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Welcome to Prime Ventures Partners podcast

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, a podcast for entrepreneurs looking

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to build and grow their startups . Learn

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about uncommon strategies and common

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traps from makers and doers

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of startup ecosystem .

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Hello and welcome to a very special edition

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of Prime Ventures podcast , where I am here

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with my partner

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and colleague , amit Somani . I am delighted

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to be here . Welcome , amit . Thank you , shri Pati

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, looking forward to it . So today

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, our episode is bad

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math in startups and

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we are going to talk about how

0:45

, in various ways , we see math

0:48

being twisted , turned , otherwise

0:51

butchered Maths

0:54

in inadvertent ways

0:56

by founders

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, and our goal in this conversation

1:01

is to highlight some of that and

1:04

perhaps offer our point of view which might

1:06

be helpful to our listeners

1:08

. So , without

1:11

further ado , let's jump

1:13

right into it . So

1:15

, amit , the first thing which I would like to kick

1:18

this off with is a conversation which

1:20

we have in almost every

1:22

pitch and we open with that which

1:24

is the market opportunity

1:26

, or TAM . So

1:29

what are some of the pitfalls

1:31

and mistakes we see in that when

1:34

we are talking to entrepreneurs ?

1:36

Absolutely Shri Pati . So the TAM , as

1:38

it's called , total Addressable Market , is

1:41

definitely one of the several

1:43

pet peaves and we'll cover many of them as

1:45

we go through the rest of the podcast . And

1:48

my biggest challenge with TAM is that most

1:50

people will just do a very simplistic

1:52

top-down model . Let's say

1:54

you were a food tech startup , you'd be like

1:57

there's 1.4 billion people

1:59

in India . Only 10%

2:01

of them ever use this and they eat three

2:03

meals a day . That is , you

2:05

know , 140 million times three . You

2:07

know that's 420 million transactions

2:09

per day And even if I only got

2:11

like a dollar per transaction , this is a trillion

2:14

dollar opportunity . Very

2:16

bogus , right , because that is not

2:18

really the TAM . The ideal

2:21

customer profile may be you

2:23

know an Indian who eats three times a day

2:25

or is mobile and wants to order

2:27

online or whatever it is , but

2:29

you really have to take a bottoms up perspective

2:32

to TAM right , saying what's

2:34

the ideal customer profile , what

2:37

is it that you know their willingness

2:39

to pay for this is and

2:41

what is your ability to address that

2:43

customer right In that total addressable market

2:45

? the addressable part is very interesting and

2:48

relevant . In fact , if

2:50

I go a step deeper , i would even say that the serviceable

2:53

addressable market , which is to say that the addressable

2:56

customer segment , the willingness

2:58

to pay and your ability to reach that customer

3:01

eventually , you know , acquire

3:03

that customer is very important , so that is one that

3:05

really gets me in

3:07

terms of .

3:08

So let me ask you are you really distinguishing

3:10

between a top-down

3:12

and bottom-up , or are you still talking about how to do a better

3:15

top-down analysis

3:17

here ?

3:18

No , i am actually distinguishing between top-down

3:20

and bottom-up . I think top-down

3:22

can be indicative that

3:24

in terms of like a litmus test

3:26

or a laugh test , right , that , okay

3:28

, there's something here . When you're

3:31

building a revenue plan or an annual operating

3:33

plan or a three-year , you know how

3:35

am I going to build this business right

3:37

For this round of financing or the next round

3:39

of financing , you're not going to say I'm going

3:41

to serve India . You're going to say I'm

3:43

going to start in Bangalore or in Delhi and

3:45

CR . I'm going to start with this demographic

3:47

, i'm going to use this channel to get to

3:50

these customers . I believe customers in

3:52

tier one will happily pay a 99

3:54

, you know rupee subscription or a

3:56

transaction convenience fee . So

3:59

I'm really talking about building a TAM model that's

4:01

bottoms up . I think the best

4:03

models are triangulated , right , Just

4:06

like an annual operating plan . So

4:08

it's totally fine , it's dismissing or pooping

4:10

top down at all levels . but

4:12

the best models will be let's do it

4:14

top down , let's do it bottom up , let's do

4:16

it channel based . Let's do it , you know

4:18

, based on the competitive or the existing money

4:21

that people are spending . you know , on

4:23

eating , just , i just randomly hooked onto

4:25

food , but in that category . But

4:28

I would say if you have to pick one model , then I'm definitely

4:30

a big fan of the bottoms up model .

4:33

Got it . So let's take this , just

4:35

the food subscription business here , right

4:37

? So would you say

4:39

that if a company

4:42

is coming and pitching and you're

4:44

listening to their pitch , would

4:46

you also like to combine your

4:48

the company's go to market when they're

4:50

actually thinking about the time or they just

4:53

you know , you'll say , Hey , look , in an optimal

4:55

go to market case , I would actually do it .

4:57

Excellent , excellent nuance . Question Tripati . I would expect

5:00

no less right . I'm looking

5:02

for initially the customer segmentation

5:04

. So for the time , actually just the segmentation

5:06

is enough . Saying tier one , India

5:09

, who makes more than 10 lakh rupees a year

5:11

, That's my target demographic for

5:13

this particular subscription . Offering right

5:15

, That's fine . I don't need

5:17

to know how will you reach them , whether you're going to use , you

5:20

know , Google or Instagram or my gate

5:22

or whatever right That's , you know . That's

5:24

a second order of discussion and

5:26

detail . So , not looking for the full GTM

5:28

, but looking for a sharp customer segmentation

5:31

and clear profiles in each

5:33

of those segments and the willingness to pay , because

5:35

that really gives me a proxy for how much

5:37

you know , the total price

5:39

here could be in terms of the addressable

5:42

revenue opportunity .

5:45

Okay , got it . So

5:47

what would you

5:49

say , makes for an attractive

5:51

time .

5:53

Actually it's basically a summary of what I just

5:56

said right , clear , segment , clear

5:58

, you know , willingness to pay and then

6:00

you know the second order thinking is the ability

6:02

to reach those customers . My

6:05

simplest rule of thumb that we share with the team at Prime

6:07

internally is if you are going to need

6:09

like a PhD degree to compute

6:11

TAM , it's probably not a good TAM , right

6:14

? If you're frivolously saying , look billion people

6:16

or you know 10,000 startups will buy

6:18

my SaaS software only if 10%

6:20

bought , that's also not a good thing . But the simpler

6:23

the model is in terms of usually

6:25

, like I'd say , fit it in one line with 40 point

6:27

Calibri , font right , saying X

6:29

multiplied by Y , multiplied by Z , unambiguously

6:32

is a billion

6:35

dollar market or a half a billion dollar market or a five billion

6:37

dollar market . Like those are the easier ones to

6:39

, and of course doesn't mean that you

6:41

won't dig into it further , but just a

6:43

simple , you

6:45

know definition or a formula is

6:47

what is a good TAM ?

6:49

Which means it's very directly

6:51

connected to your price points .

6:53

Yes , price point , total

6:55

number of customers or businesses you're going to

6:57

reach and some notional ability

7:00

to reach them . Right , because

7:02

you could say , look , i'm going to address everyone . Everyone

7:04

is a target customer . Usually bad idea right

7:07

, not just for GTM reasons , even for TAM reasons

7:09

, because even to address everyone , you

7:11

need to reach everyone , you need to have a brand for everyone

7:13

, you need to have a distribution strategy . So becomes more

7:15

challenging .

