buying SaaS software. Who's taking on all the risk?

19:26 The software company.

19:30 the software company, they got to commit to AWS, they got to commit to computing power and whatnot, right? They got to commit to building the software. So they are committing in that, right? Now in that realm, you now Todd, you lend all the costs because you got to pay the seller all the bonuses. You got to acquire that. So it is now you who have to take the risk of all this costs. And so you now also have to amortize this. Now, the way you amortize this, right? The way you amortize this over the years is that you essentially, you are looking at that dollar value that you get, you're looking at the dollar value and you spread that out over three, four, five years. That's the reason why you want your LTV to be several years. You wanna make sure that your LTV is operational over those years. And that's the reason why your cost of expansion, and cost of retention is so important. And once you've seen it, and once you fully understand what happened here, you start to understand how important it is that you manage your costs.

20:48 Love it. I love it. I love it. This is so fascinating because I think that, you know, a lot of people, it's a mystery, you know, that they, everything on the internet, everything on social media, all they talk about is launch, launch, launch. And not many people have explored the formulas that you're talking about and kind of tried to describe the dynamic of the shift between a company in launch mode and a company in growth and scaling mode. I love that you've done this so thoroughly and I've been excited to talk to you about this because this is, I love, love, love to talk about this stuff. This is so valuable. How come people don't know this? How come people aren't talking about this as much as the launch?

21:19 Primarily because growth at all costs has prevailed. Meaning, and growth at all costs was not something necessarily bad, it was just something that over time became bad. Now why, how does growth at all costs works? Growth at all costs essentially says, I value the rate at which you grow more than anything, more than the cost, more than anything. And at the time,

21:46 Which is a typical investment mindset, right?

21:47 That's a typical investment mindset. But what has since happened as the market SaaS market became from Greenfield to a more mature market, the growth rate has halved and the cost of acquisition and the cost of retention has doubled thought. And so now the metrics are no longer sustainable. Now we can no longer deploy growth at all costs. And so now like any other factory, right?that we now have to learn, we now have to learn how to build these businesses in a more sustainable, more scientific way. And that is what we call operating like a revenue factory.

22:23 I love it, love it, I love it. That's a great back way into your concepts, into your book. Your revenue architecture and what you're talking about in terms of designing the structure to be able to sustain this, how do you typically encourage your clients? Or how do you typically encourage people to go? Should they be architecting themselves for a more sustainable growth or for just a quick, rapid growth and scale? Just… Does it just depend on their ability to enter the marketplace? What are your thoughts on that?

22:58 It depends on where they are. Generally, in the beginning, you are very much in scalable growth. You grow as fast as possible, doubling or tripling, doubling, doubling, and so on and so forth. But once you start to exceed, and that is really common in the 10, 20 million dollar range. But once you hit 70, 80, 90, 100 million dollars, you have multiple GTM motions, you may have multiple products and so on, you enter a different phase. So it depends on where you're at. But it all comes down to, is you calculate things, you calculate what your growth rate are. Like, look, if your growth rate, one year is 180%, and the next year is 160%, and the next year is 140%, and the next year is 120%, I can tell you what the growth rate in subsequent years are going to be, right? I gotta lie. You're not gonna jump to 200 % under normal circumstances, right? So you can calculate this mathematically and you can create plans around it, which is what we do.

23:52 I love it. You know, you sound to me like one of those guys that's really good at spreadsheet, I call it spreadsheet millionaire. You have the ability to be able to build a pro forma to show this type of growth depending on different inputs and different ways to execute. I have met so many companies that are trying to figure out why they're not growing after a good launch, who have never built a pro forma like that before. What are the first steps for people to think about? Do you have some evidences in your book or in certain things that you've displayed or put out in the public for people to learn how to build these pro formas to understand what their inputs are gonna do?

24:32 Okay. Yeah. What we do is we call it the growth formula. And so for example, if you per month get like 200 leads, right? I'm making it simple. 200 leads that generate two wins that generate $20 ,000, then we can create a growth formula that says in order to have one win, you need a hundred leads and that generates $10 ,000. That $10 ,000 over five year LTV creates $60 ,000 or something like that. Right? That is a growth formula that tells us how your business works. It gives us the idea of causality. It gives us the idea of what causes one thing causes the other thing causes the other thing. Most often, and I want to amplify this point. Most often we think of win rate, for example, as a conversion metric, as a static number. Our win rate is 18 % or 22%. We look at win rate as something that has a trend line. It could be seasonal. It could be trending down over time. The average over the past two years doesn't matter because our current win rate is trending down to 18%, although our average over the past two years is 24%. Right? You go like, but you look at these trend lines and you base your forecast on these dynamic numbers. This is not complicated Todd, but it requires. 

25:56 There's dynamic numbers, but there's also some fixed inputs.

25:57 They are, say that again, what do you mean with fixing?

26:00 What's that? Yeah. No, I have a feeling that there are a lot of dynamic inputs that just kind of appear that they don't have a lot of control over. But what about the fixed inputs? What can they control and how do they map that on a spreadsheet?

26:13 Okay, one of the big metrics that they can control is discount. Discount is often given at far too quickly that you go like, look, the customers are not as dependent on discount as you think they are. So you can be a little bit less lavish with the discounts. That is one clear metric that we can see. Second, disqualify early on is also something that should be learned and taught properly. Any deal that enters the pipeline, that is unqualified causes the company a lot of resources that have to consecutively be spent on that. It may for an expensive deal, for a typical engineering deal, it may even require a sales engineer or a proof of concept, an extensive demo, whatnot, right? The executives flying on site. And that's why you always got to be very careful to qualify out. So qualify out and discount. These are two very static things that you can easily focus on.

