It's no secret that investors—public or private—are no longer rewarding "growth at all costs".

In public markets, the index of unprofitable tech companies has fallen twice as much as Nasdaq.

Morgan Stanley Unprofitable Tech Index (MSXXUPT) has dropped twice as much as Nasdaq 100 since December 2021 (Source: Sequoia Capital)

Now cost of acquiring a customer (CAC), burn multiple, and profitability are king. Every company is being asked to shift towards profitable growth. Company boards and Executives are scrambling to rewrite their growth playbooks. 

Here’s how this is playing out in a typical boardroom right now: 

Board: Capital is now expensive. You need a path to profitability. CEO: We need to grow more efficiently. CFO: Marketing spends a lot. What parts drive revenue? CMO: It's hard to pinpoint CFO: Let's cut it all

6 months later: growth is dead.

Here's the conversation at the next board meeting:

Board: Why aren't you growing faster? Your competitors are outpacing you.  CRO: We don't have the pipeline. CEO: Let's hire a new CMO. CFO: *crickets*

Why does this conversation keep happening?

For a decade we've built ad-centric growth engines that wasted $19 out of every $20. But this was OK because capital was so cheap for the last few years. But when the old playbook fails to deliver results, the marketing budget and CMO are often the first to go. 

You can't just take out a scissor and cut your way to profitable growth. Most Exec teams eventually find this out the hard way.

Jaleh Rezaei was one of those execs as Head of Marketing at the payroll startup Gusto. Recently she gave a talk to Y Combinator and Sequoia founders to share how she shifted Gusto from “growth at all costs” to profitable growth. 

This post shares a summary of the 4 changes all companies need to make to achieve profitable growth:

1. Shift to program-level CAC

2. Invest in conversion, not just demand 

3. Launch new programs iteratively

4. Design an operating cadence

Here’s the full recording of the presentation:

Change 1: Shift to program-level CAC

The first major change Jaleh made within Gusto was to change how CAC was measured. It’s common for marketing teams to report an overall CAC number. The calculation looks something like this:

This equation most often used to calculate cost of acquiring a customer. The problem is you can't see which programs are cash-burning, and which are profitable. 

But the problem with reporting an overall CAC is that there’s no granularity to which marketing programs are performing profitably and which are cost centers. To drive profitability, you have to understand CAC at the program level, not overall. This requires breaking out each of your marketing programs so that they can be compared fairly against your target CAC. For example, let’s say your target CAC for marketing is $40,000. You’re running three different marketing programs: community, events, and ads. Instead of putting them together as a blended CAC, break each of their costs out and divide by the number of customers that were attributed to each. The result is a fair comparison between marketing programs.

Program-level CAC allows you to compare each program fairly. 

If the program is running over the target CAC, you’re now able to go in a level deeper and begin to cut or optimize where necessary. 

For expensive programs like ads, Jaleh recommends building realtime infrastructure to monitor your conversion and CAC. These dashboards or reports should be reviewed weekly and course corrected right away. 

For smaller programs, a quarterly CAC report will suffice.  

For marketing programs that accelerate revenue but don’t directly generate revenue (like content), build a revenue attribution model since program-level CAC won’t give the full picture. Fold that cost into overall CAC.

Change 2: Invest in conversion, not just demand

There are 2 growth levers available to marketers:

Demand helps you get in front of the right buyers. 

Conversion gets them to buy your product. 

When Jaleh took over marketing at Gusto, nearly 100% of their marketing spend went into generating demand through ads, events, direct mail, PR, content, and more. They were doing a great job getting the right buyers to their website, but they weren’t able to convert them into customers. 

The CAC payback period crept up to over 20 months. She and the board began to get nervous about how quickly they were spending cash to “grow”, without new revenue coming in the door. Jaleh began to dig into the analytics to find the answer. What she found was they had a massive conversion deficiency. In a nutshell, this is what was happening over and over again:

1. They’d get in front of the right buyers with the right top of funnel message. The buyer would get excited and engage to learn more (click an ad for example). All good so far.

2. But then the buyer would be taken to the same website buying experience that every other buyer was shown as well. Here’s where things would break down. 

3. Like most B2B businesses, Gusto serves a number of different customer personas each with different problems that need to be solved. So when they were all shown the same one-size-fits-none landing page, they’d get confused by the messaging because the product shown in the ad didn’t seem to be the same one on the landing page. 

The result: all the buyers she’d worked so hard to acquire would leave the website without converting into leads. The marketing budget may as well have been set on fire. 

To fix the problem, she reallocated 50% of the budget to build a growth engineering team. Their purpose: to create personalized website experiences for every visitor arriving on their website. 