7:16

And so what would be a good number to

7:19

make it attractive from an investor

7:21

perspective ?

7:22

Look , every investor will look at it

7:24

differently , but one thing that's common to all

7:27

venture capital is people are looking for large

7:29

, addressable markets . Right , because venture is not

7:31

a business that is a cash

7:33

flow business or a you know , like

7:35

a day

7:37

to day profitability kind of business . To begin with . Right

7:40

, you're building for a large outcome . So

7:42

rule of thumb , i would say , is anything less than a five

7:44

hundred million dollar TAM is probably a non-starter

7:47

to begin with , especially

7:49

if you're at an early stage of your company , because one thing that

7:51

we won't get into today is some

7:53

of the best entrepreneurs will also expand

7:55

the TAM by going into system markets

7:57

and all that . So for today's podcast may not

7:59

be in scope , but you can cover that later

8:01

. But I'd say at least 500 million to

8:03

a billion dollars of bottoms up addressable

8:05

TAM is a good number

8:08

, and the reason I say that is for most companies

8:10

to get to 15 , 20 percent market

8:12

share is a daunting proposition

8:14

, right ? Like you know , microsoft

8:17

in the late nineties got to 20 percent market share

8:19

and got the FTC after them Right

8:21

. So it's not . Everybody says of course I'll get 20 percent of

8:23

the market because I'm the best , but it doesn't

8:25

really happen . So I'd say that basically makes it

8:27

that your obtainable revenues at least hundred million dollars

8:29

in some scenario , say over

8:31

five , seven years .

8:33

So before we get off this , you know

8:36

the TAM subject . What if I come

8:38

in and say that , hey look , i'm actually doing

8:40

a category , creating company right

8:42

In which , at prime , we really

8:45

look forward to evaluating

8:47

and funding , and we have done that several times in

8:49

the past ? So in those cases

8:52

you could say , look , i'm creating a category , maybe

8:54

the time is only 250

8:56

million , but I will still

8:58

actually reach the hundred million

9:00

of my revenue in a in

9:02

some reasonable period of time . How would you , how do you think about

9:04

that ?

9:05

Yeah , no , wonderful question . Actually

9:07

, I'll take it back to product for a second and I'll

9:09

come back to the time . There

9:11

is almost a Jack Dorsey as this quote

9:14

that nothing is invented new on the internet

9:16

. It's all the same human

9:18

needs , the same business needs . I need productivity

9:21

, i need creativity , i need quality , i need

9:23

you know measurability , i need transparency

9:25

, whatever it is that mixing B2B and B2C kind

9:28

of companies here . So really

9:30

, there will be some proxy for

9:32

what you are thinking you're unleashing , right

9:34

, whether it is an iPod or an iPhone or a Sony

9:36

Walkman from days past . Right , you

9:38

say , okay , there's people like listening to music

9:40

and therefore they're already spending XYZ

9:43

. Now you could say I'm going to expand

9:45

the number of people that get to listen

9:47

to that kind of music or use that kind of device

9:50

or are much more mobile than they

9:52

were before . And but to

9:54

say that you know there is zero proof

9:57

and this is like a brand new thing

9:59

. And , by the way , that does happen from time to time

10:01

. Right , we're sitting on the chat GPT revolution

10:03

and there's so many products , right , but for every

10:06

chat GPT or something else , there's also Segway

10:08

, scooter , where you know there

10:10

was no real kind of demand , right ? So

10:13

I would just say , look for proxy

10:15

signals , for is there any spend

10:17

on that category ? Is

10:20

there , you know , the the

10:22

customer sort of economic background

10:24

? Is it relevant , whether it's on the business side or on

10:26

the consumer side ? right , to be able

10:28

to pay for that ? And you're right , there

10:30

are some absolutely truly category creating

10:32

companies where it will

10:34

be difficult to complete the time . And

10:36

you , literally , even as us , as we sees , we

10:39

have to go and back them because they're solving

10:41

a meaningful problem and someday we'll figure out how we'll

10:43

make money .

10:44

Fair enough And I think I would

10:46

say one thing to avoid

10:48

for entrepreneurs is to not do

10:50

a gold seek on on Excel .

10:53

Yes , We've seen that . I

10:55

have seen you know magical numbers like 1.18

10:58

and then you do some regression and it's like

11:00

like wait , this is just extrapolated from

11:03

this thing . So yeah , i would avoid that too . So

11:06

you know . One other thing I'd want to talk about Tripathi is the CAC

11:08

right ? If he's sort of go down and then

11:11

and on the CAC , maybe I'll start and you and you can chime

11:14

in , right That because related

11:16

to the time question and then you said Hey

11:18

, what about GTM ? So

11:20

on the CAC one , i think the challenge

11:22

that I find is that , obviously

11:24

, initially to bootstrap the

11:27

funnel right , because demand you have to create and

11:29

you have to leverage you'll go spend

11:31

some money on performance marketing . Now

11:34

it could be , you know , google or Instagram

11:36

or whatever it is that you're spending money on

11:38

. However , one

11:41

of my pet peeves about CAC for a company that

11:43

has a little bit of traction , it could be a few hundred KRR

11:46

or half a million ARR or whatever it is is

11:48

people always talk about blended CAC , like

11:51

my CAC is $200

11:53

. Okay , it's

11:55

$200 . For what segment ? For

11:58

what channel ? For what price ? prime

12:00

of the product ? right , and

12:03

typically it's like no , no , no , it's everything

12:05

, like all . But no , you , you've

12:07

been around for a while , so you just started spending

12:09

on marketing three months ago , so earlier you were

12:11

acquiring customers organically

12:13

or through referral or through your you know Facebook

12:16

group or your Insta channel . No

12:18

, no , it's all blended . That's not

12:21

, that's not really your CAC . Right , because

12:24

and we'll talk about averages and and medians later

12:26

because cost of customer

12:28

acquisition is very relevant to

12:30

a channel or a or a segment

12:32

. Right , because depends

12:35

on where you're acquiring , so you might actually find

12:37

that your paid CAC to

12:39

distinguish the term is actually $600

12:42

because it's very expensive to get

12:44

people on these channel . However

12:47

, your organic thing is zero , by

12:50

definition , it's organic , whereas

12:52

your SEO CAC , which is a longer level

12:54

gestation period , like you build on SEO

12:56

or ASO . You're spending money

12:58

on content marketing , on SEO , but

13:01

you'll realize the results six , nine months later

13:03

, right , so it's very , very different

13:05

. So it's very important to know what

13:08

is the . At the very least , i would , you

13:10

know , suggest to entrepreneurs to say what

13:12

is the paid CAC for all the paid channels

13:14

, if you must blend it , and what is

13:17

all the organic channels ? right , and

13:19

when did you start what channel , at least at a broad

13:22

level , at monthly , quarterly , whatever it

13:24

is . And one thing that I would I

13:26

would strongly recommend that that really kind of bothers

13:29

me , this blended versus it , and related

13:31

to that , is the fact that CACs

13:33

don't stay stable or grow

13:35

linearly . So it's not like , well

13:38

, i have my CAC used to be 500 , now

13:40

it's 300 . So , therefore

13:42

, once I grow even more , it'll be 150

13:45

. No , it won't . In fact

13:48

, if anything , unless you're in a massively

13:50

monstrous category which is completely

13:52

untapped , and in a category creating kind of startup

13:55

, you will find lot more competition

13:57

comes in . You will find some harder to reach customers

13:59

, you will find customers that are the late majority right

14:01

To use Jeffery Moore's framework

14:03

, et cetera And therefore your CAC . Actually

14:06

I believe it could increase , even though

14:08

your customer base is also increasing , but

14:10

the ratio at which you have to grow So

14:12

I think thinking about CAC not just as

14:14

a static point , but

14:17

seeing how will the CAC evolve as you go

14:19

along Totally is dependent

14:21

on the scalability of the channel that you're using

14:23

and the readiness of the customer to pay for

14:25

it . So those are some thoughts , any thoughts you have .