27:08  Love it, I love it. Now if you're listening to this and you're getting a little bit lost in the weeds that we're jumping into because we both love this topic, if you have not built a pro forma to map what is actually happening in your business, I know a lot of you have come up with an idea of what's going to happen when you launch, but once you've launched and you're actually generating the revenue, it's a good time to look back at what is actually happening in the business. Not what you forecasted, but what's actually happening. And recalibrate, because if you don't recalibrate and you don't understand what's happened versus what you could have happened, that could be a huge missing link in your ability to grow. Am I right there?

27:50 You're absolutely right. Calculating is a fantastic way to do it. Look, the thing that I want to make sure, often taught, this is a mistake that people make, but this is an easy way to remember, our easy thing to apply. Many people think, but I don't have the data or I don't have the numbers. I don't know what it is. Do me a favor. When that happens, simply write down my assumption. My assumption is our win rate is 22 % or 25%. Write down the assumption and then test the assumption later on but make an assumption on your formula. It is better than not writing it down and not knowing what it is. Just make an assumption. In many cases, people know how to do, I mean, like at seven, $8 million, we all are still very involved in the business. And that means that you have a reasonable idea on what the assumptions are. So you can test your assumptions.

28:37 Agreed, agreed. I think that if you're less than 10 million and you don't have a good idea of what's happening, you're running it wrong. You've got to really understand what's going on under 10 million to really be able to apply some change and systems and processes to be able to scale to 100 million. And I think that that's a common issue, would you say? I mean, that pre -10 million is so different than getting beyond that number.

29:05 Now that is right. So early in up to $10 million, you really need to learn what works. A thought that I want to leave you folks with is as follows. If you think about like, what is your GTM motion? And often people are having too many GTM motions early on. What you find is that there is, for every one of you, all your listeners, there is a GTM motion that is a natural fit for your product. For example, Slack and product led growth PLG is a natural fit. For example, inbound selling and HubSpot is a natural fit. Tesla, when you buy a self -driving car by going online with a self -selling experience, in a weird way, it's a perfect fit. What you need to grow your company on is to figure out which GTM motion is a natural fit for my product. Once you have that fit, pushing and investing in that well beyond 10 million, go keep investing in that. Don't give up too soon. Don't think, oh my gosh, PLG with my enterprise software, that's gonna be it. What took you to $10 million in this case can help you grow. Just apply the processes. What got you to $10 million in enterprise sales was a fantastic product and then you need to grow based on process. But don't go too soon and hand off, oh, now I want this cool, sexy new GTM motion, I want SDRs, I want AEs, because that is not a natural fit for your product.

30:44 Interesting, interesting. I love it, I love it. You know, Jaco, we could probably go on for another hour or so talking about this kind of stuff, and I would love that, but I don't think my listeners are used to that. So what I want to do is focus on your last advice. I mean, for those that are in this listening audience, a lot of them are in the throes of that transition between launch to growth and scaling. I loved how you differentiated the difference between a sustainable growth, and a scale motion that is much quicker, more rapid, which by the way, for those that are curious, don't do that unless you are planning on raising capital to be able to sustain fulfillment on that growth. I think that's kind of the missing cue is a lot of people will get themselves in trouble ramping up sales and not being able to fulfill those deliverables when you sell that stuff. And so Jaco, what's your. How do you leave this interview? How do you want to leave the message that you have to help people reach that motion of getting out of that scale, that growth, sorry, that launch mind into that growth and scaling mindset?

31:52 Here's my advice to you. Like over the past years, we saw, or 18 months ago, we saw that ChatGPT launched, right? And AI became part of our world. If I would have asked, when I would have asked 18 months ago about like ChatGPT, nobody would know about it. And if I would describe, hey, a product is gonna come out that does this, how long will it take? Most people will say at least five years, if not 10 years. Now Todd, what we have as human beings, we have a reasonable ability to forecast what happens. If you look at sci -fi movies, we do reasonably well. What we suck at is we really have a hard time predicting the speed that it comes with. Now, what I find is that today, if you as a listener listening to this podcast and you're going like, what can I do? I want you to do the following. I want you to think about what will happen in my industry in the next 18 months? What will, sorry, what will happen in the next industry in the next 10 years? Figure out 10 years from now, this will happen in our industry and then prepare that that will be happening in the next 18 months. Will you be wrong? Absolutely, but you'd be more right than anything else. Probably not. 

33:11 I think, I don't think you're going to be so wrong though. Yeah, to be honest with you, this is a, you know, you and I both lived through the .com growth and boom and how that affected business. Now we're kind of experiencing this AI boom that I mean, literally, I feel like every other interview I do on this podcast is someone that started an AI company and they're killing it. And I'm like, okay, when is it going to settle? When are we going to learn what, what products to rely on and what not to rely on? But Jaco. I want to thank you so much for your time today. I love the input you've given. I love the concepts you've taught. For those of you listening who haven't done so already, make sure you're looking him up. Make sure you're looking at his books. Make sure you're following him on social media. He has a great following on LinkedIn. Where else do you feel like you focused your energy, Jacco?

33:59 Most of the times we also put a lot of our materials on YouTube, youtube .com slash winning by design. Revenue architecture is the book. Where I spend most of my time is in my van along the coast and running trails. That's the, you know, like where I'm passionate about in addition to what we just spoke about today.

34:15 I love it. You're a good man. Jaco, thank you so much for your time today. And for those listening, don't hesitate to go jump on his bandwagon, look for him on the trails, but find him on LinkedIn and YouTube and apply what you're learning. Thanks so much, Jaco.

34:29 Thank you for listening. Bye bye.