Here’s the math that helped her justify the return on investment towards these engineering salaries:

Improvements in conversion throughout the funnel drastically increases resulting ARR from marketing spend.

By improving the conversion rates across the entire buyer journey, she was able to get their CAC payback to under 12 months. Gusto’s annual recurring revenue began to scale at the same rate as the marketing programs. 

“You can't just take out the scissors and cut your way to profitable growth.” explains Jaleh. “Reallocate the budget to efficiency drivers.” 

Change 3: Launch new programs iteratively

All new marketing programs require optimization before they can be profitable. But the reality is that most programs never actually reach profitability. That’s fine, as long as you have a defined process for how you launch, monitor, optimize, and cut programs when necessary. Jaleh recommends funding experimentation liberally, but in small amounts (anything less than $50k). You don’t want to be afraid of experimentation, but you want to hedge your success across a wide number of smaller bets. Give every program a 3 month timeline to prove their effectiveness before getting more funding to continue to optimize. Cut programs that don’t hit that target. Jaleh shared the 6-step framework for building speed into your marketing team that she developed at Gusto and now uses at Mutiny. The full framework can be read on FirstRound's blog here. 

Change 4: Design an operating rhythm

Your company's operating rhythm is the process you use to set your strategy and how you then execute against it. “For us, designing an intentional, top-down approach to an operating cadence has been the best tool we’ve found for improving execution.” said Jaleh about the importance of building an operating cadence. Every company has a different approach, which is exactly why defining your company’s operating cadence is so crucial. “It’s very important to say this is how we are doing it here. Otherwise, it can quickly become a mish-mash of poorly defined, redundant meetings, particularly as you scale.” Jaleh suggests building three layers for your operating cadence:

Quarterly OKRs

The quarterly objectives and key results (OKRs) are derived from the company’s long-term vision and strategy. Here’s how Jaleh recommends setting these OKRs: “We have a quarterly offsite that we kick off with guidance on 3-4 key objectives, and use the time together to plan the set of initiatives that will achieve our goals. We won’t leave the offsite until we have confirmed objectives, measurable key results, and these have been communicated to the entire team.”

Weekly growth strategy meeting

With the OKRs set, now comes time to define the enabling projects to achieve the OKRs. Many marketing organizations only measure performance at a monthly or quarterly cadence. But Jaleh highly recommends narrowing the timeframe to observe weekly performance. “We’ve found that having weekly targets meaningful impacts program performance. This allows us to quickly spot issues or opportunities, understand them better, and then develop action plans. It also avoids the situation of tallying up the score at the end of the quarter and “discovering” something didn’t go as planned.”

Below is an example of what the project dashboard could look like. Notice how each project is measured to weekly actual vs. to plan. Weekly growth strategy meetings allows the team to see what programs need course correcting so they can hit quarterly revenue goals.

Weekly GTM meeting

Finally, all go-to-market (GTM) leaders should have a pulse on the overall health of the company at any given time. This is accomplished with a unified dashboard that shows all the mutually exclusive, collectively exhaustive (MECE) revenue metrics. 

Jaleh recommends keeping this dashboard to less than 10 summary metrics that don’t change and assigning specific metrics to an owner. 

“If deviating from the target, you want it to be 100% clear who is the right person to diagnose and coordinate a path back towards the plan.”

A unified revenue dashboard should be reviewed by the GTM leadership weekly to understand the health of the company's revenue goals. 

A strong operating cadence will give you full coverage into the levers you have for hitting growth goals. But remember, growth doesn’t just mean traffic. It also means revenue.

“You want to avoid at all costs a world in which a team can hit all their team targets, but the company misses the revenue number.”

The role of technology to enable profitable growth

Technology can greatly accelerate these efforts, especially for high ROI but high effort areas like conversion. This problem is near and dear to Jaleh’s heart. “After slogging through this for years, we decided to build Mutiny – a platform that does this automatically for everybody.” Mutiny isn’t alone in enabling profitable growth. There is an entire ecosystem of companies that are helping drive efficient growth. Among the most valuable are data and analytics companies such as Clearbit, 6sense, Segment, Amplitude and Snowflake that enable clean GDPR-compliant data to power personalization and conversion.

Profitable growth key takeaways

• CFOs & CEOs should partner with the CMO to understand their growth levers, cash guzzlers & efficiency drivers.

• Shift to program-level CAC measurement. 

• Reallocate your budget & team to drive efficient growth from the ground up.

• Leverage the second lever of growth: conversion. 

• Use technology to enable conversion.

• Make lots of inexpensive bets. Cut them if there’s no line of sight to profitability after 3 months. Fund those that are working and continue to optimize until they’re profitable. 

• Track quarterly ORK progress with weekly reporting to ensure you can course correct to hit revenue targets.