14:27

No , just a comment there And I think the

14:30

folks who actually to spend a lot on performance marketing

14:32

will probably identify with this is that other

14:34

reason CAC increases is

14:36

because the keywords which you are bidding on start

14:39

moving from the long tail to the more torso

14:42

of those keywords

14:44

, meaning that there's a lot more competition . So

14:46

if at FinTech you might initially

14:48

be saying that hey look

14:50

, i'm a savings product for

14:53

people who are students in

14:55

studying engineering

14:57

And I'm just making this up right And

14:59

the set of keywords to attract that is different , but as

15:02

that particular customer cohort gets

15:04

exhausted , you might have to

15:06

start advertising on just the savings product

15:08

And then the click through

15:10

required and the bid required on Google

15:12

to actually get those clicks . Now

15:14

you're competing against HDFC Bank , for instance

15:17

.

15:17

Absolutely . By definition

15:19

, whenever you optimize

15:22

your marketing spend , you'll optimize to

15:24

the most efficient frontier . So

15:26

every time you need to scale it 10x , right

15:29

? If you are at 100,000 B2C customers

15:31

and you go to a million , exactly

15:33

your point comes into play , because the low

15:35

hanging fruit is gone . Now you're , like

15:37

you said , you're competing for a savings product with HDFC

15:39

Bank and ICICI Bank and 20 other FinTechs

15:42

there , right ? So I think

15:44

that is one . The other is , which is I mentioned

15:46

earlier , is you know some of these customers

15:48

may not be for , especially for category defining

15:50

or creating products . They may not already be out there

15:52

searching and all that . So those are very

15:55

expensive to acquire . Because there you're trying to convince

15:57

them that you need this new mouse

16:00

trap , right ?

16:01

The intent is not really there

16:03

.

16:03

Intent is not expressed for sure And

16:05

therefore , for example , in CAAC , attribution

16:08

is important , right . So I may

16:10

have seen an Instagram reel one

16:12

month ago and then saw , clicked an

16:14

ad on TripAdvisor or make my trip , you

16:17

know , two weeks ago , And now I come on some

16:19

third channel and I convert . Now

16:21

, where are you going to attribute that cost of

16:25

what you spend on Insta ? you

16:27

know TripAdvisor , whatever , and

16:29

now the last click . So

16:31

it gets complicated , but I would just say at least don't

16:33

do blended CAAC , do paid versus

16:35

this and then have segmentation as

16:38

you go along and you know , ability to express

16:40

the scalability of the channels .

16:42

So maybe one more thing before we move on from the whole CAAC

16:44

equation , which is that how do we answer

16:46

when entrepreneurs say

16:48

that , hello , i'm doing a lot of advertising

16:50

on the SEM

16:53

side , but that

16:55

is leading to organic , ultimately right

16:58

. So that's the reason why I'm

17:00

blending the two . So how do we

17:02

think about ?

17:02

that Great question . So I think the timeliness

17:05

and literally kind of this click

17:07

, first click versus last click attribution

17:09

will lead into that . The simplest

17:11

measure of organic certainly on the search side and

17:13

now that is being disrupted right Through Janiya

17:15

and other stuff , but let's stick to the old world for a

17:17

moment is that the organic

17:20

keyword searches for your brand should be increasing

17:22

, right . So people are not searching for

17:24

your brand or your unique products , USP

17:27

or whatever . You know that all the other investment

17:29

you made in brand marketing or performance marketing

17:31

or SEM is not kind of yielding

17:33

results . So the simplest way I would say

17:35

is that timeline is very relevant of when you

17:37

did the spend . If you did an IPL

17:40

marketing campaign , like three

17:42

months ago , right , it's gonna

17:44

be hard to attribute that in the month of June

17:46

2023 or July , maybe , right

17:48

, 2023 . So

17:50

you can keep some rolling window right . I

17:53

would say like a quarter . Maybe Most

17:55

people will be . I would say should be more conservative

17:58

and do it in the last 30 days or maybe 60 days

18:00

, but you can use a time window to do it And

18:02

, by the way , over time it'll be a rolling average right , because

18:05

what you're gonna spend now on

18:07

SEM or brand should have an impact on organic

18:09

later , so it'll wash out beyond

18:12

a certain timeframe .

18:13

Fair enough .

18:14

Yeah , great . So

18:16

let's switch gears from like a bit to the top of the

18:18

funnel to really

18:20

just going the other end , you

18:23

know , at the bottom of the funnel , which

18:25

is , let's say , you've got the customer , they're paying

18:27

something . Now they

18:30

are beginning to churn , and I know that's one

18:32

of your pet peeves and you've even written a lovely blog

18:34

on it . So , how you

18:36

know , what do you look for when you look for churn and what annoys

18:39

you when you see the kind of lamins

18:41

or the vanity churn metrics that

18:43

people usually throw at us .

18:46

Yeah , so churn

18:48

really is . Whenever we look at metrics

18:50

, we have to ask ourselves what is the objective of that metric

18:52

? right , and the case of churn ? the

18:55

objective is to for us to

18:57

figure out , as an entrepreneur , whether

18:59

the value we are delivering to the customer

19:01

is sticking , because

19:04

the customer churns when they are expecting a certain

19:06

value and they don't see that value and

19:08

they say , okay , i'm not using the service , right ? So

19:10

that's the objective . So I understand how well the value

19:12

proposition is sticking And so

19:14

I would say it's true for all metrics

19:16

. Like you need to be clear about what the objective is , because

19:19

taking a particular definition and then just cookie

19:21

cutter pasting it into your business usually

19:24

results in just the wrong set of numbers And

19:26

garbage in , garbage out you'll make . If you're

19:29

actually not using those metrics to influence

19:31

or inform your decisions , it's really

19:33

not a very useful metric . Okay , so in the case

19:35

of churn , the first thing I would say

19:37

is just imagine a SaaS business

19:39

where you know you have usually monthly

19:42

subscriptions , you have quarterly subscriptions

19:44

, you have annual subscriptions , right ? So

19:46

let's say you have , you're selling annual subscriptions , So you

19:48

sell an annual subscription in January And

19:50

now next year you

19:53

start calculating and a month later

19:55

, sorry , in January of this year you sold 100

19:57

subscriptions And they're all annual . What

19:59

is a churn in February , march , april

20:02

, may and June ? Zero , absolutely

20:04

. Right Now you could come and say , look , i have

20:07

zero churn . And that

20:09

is like the first thing which I feel is

20:11

is probably giving the wrong

20:13

, wrong inference there

20:16

. And the way to think about it

20:18

is that the customer has no choice . In one sense , they

20:20

have already prepaid for it And they're

20:22

not requesting a refund . And

20:24

there are other ways to actually , you know , account

20:26

for that by looking at hey Lord is engagement and

20:29

so on and so forth of the customer . But

20:31

let's ignore that for a second . One

20:33

clean and simple way to look at it is to

20:35

calculate churn based on up for

20:37

renewal basis , and what

20:39

that means is that at any

20:42

particular month you look at

20:44

all the customers who could

20:46

have or who are up for

20:48

renewal , who needed to renew their subscription

20:50

. So let's say you're in February and

20:53

now a whole bunch of annual plans which you

20:55

sold previous February and

20:57

a whole bunch of quarterly plans which you sold

20:59

previous November and a whole bunch

21:01

of monthly plans which you sold in January . They're

21:04

all all coming up for renewal . Correct Right . So

21:07

you take that as the denominator And

21:09

in the numerator is all of those

21:11

folks who did not renew . So

21:13

there's a very active decision being made by

21:15

the customer to

21:18

renew or not to renew And when

21:20

they are actually paying and voting with their

21:22

wallets , that is a right

21:24

measure of both retention and churn . So that

21:26

, i would say , is probably the most common

21:29

mistake . I see , and you see it consistently

21:31

in SaaS companies specifically , much

21:34

more so than , say , b2c or any other companies

21:36

, because the subscriptions keep varying

21:38

the time periods . On that Completely

21:41

.

21:42

Thank you , shri Pati . Ask

21:44

people to segment it . Let's say I only

21:46

have two plans , an annual plan and a quarterly

21:48

plan . Yeah , would you suggest

21:50

that they do a quarterly plan

21:53

churn metric differently than the

21:55

annual plan churn metric ? Or would you still say

21:57

, look , you know , renewal is a renewal

21:59

. It doesn't matter when it came up for renewal

22:02

. How would you think about that ? Or , you

22:04

know , you can make it more complicated with the monthly as well .

22:06

Yeah , yeah , i mean it's like similar to the segments

22:08

and CAC which you mentioned earlier , the channels . Actually

22:10

, it is useful to do it by the

22:13

contract , by the duration of the contract , because

22:16

consistently you'll find that and

22:18

there's a fairly common experience

22:20

of startups is that moving customers

22:23

from monthly to quarterly , for instance , immediately

22:25

sees a reduction in churn and also

22:27

follow on churn , it's a higher

22:29

retention , because in one sense

22:31

the cognitive load on the customer

22:34

is reduced from a

22:36

monthly decision to a quarterly decision . So

22:38

I would say that doing that is useful because

22:40

that will help you decide . If

22:43

you want to , for instance , completely scrap your monthly plan

22:45

, correct , it will mean that a lesser number of folks might

22:47

sign up , but by scrapping you might just be

22:49

getting much better retention .

22:52

Great . Another one that

22:54

we often talk about right is this

22:56

notion of , let's say , in particular in SMB

22:58

, saas , right , which is not necessarily always

23:00

the Vogue , where the end

23:03

customer itself goes out of business , right

23:06

. So it's you know , and

23:08

therefore it's not like they renewed , or

23:10

do you double click a little bit on that

23:12

and try to see did they go to another

23:14

competitor or another offering in as much

23:16

as you know ? or perhaps

23:18

you know they went out of business And so

23:20

would you count that in churn or would you count that

23:22

as a no longer using and

23:24

therefore , you know , i get a little credit .

23:27

Yeah , i would actually say it's important to distinguish between

23:29

that and that is specifically true for SMB businesses

23:31

, because that is

23:34

, in one sense , involuntary

23:36

churn , for lack of a better word . Right , yes

23:38

, so I would actually remove that . But

23:40

if you have a large proportion of it , which

23:42

frequently happens in SMB , you might have to

23:44

ask yourself whether you're targeting the right segment in the

23:46

first place . Correct , and

23:48

in SMBs , you know , some things don't

23:51

have a high churn , but most things have a high churn

23:53

precisely for the reason which you're talking about . So

23:56

I think it is . It affects the business

23:58

, it tells you whether you're on the right segment

24:01

or not . if you're , you know if most of your

24:03

customers that actually have very high

24:05

mortality rate , so to speak . But

24:07

it doesn't help because I

24:09

answer the question whether your value is sticking or not

24:12

, because your value might be sticking and the customer is

24:14

going out of business . So it's helps to actually

24:16

just split them into two , got

24:18

it ?

24:19

Got it . So , moving along

24:21

, there's one thing that is very closely tied

24:23

with churn right , Which is the customer

24:25

lifetime value , or the LTV as

24:27

people call it , And I think this will also have a

24:29

bearing on the B2C side , which we

24:31

didn't cover in churn , which is

24:33

, you know , B2C setting . You know I'm not

24:35

buying every day or every week . I mean , maybe some businesses

24:38

are like that where there is an opportunity to buy every day

24:40

. I may be buying three times a year , four times

24:42

a year , etc . So how do you think

24:44

about LTV and your you know kind of

24:46

challenges and myths around LTV in general

24:48

, And then we'll dig into B2C a

24:50

little bit as well .

24:51

But yeah , So probably

24:54

the biggest

24:56

, i would say , confusion in entrepreneurs

24:59

mind is that what actually is LTV

25:01

? right , you might seem like a very simple thing lifetime

25:03

value . But let me give

25:05

an example . Right ? So suppose

25:08

I'm in the business of selling this mug here

25:10

and this costs me high hundred dollars

25:12

, a very expensive gold mug , right

25:14

, and I decide to set up a site

25:17

in which I'm going to sell it for $50 , right

25:19

, yeah , so now I might

25:21

actually get a lot of demand for it , right

25:23

? So now , if you buy it , what is the

25:25

lifetime value of this customer ? Right

25:28

, and the answer would be well

25:30

, i'm getting $50 from this customer . So

25:33

the frequent and

25:35

common mistake here is to use

25:37

that $50 as the lifetime value . Let's , for the moment

25:39

, say the customer only transacts once . The

25:42

customer is actually a negative 50 lifetime

25:44

value , because for every cup

25:46

which you're selling , you're losing money , and

25:49

this is not uncommon . In early days of e-commerce , we had

25:51

negative gross margin in a lot of cases . Right

25:53

, yeah , promotions also in a

25:55

number of businesses . So

25:57

the lifetime value is

26:00

the value piece of it , right , we'll come

26:02

to the lifetime in a second . But the value

26:04

piece of it is actually contribution

26:06

which you as a business is getting from

26:09

that customer . So it must

26:11

must remove your

26:14

costs to both provide

26:16

the product and service that

26:18

customer . So the way I think about to

26:20

simplify things is to remove all variable

26:22

costs associated with that

26:24

customer . In many cases we'll find

26:26

that by the time we acquire that customer , by

26:29

the time and the the CAC is not part of LTV

26:31

because we take it as a ratio , usually LTV

26:33

to CAC . But you have to remove all

26:35

COGS , you know service costs

26:38

, customer service costs , all variable

26:40

costs associated with that customer , and then the

26:42

remaining value is the value

26:44

. And so frequently when you do that the

26:46

so-called LTV to CAC ratio will

26:49

look dramatically different than otherwise .

26:51

So let me , let me come back to you

26:54

and say , let's say that $100 mug I was

26:56

selling day zero for $110 .

26:58

Yeah .

26:58

And the cost of all the other variable stuff is not

27:01

more than $10 . Just , we'll just make an assumption

27:03

right COGS is $100 and then the rest

27:05

of it , do you ? how

27:07

do you still think about kind of LTV

27:10

in that context ? Because I may just buy

27:12

this mug once in life and never buy it again

27:14

. Yeah , What durations do you

27:16

use , you know ? are there any good

27:18

practical ? everyone will say , oh my goodness

27:21

, i sold Shri Pati a mug . He's going to buy 1000

27:23

other mugs from me over the next five years . Yeah

27:25

, shri Pati may never , ever even come back to the site because you

27:28

just saw something clicked it's somebody's birthday coming

27:30

up or whatever and bought it , right .

27:31

Yeah .

27:32

So how do you think about the timeliness of

27:34

the LTV , assuming that the basic

27:36

condition of value is met ?

27:37

Yeah , I think that's a difficult

27:39

question for entrepreneurs to answer because

27:41

they have usually not been in business for too long Exactly

27:44

To actually know that . So let's actually take

27:46

the case of both a B2C and

27:49

a B2B . In the case of B2C , you'll

27:51

have to make educated guess on

27:54

why on earth will that customer come again

27:56

for this mug ? If it's a consumable

27:58

, you can say , hey , look , when I come , what

28:01

is my repeat rate ? Will they actually come

28:03

often enough ? If they're actually buying toothpaste

28:05

, they'll probably come often enough . But if they buy

28:07

something which lasts them a year , then

28:10

actually you'll have to reacquire that

28:12

customer . This frequently

28:14

happens , for instance , in fashion Absolutely

28:16

Right . So you are even in travel

28:19

, right ? If you're actually doing international travel or something

28:21

like that , you'll have to end up reacquiring

28:23

that customer . So the repeat rate here becomes

28:25

really , really important And the

28:28

entrepreneurs have to focus on proving

28:30

and validating that the repeat rate they are presuming

28:33

and the lifetime they are presuming actually

28:35

is correct . And so for

28:37

B2B it's a slightly easier answer

28:40

by actually changing the question itself , and

28:43

usually my suggestion to entrepreneurs

28:45

is to change the question from a

28:47

lifetime value to payback For

28:50

B2B . For B2B , right , yeah , how

28:52

soon is my cost of acquisition

28:54

paid back by the customer's contribution

28:57

, And if that is anything

28:59

less than 12 months is a very good number . And

29:02

in 18 to 24 months you actually start

29:04

wondering because now you need to retain

29:07

that customer for so long . If you're getting

29:09

a payback in one month or in the first transaction

29:11

, you're actually in very , very good wicked , absolutely

29:14

, absolutely .

29:15

And , if I may add , on B2C , i

29:17

think again , like what we talked about earlier

29:19

, seeing the proxy for that demand

29:21

right . So , whether it is , you know , travel

29:24

versus a food startup versus

29:26

a mobility startup , like booking

29:28

an Ola or an Uber or some kind of taxi

29:30

service , you say , look , you

29:32

know , on average , a person going to office 250

29:35

days a year , 300 days a year , books

29:38

, you know mobility or shared mobility twice

29:40

a day . So what's the share of that wallet ? am

29:42

I getting Right ? So I think

29:44

there are ways to model it . But at

29:46

least my peeve is when people say , look , i've

29:48

got them for literally life , like five

29:50

years or something , and you don't really know because the customer

29:53

behavior and the innovation and the competitive

29:55

landscape changes so quickly that

29:58

you have to be a lot more reasonable about the actual

30:00

lifetime . Right , and B2C , certainly

30:02

, customers are a lot more flippant and a lot

30:04

more demanding .

30:05

Absolutely , and I would say that for entrepreneurs

30:08

, they need to be conservative in these assumptions . Yes

30:10

, because you're running a business and if you're not conservative

30:13

, you'll quickly run out of money on

30:15

this one . So making optimistic assumptions on

30:17

that is really

30:19

very risky .

30:20

Absolutely , shri Pati . Let's let's

30:22

pick it up from . You know the average

30:24

order value and

30:27

how do you kind of look at that , and

30:29

also this notion of aggregate revenue

30:31

or aggregate . You know metrics

30:33

as opposed to cohort based metrics , whether

30:35

it's for B2B companies or for B2C

30:37

. Any of your thoughts on that

30:40

in terms of what's the right way to go about it and what is

30:42

a bit annoying to look at ?

30:44

Yeah . So the thing is that when

30:47

we look at revenues , let's for the moment say

30:49

you're a gaming company and you

30:51

have a 300 or 500

30:53

K ARR Right , and

30:55

you're saying , look , i got 500 K

30:57

ARR . Next month I am 550 K ARR

31:00

, and so forth . But the challenge is looking

31:02

at these numbers is that it doesn't provide

31:04

any intelligence on how

31:07

this number is going to trend in the future

31:09

, because what we are looking for is investors

31:11

, and what really you are looking for as an entrepreneur

31:13

is what is my future

31:16

revenue and future profitability going

31:18

to be like ? And if you don't tease

31:20

apart what are the constituents of

31:22

this MRR , you will not have any

31:24

success with it . So what I mean by

31:26

this is that , let's say you have $50,000 of

31:29

revenue this month . You say my MRR is 50

31:31

K . How is that distributed

31:33

between customers you have acquired

31:35

this month , between customers who are in their

31:37

second month , those who are in their

31:39

third month , those who could be a year ago

31:43

customers , and how they are doing So

31:45

? that , for example , is

31:47

a cohort based analysis . You're looking at cohorts

31:50

, which are acquired by time period , and

31:52

you're looking at how they are performing for

31:55

their first , second , third , fourth and fifth months . And

31:58

this is really important , not only because

32:00

now you're looking at what

32:02

is the contribution from a new user , new

32:04

users but also how well

32:06

are my older users

32:08

continuing to contribute to

32:10

my game , to my revenue this month And

32:13

hence to the LTV , which is something which we

32:15

talked about in the last episode . What

32:17

is my lifetime value ? Without a cohort

32:19

analysis , just understanding lifetime

32:21

value itself is going to be very difficult . Now

32:24

, cohorts themselves can come in various

32:27

other shapes . Usually

32:29

, it is a time-based cohort . That is the most common and

32:31

usually most useful . So

32:33

a person or a cohort acquired

32:35

in January versus February , versus March

32:37

, and so forth . But you could also look

32:39

at how am I doing

32:42

with respect to things which happened

32:44

. For example , i

32:46

did a particular promotion in

32:48

a particular month or from a particular channel

32:50

. What happened ? How is that cohort

32:52

behaving ? for instance , you

32:55

might also look at how a segment like how

32:57

are my Android users versus iOS

33:00

users behaving , and so forth , and

33:02

then you can split that cohort again a time-wise

33:05

cohort , but you're not looking at just

33:07

the iOS users or just the Android users

33:09

and so forth , and this might give you a lot

33:11

of insight into what happened . What you'll

33:13

usually find is that not all

33:15

cohorts behave similarly . You'll

33:18

find that suddenly one or two cohorts

33:20

have a much higher retention

33:23

, much higher lifetime value , for instance , and

33:25

that gives insights into

33:27

what is it that the company did at that

33:30

time . You might have done

33:32

a particular channel which actually did

33:34

a lot of acquisition from there , or

33:37

you might have changed some of

33:39

the gameplay mechanics which

33:41

made sure that you had a very high retention

33:43

and a very high monetization

33:45

from that segment . So the long

33:47

and short of it is that looking at cohorts not only

33:49

just how is my revenue divided this

33:51

month , how is the first month of my

33:54

various cohorts doing , how is my retention doing over

33:56

that and how are my longer serving cohorts

33:58

doing across a time period

34:00

is really the only way you can get

34:03

meaningful insights into the business .

34:05

Absolutely . And whatever you said , I think almost

34:08

all of it applies to B2B companies as well

34:10

. I think gaming was just an example . So

34:13

I think I would and it's not

34:15

just from an investor point of view that you should

34:17

do this , I think even to run your own business

34:19

to figure out what are the most attractive

34:21

cohorts or the most attractive

34:24

segments or the most attractive channels from

34:26

where you're acquiring these cohorts . That

34:28

will be very indicative of where you should do your

34:30

capital allocation or your

34:33

intellectual bandwidth allocation . To say

34:35

, oh my god , users acquired an iPhone

34:37

seem to kill it , or vice versa . Or

34:39

users acquired from a particular channel , right , They

34:41

seem to do much better , and so forth .

34:43

Absolutely , and one of the things we talked about last time

34:45

for a SaaS business was paybacks . So

34:48

one of the things we look for in

34:50

evaluating companies is if you look

34:52

at various cohorts , how is the

34:54

payback trending over time ? So

34:57

if suppose you actually

34:59

had a payback of 12 months , is that

35:01

actually becoming shorter ? And the way

35:03

to figure that out is look at the revenue

35:06

realization from

35:08

each of your cohorts over a period of time And if

35:10

these cohorts are becoming steeper , meaning

35:12

that if the Y axis is revenue and

35:14

you're actually going to a higher

35:17

revenue earlier in the cycle

35:19

, that's indicative of a good business

35:21

trend .

35:22

Absolutely , and one of the metrics that I know both

35:24

you and I are big fans of the dollar-based

35:26

net retention . That will also

35:28

come very easily from the cohort

35:30

data , because , yes , there's logo

35:33

retention . I had 100 customers last year

35:35

, i have 110 now , two churned

35:37

, and so on and so forth , but I could also have

35:39

two churned . So I only have 98

35:41

customers , but the cumulative value of the

35:43

dollars I'm getting now is 115%

35:46

of what I was getting last year . So I'm actually more

35:48

valuable to my customers , either because of my product

35:50

offering or my pricing power or

35:52

increased number of users or licenses or whatever

35:54

.

35:55

Absolutely , and

35:57

we talked about churned last time , and it's related

35:59

to that , which is that if you look

36:01

at your revenue cohort

36:03

versus user cohort , you

36:06

might actually get other insights . So

36:08

, for instance , if you find that

36:11

your revenue retention is increasing and

36:13

you have 110% , 120%

36:16

revenue retention , but if you look

36:18

at your user retention

36:21

and you see that it's actually going down , what

36:24

that means is that your customer mix is

36:26

changing And it's going towards

36:28

a higher value customer . Now

36:31

it is a great thing if that is what you intended

36:33

to do , but not so great if

36:35

that is not something which you plan to do and you

36:37

wanted to actually have a large number of customers . Now

36:39

what's going on is that your average order value , which we'll

36:41

talk about in a bit , is increasing And

36:44

your product probably

36:46

is now moving up market And

36:49

it appeals more to a certain segment than

36:52

more than the previous what you were doing

36:54

earlier . So cohorts actually give you a very

36:56

good indication of

36:58

how things are moving in your business over time

37:00

, which averages almost universally

37:02

don't .

37:03

Yes , we'll talk about averages and

37:06

medians later . There

37:08

is one other scenario from what you just described

37:10

, the last example . That could be the case that

37:12

your dollar-based net retention

37:14

is increasing but your actual user

37:17

or business retention is decreasing . It

37:19

could be that your aggressive marketing strategy

37:22

is not working , so you're just randomly

37:24

acquiring customers because you're

37:26

trying to grow your way into your

37:28

next kind of business milestone , but

37:31

you're not acquiring effectively And

37:33

therefore sometimes I find that that behavior

37:35

tells you of the customers you don't want to

37:37

acquire because they'll be rapidly churning

37:40

or they'll not be high retaining or they'll certainly

37:42

not be high increasing in terms of their

37:45

contribution to your business . So

37:47

I think that cohorts are absolutely

37:50

the way to go and you should literally

37:52

run your business on it , not just from a

37:54

reporting perspective . Let's use

37:57

this as a segue to talk about the average order

37:59

value . So

38:02

there's a lot of this confusion

38:04

on ARPU first

38:06

, transaction value , et cetera

38:09

, et cetera . Any thoughts on when

38:11

you look at average order value or

38:13

ARPU , for whether it's a SaaS company

38:15

or anything else , how do you think

38:17

about it ? What are some of the challenges in terms of

38:20

how people report these metrics ?

38:22

Yeah , so when you're thinking about , for

38:24

a SaaS company , the ACV

38:27

, the annual contract value

38:29

is , the way you look at it , right

38:32

. And annual contract

38:34

value presumes , first and foremost , is that the

38:36

contract is annual , which

38:38

might or might not be the case , that's right . And

38:41

the second thing is that it becomes a little bit harder because

38:43

in a lot of SaaS companies you have subscription

38:46

and you have transactions , so

38:48

the total value is actually

38:51

a blend of that , really what you're

38:53

going to realize from that customer over

38:55

the year . So it is

38:57

very important to kind of both calculate

39:00

and delineate very clearly what

39:05

your annual contract value is going to be for

39:07

that customer , especially since more and more businesses

39:09

are now moving from subscription into

39:12

a usage-based model

39:14

, because , being driven by the customer side , because

39:16

they are not using , they don't want to pay for

39:18

it . It's probably the first thing

39:20

which comes to mind from a SaaS thing , but that's you

39:22

can talk about from a more B2C

39:25

perspective how you think about

39:27

AOVs .

39:29

Yeah , no , i think I

39:32

had just one more thing to kind of add like

39:34

a rejoinder to the B2B side , which

39:37

is that sometimes for certain class

39:39

of B2B companies right could be on a

39:41

mid-market or enterprise

39:43

there is a one-time set-up fee

39:45

or an onboarding fee or a

39:47

services fee or whatever , which

39:50

is not going to be a recurring revenue

39:52

. So certainly when we are looking at it and again

39:54

everything is aggregated and blended into one whole

39:56

thing , saying we are a $50,000

39:58

ACV , but when you double click on it

40:00

you're like well , 15,000 is onboarding

40:03

and services for set-up , which

40:05

will probably never happen again . Then really

40:07

the annual contracted value is really $35,000

40:10

. I'm not saying that the $15,000 is

40:12

not relevant , but that revenue is

40:14

a little . you know , blue dollars versus green dollars

40:17

. So that's one thing that .

40:19

Yeah , I think it's an excellent point , Amit , And what

40:21

I would say where I found that useful is

40:24

when customers are able to say wait

40:26

, my set-up or initial

40:28

fee covers my CAC .

40:30

Yes .

40:32

Right .

40:32

Including the variable cost of the people providing

40:34

that onboarding or whatever other service , exactly

40:37

Plus the variable cost .

40:38

Correct . So I think that's a very clean way of thinking

40:40

. To me that shows good understanding

40:42

of running a business in a capital

40:44

efficient fashion . because you go and acquire

40:46

a customer for $1,000

40:48

. But , as you correctly say , all

40:51

loaded in costs of getting that customer onboarded

40:53

, the fee you're charging is $1,000 . You

40:55

can say , look , i'm not losing money , So my payback is there

40:57

as soon as the customer comes onboard . But

40:59

, as you correctly said , for calculating LTV

41:02

for that customer now you'll have to

41:04

understand the recurring nature

41:06

of the revenues

41:08

, correct So

41:10

. but , amit , when you're looking at B2C

41:13

businesses , the

41:16

almost always companies

41:18

will be providing promotions . They will

41:20

be doing , they'll be refunds , returns

41:23

, right and going on . So what

41:25

is a clean and fair way

41:27

of accounting that ? because almost

41:30

any business with stars has to . we

41:32

will face these kind of things as the product matures

41:35

and the value proposition kind of firms up .

41:37

Yeah . So typically though I mean there are different ways

41:39

to treat it . I'm not an accountant but certainly , evaluating

41:42

it from a business point of view or from an operating

41:44

point of view , i would say I would

41:46

cleanly separate All

41:48

variable costs , right . Just like you

41:50

got revenue at the top of the Kind

41:53

of top line , you eliminate all

41:55

the variable costs with respect to cac

41:57

, onboarding , setup , whatever it

41:59

might be , payment , gateway charges , etc . And

42:02

then I would have another line item for refunds

42:05

or promotions or whatever . So I included

42:07

in the variable cost because it

42:09

is , it is a variable cost from a PNL

42:12

perspective , right ? Rather

42:14

than saying like , let's say , you just to take

42:16

a degenerate example Which is not that far off , in

42:18

certain fashion , kind of verticals , right Like

42:21

you might have 30 , 40 , 50 percent return rates

42:23

. So now I'm booking crazy revenue on the top

42:25

line saying I'm at 5 million GMV , i'm a

42:27

50 million GMV , but 25 million

42:29

dollars . That comes back right Every

42:32

every month or every whatever

42:34

unit of frequency it is . So

42:37

therefore , your revenues really not 50 million dollars

42:39

, right ? So when we

42:42

I don't think we covered the gross margin and so forth , but

42:44

maybe we can talk about , you know , gross margin

42:46

versus net margin versus contribution margin and

42:48

them Yeah this is a good time to perhaps

42:50

talk about that . Yeah , so . So I would say

42:52

that these days especially since we are recording

42:55

this in June 2023

42:57

, you know , people are not looking at GMV

42:59

and top line and all that stuff . Right , people

43:01

are looking at . In fact , there was a

43:03

little , you know , quirky quote going around

43:05

that the gross margin is the new revenue , right , so

43:08

it's not even like your cost of goods and all that

43:10

which technically , even by accounting standards , is

43:12

revenue . So I would say , in the

43:14

modern definition of a

43:16

capital efficient business , I think you

43:19

have to eliminate the Cost

43:22

of goods and obviously refunds and

43:24

kind of any of those top line kind of variable costs

43:26

right In your actual

43:28

revenue . Now , that may be a little bit harsh , but

43:30

that is the reality , because that was that revenues

43:33

never going to really come to you , right , it has no ability

43:35

to hit your bottom

43:37

line because it's right off the top , right . So I would

43:39

eliminate that and and really

43:41

look at it from that point of view In

43:44

terms of just gross margin and contribution margin

43:46

, right , gross margin is just less cost of goods

43:48

. Very simple , whatever product or service

43:50

you're providing , that's what it

43:52

is . And then I

43:54

get very annoyed with CM1 , cm2

43:57

, cm2.5 , cm3

44:00

. Look , it's very simple . Contribution

44:03

margin is Basically the

44:05

contribution at a unit economics level

44:07

per unit sold , less

44:09

all variable costs . So

44:12

, like I said earlier , payment gateway

44:14

goes from that , amortize refunds go from that

44:16

. You know , whatever

44:19

right a a cat goes from

44:21

that , onboarding goes from that and

44:23

that is your real ability to

44:25

figure out the economic Viability

44:28

of this business . Right , is there juice quote

44:30

unquote in this business or not ? And

44:33

I think all this notion of well , cm1 doesn't

44:35

take that out . This one doesn't . I mean to the extreme

44:38

level that I would even say There are certain

44:40

fixed costs That might

44:42

be amortizable on a variable basis

44:44

. We talked about it in the earlier episode , seo

44:46

. So you might have a massive investment in

44:48

SEO or doing video creation For

44:51

your YouTube channel or your in Surreal channel

44:53

, which is amortized over time because

44:55

you're using that to build brand and that's going to affect

44:57

your cat or hopefully reduce your cat

44:59

, but that needs to be amortized . You can't just

45:02

say , well , i just have ten people doing content

45:04

and that's just like . That's different , that's

45:06

a fixed cost . No , it's not fixed costs , because

45:08

if you're trying to grow the business , you might have 50 people doing

45:11

content or , if that's

45:13

not an effective strategy , might have two people doing content

45:15

and therefore there should be amortization of that .

45:18

So would you rather that we actually stop using

45:20

, you know , cm1 , cm2 , cm3

45:23

and so forth .

45:24

Hundred percent . I would just say look , there

45:26

is your top line revenue , there's your gross margin

45:28

, there's your contribution margin , which is less

45:30

of all variable costs . And if

45:32

you're a higher bar startup , i would

45:34

say even the fixed costs that are naturally amortizable

45:37

, of course , you know like office space

45:40

and you know software engineers and so on , may

45:42

be harder to amortize . Yeah over variable transactions

45:44

, because those are really assets you're building for the long term

45:46

. So just keep it simple right real

45:49

revenue , real variable

45:51

, you know I mean revenue less variable cost

45:54

and then eventually , hopefully someday

45:56

, you have a bit and Pat Right so like profit

45:58

after everything .

45:59

Yeah , and for SaaS companies that would almost

46:01

definitely include the cloud costs . Of course

46:03

, absolutely significant variable cost

46:06

is cloud cost right , So absolutely

46:08

has to include that for sure and

46:11

I would add that initially , you know a lot of companies

46:13

have credits and things like that , so those

46:15

costs are hidden initially . But

46:18

the right way to think about it is that what happens when those

46:20

promotions and credits and everything else expire

46:22

and then , and then What

46:24

is your margin ? and actually you'd be surprised that many

46:27

SaaS companies we see Do

46:29

not have that much of a very

46:32

high gross margin because the cloud

46:34

costs and now increasingly The

46:36

gendered AI , chat , gpt and all these

46:38

costs are going to be non-trivial part

46:40

of delivering the value and they all , they all need

46:42

To be properly accounted for absolutely

46:44

. So let's move to a

46:46

related topic , which is

46:49

averages and medians

46:51

. Yes , so I know that that's something which Which

46:55

you Really have

46:57

a lot of thoughts on , so let's , let's hear it .

46:59

Yeah . So I think again , we've

47:01

covered this in both the episodes right that

47:03

don't look at aggregates , look at cohorts

47:05

, don't look at total revenue , look at revenue

47:08

by segment , don't look at total cac , etc

47:10

. And this should be leading the witness to

47:12

to kind of the jury , in this case , to

47:15

to what the outcome is . Averages

47:18

are extremely mid-lead misleading for

47:20

any metric , right ? We looked at a few in

47:22

the past and give a few more examples and the reason

47:24

they're misleading for any metric . It could be

47:26

engagement time , it could be session

47:28

time , it could be , you know , whatever other metric

47:30

which are very relevant may not be purely

47:32

from a PNL perspective , but from

47:35

a product success perspective . Right , because

47:37

they hide the behavior of the

47:40

power users Versus

47:42

the name , or , you know , new onboarded users

47:44

versus your typical user

47:46

. Right , because averages

47:48

and medians are synonymous when they , when

47:51

the distribution is uniform . Right , or

47:53

like a more like a normal distribution ? Yeah , when

47:55

, but in early stage startups , probably

47:58

even later stage or mid-stage startups Distribution

48:01

is hardly but uniform . There are certain

48:03

set of customers that will absolutely love

48:05

your product and double down on it and spend hours

48:07

. Right , we have couple of gaming companies in

48:09

our portfolio where two , three , five percent

48:11

of users will dominate right . Yeah , our

48:14

users number of games , times in app

48:16

purchases , etc . But if you did an

48:18

average of somebody who spent a dollar

48:20

per week or per month

48:22

on a game and somebody else who spent $500

48:24

real example from real company right . But

48:27

you do the average of those two users 250

48:30

dollars and 50 cents , extremely

48:32

misleading , right . So I would

48:35

say you should , and and medians

48:37

, of course you know will work better with skewed

48:39

distribution , which is the case right . Also

48:42

, i would basically appeal to the founders that it's

48:45

also a good way to run your business . So you need to

48:47

know where the money is coming from

48:49

, right , where the engagement is coming from , where the

48:51

retention is coming from . So , in

48:53

even beyond a median right

48:55

, i would which is the highest frequency

48:57

, sort of recurring data point , i would

48:59

say look at the 90th percentile user

49:02

and Or the business

49:04

that that you're serving and the 10th

49:06

percentile user . That gives

49:08

you a true picture . So it's almost like three

49:10

quote-unquote , three medians , right . Or , if I drew

49:12

a graph right , this

49:14

is That at

49:16

the 90th percentile , which is the highest engaged

49:19

users or businesses or whatever . This

49:21

is my retention , this is my revenue , this

49:23

is my AOV or ACV , etc

49:26

. At the newest right

49:28

and I'm talking newest in the sense of either

49:30

could be onboarding but , like you said , on a time basis

49:33

, or could be by how much they're

49:35

producing for me . So I could have a gaming user

49:37

who's been with me for a year and has only

49:39

ever spent $5 or 50 cents . Still

49:42

a very loyal user , but they're

49:44

in that 10th percentile . Yeah , if you do

49:46

the cohort not by time right . So

49:49

I would definitely say that those are couple of things

49:51

that I would really Encourage people to

49:53

do is look at medians , look at 90th percentile

49:55

, look at 10 percentile And , in fact , run

49:57

your business on it , because that will lead you to the

49:59

ones that you want .

50:01

Actually , one of the terms which is used

50:03

in SAS metrics is this thing called the smile

50:05

curve . Yes , right , which , if you look

50:08

at , if you draw a curve

50:10

wherein on the suppose There's

50:12

a product which is being used on a daily , weekly

50:14

basis , and on the x-axis

50:16

you Plot the number

50:19

of the users were coming once , twice

50:21

, three times , four times , so many times

50:23

. Like to think of a game , if people who come daily

50:25

would be Clocking at the 30

50:28

times a month They are coming , right

50:30

on the y-axis is , of course , the number of people and and

50:33

really interesting companies

50:35

and SAS companies have this smile

50:37

shape to this curve wherein you have a large

50:40

number of folks who are coming for Just one or two or three

50:42

days in a month , so they are the

50:44

infrequent users in your , in your distribution

50:46

, and then it goes and

50:49

as the number of days goes in , increases , it

50:51

goes down , but The

50:53

there are a small fraction of power

50:55

users who are coming at

50:57

the 28 , 29 , 30 days a month

51:00

, right , and it again trends up . So

51:02

that trending up is a very healthy

51:04

sign , because what it

51:07

indicates is that the

51:09

focus on acquiring that kind of customer

51:11

becomes the focus of the company , because

51:13

Understanding what is the behavior of that customer

51:16

? Which channel are they coming from ? What

51:18

are the things which can be done in the product

51:20

to incentivize that kind of behavior ? Becomes

51:23

like the gives us an insight so

51:26

that it really leads to a high value business .

51:28

Absolutely , and I think the exact same thing applies

51:30

to gaming startups , content startups any

51:32

kind of beauty engagement startups , because

51:34

you'll acquire a lot more at the top of the funnel

51:36

and then you will have some

51:39

PMF right for the ones that

51:41

really liking it . And then really the

51:43

ones on the on the other end of the smile curve Will

51:45

be the ones who are the highly retained , highly engaged

51:48

, highly paying customers right .

51:49

So I think that behavior is quite common

51:52

to To to be to see

51:54

as well exactly and how

51:56

that kind of curve trends over time Gives

51:59

a very good insight into how the business health is

52:01

.

52:01

Yeah , that's . That's another very good point , right ? Oftentimes

52:03

, entrepreneurs will critique this notion

52:05

of , well , all this cohort and all this is fine

52:08

, but really , you know , my product

52:10

was very shabby six months ago , right , or 12

52:12

months ago now It's getting much better . Yeah , but

52:14

you will see the trending of the entire curve going

52:17

up right . So when we are looking at it as well , we're

52:19

not just looking at an absolute data point saying

52:22

, oh , month three must be this and month eight must

52:24

be the or six must be This , right , we're

52:26

saying is the overall curve trending up right ? So is your

52:28

onboarding getting better ? is your acquisition

52:30

strategy getting better ? is your day seven

52:32

, day 30 ? Retention , or for a B2B

52:34

SaaS company , might be quarterly revenue .

52:37

Plan or whatever .

52:38

Yeah so the curve ? a beautiful point

52:40

that the , the directionality

52:42

of the curve , is what we're looking at , not

52:44

often not the absolute number For

52:47

any given month or quarter .

52:49

Absolutely .

52:50

Yeah .

52:51

Well , i think we kind of like covered

52:54

We covered cohorts

52:56

, we covered aggregates , we covered

52:58

medians and averages

53:00

and AOVs . So Which

53:03

is where we would like to wrap up This

53:06

episode ? but one thing I will leave our

53:09

listeners with , and especially entrepreneurs , is

53:11

that's very important to visualize

53:13

the data , because if you don't visualize

53:16

the data and by that I mean actually drawing the

53:18

trend lines , drawing the right kind of kind

53:20

of curves there So that you

53:22

can draw meaningful inferences in a quick

53:24

and efficient fashion It is

53:26

very difficult , because we can get all kinds of data

53:28

and it's just noise if you

53:30

cannot actually make meaningful inferences out

53:32

of it .

53:34

Yeah , and if I may add my closing comments before

53:36

we wrap this up , shri Pati , is that , in

53:38

addition to the visualizing , look , we talked about a lot

53:40

of different data , a lot of Bad math , about

53:42

different metrics , etc . I

53:45

think you also want to quickly zone in

53:47

on the , you know , two to three or maybe three

53:49

to five metrics that really matter , because

53:51

you you don't , as a you know , have the ability

53:54

, as a young team , to focus on 18 different

53:56

things . You should measure everything , you should

53:58

visualize everything . Yeah , you should

54:00

capture everything , because you may come back with an insight

54:02

later And oh , we never measured that . Now

54:04

I don't have ability to figure that out right

54:06

. But then really pick

54:08

the three to five that are defining to your business

54:11

. This kind of customer

54:13

, this kind of cohort , this kind of ACV

54:15

leads to this kind of retention , of this kind of churn

54:18

. Everything else is noise , okay

54:20

, and you're seeking that . You

54:23

know highly repeatable , you know

54:25

Exciting customer

54:27

, cohort or behavior that that you're going to

54:29

try to tap to . So I would say measure everything

54:31

, but focus on a handful of few

54:34

in terms of driving the business . Absolutely

54:36

All right with that . We'd like to call

54:38

it a wrap for this episode of

54:40

the prime venture partners podcast . If

54:42

you like the episode , please write into us . If you'd like

54:44

to hear more about stuff like this , or any other

54:47

metrics that are your peeves , please

54:49

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54:51

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54:55

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