What does usage-based pricing mean for your B2B SaaS finance team? A conversation with Kyle Poyar

Episode Description

In this episode of Diving Deep, we’re joined by Kyle Poyar, Operating Partner at OpenView.

Kyle is an expert in SaaS metrics, a key contributor to OpenView's famous benchmarks report, and one of the brightest minds writing about Usage-Based Pricing.

Watch this episode to learn from Kyle as he dives deep into B2B SaaS metrics and discusses:

What is usage-based pricing and what does it mean for your finance team?
The new skills your finance team needs if you move to Usage-Based Pricing
The two mistakes to avoid when calculating your LTV:CAC
How to pick the right NDR benchmark for your business
And more!

Show Notes

Follow Sidharth: https://www.linkedin.com/in/sidharthkakkar/

Follow Kyle: https://www.linkedin.com/in/kyle-poyar/

Follow Subscript: https://www.linkedin.com/company/subscript/

About Diving Deep with Subscript

Diving Deep with Subscript is a video series where we dive deep and explore SaaS metrics with leading investors, CEOs, and finance leaders.

Watch the entire series of Diving Deep with Subscript

Get caught up on the entire series right here: https://www.subscript.com/diving-deep

Episode Transcript

Sidharth Kakkar
So there's potentially no one more thoughtful about usage based pricing than you have been on the topic or that you've written about on the topic. And so that seems like a good place to start. And then there's so much nitty gritty there. But before we dive right into it, can you talk a little bit about what you think of as usage based pricing?

Kyle Poyar
Absolutely. Well, then for usage based pricing, I think the biggest thing is to contrast that with what it's not. And we're used to thinking about SaaS companies as subscription businesses that charge based on seats or based on how many folks log into software. That's the classic Salesforce model. It's in everyone's head when they think of SaaS. Usage based pricing is starting to take metrics around how folks are engaging with your product and whether or not they're successful and incorporating that and how you monetize. There's the extreme, like going all in on usage based pricing where you're pay as you go, no commitment. You're only paying for what you use. But there's also a lot of hybrids where you could buy on a subscription basis, but where your subscription is tied to how much usage you're committing to. And there's a lot of in between out there. To me, the key thing is it's not just defaulting to seat based subscriptions.

Sidharth Kakkar
Yeah. Operationally, this is relatively new. And so some of the tools that around usage pricing is newer. And then also it's obviously much harder because you can't just sell the ten or 100 Salesforce licenses, and then you have to wait until the renewal or until someone wants more seats. Any initial thoughts on, like, operationally what do you think are things that people end up having to think a lot more about that they didn't have to think about in a seat based model?

Kyle Poyar
Well, the first thing is around customer success. So as you said, the traditional process is sales goes and sells the thing. You get the annual commitment, hand off the customer success, and they check in periodically and hope that customer renews. In a usage model, the customer makes the decision really every day whether they're going to log in and use your product. And so you have to win them over literally every day. And everyone has to start playing a role in customer success across the organization. You even start to see if businesses like Snowflake or AWS sellers stay with accounts and are only compensated when their accounts actually consume or use the product. And so sellers are literally motivated to drive customer success and usage. But you also think differently of how you market the product and what KPIs you look at internally and how you even approach things like pricing and packaging. So I think that mindset of customer success needs to flow through, but you also need to invest more around product led growth. And so the great thing I think around this pairing of product lead growth and usage based pricing is that in a usage model, the more you improve your product to drive usability and more adoption and stickiness, you can see the results in terms of actual revenue generation.

Kyle Poyar
It's a direct link, right? And so you can invest more, but you have to invest more if product becomes a really key revenue generating lever for the business. And then the last thing I'd add is a lot of internal processes change and businesses become less predictable if you don't have this committed upfront contract necessarily for all of your deals and folks could churn it's hard to manage the business. And if you're not able to say, hey, we're going to generate this much revenue for the next year, it's hard for you to do things like predict what head count that you need to support the business or how much funding you want to raise or how much you're going to plan to burn. And even large public companies struggle with this. If they've got customers where they have no history of usage, it's really hard for them to forecast to the street what revenue is going to look like that year, and they end up taking a conservative approach. So we could double click on that more. But I think of it as managing a usage based business is as different from a traditional subscription company as it was to move from on premise to subscription SaaS in the first place.

Sidharth Kakkar
Yes, actually it's funny because there's a nice story here which is on premise software didn't really incentivize you to make your customer successful at all, and then SaaS made it much more likely that you cared because every year they have to renew. And then I guess usage based makes it even more like you have to care even more. So I'm assuming companies are making more money, but also customers are hopefully getting a lot more value, which is great. On the unpredictability part, though, that's fairly terrifying. As a CFO or FP&A leader where historically you might just take your sales capacity and use that to determine what your revenue will be. And now you just have to go or I don't know, how do you even wrap your head around that? Like, how do you figure out who do you want to hire and what ramp should look like for sales reps and customer success and things like that? Where do you would start?

Kyle Poyar
I think the first thing is it's important to keep in mind that your finance teams and your customers want the same thing. So customers actually do want something that's predictable, even if they like the flexibility of usage based pricing. And so you should be doing things like understanding the customer's use case going in, helping them forecast or predict what their usage is going to look like. You can use calculators in the sales process and then monitoring what usage looks like kind of from the beginning all through to implementation and full roll out. So I think that the more connected finance is with go to market teams and what's actually happening inside of your customers, the better. And that just helps you understand what's really unpredictable. You don't know if your customer's business is going to take off or shut down, but also what you can start to have pretty good confidence around. I think the only thing is finance becomes a much more data driven exercise. You're looking at what happens to cohorts of customers over time. How does their usage play out? What are the factors that predict usage is going to grow or shrink in an account?

Kyle Poyar
The other great thing from my standpoint is that data is actually really helpful to make sure you're targeting the right customer. You have good visibility into whether that customer is going to churn or take off. And so finance can actually become a much more strategic operator inside of a business. But it requires really getting really good granular usage data at a historical level across your accounts and really having some data science background or at least like good quantitative folks that can be looking at that data continuously. And then I guess the last thing is in order to have that really good usage metering and billing infrastructure needs to be put in place. And I think historically that's been challenging. A lot of the top software companies that are usage based built that in house and they have dedicated engineering teams just working on billing. There's now a cottage industry of emerging startups, some extremely well funded, that are solving this problem and they're treating it as a data infrastructure problem first and foremost, which I think is the right way to look at it for a usage based business. And so the great news for companies that are earlier stage are just thinking about usage based pricing is that you don't have to build this from scratch. There's a good set of tools that you can work with.

Sidharth Kakkar
Such a good point. I also really appreciate your point about cohorts because I feel like they're always useful even in a seat based model. But in a usage based model, you particularly need to be able to understand sort of when things start picking up and for which segments they start picking up more. So you can kind of have that information flow back into the initial acquisition part of the business. You always want that, but you particularly want that one.

Kyle Poyar
It was nice to have with the seat based business, but it becomes critical for managing a usage based company for sure.

Sidharth Kakkar
Yeah, because in the seat based business your first year, at least you knew what that was going to be and that's pretty good because it's your first year and it's just going to be a reasonable sum and all that.

Kyle Poyar
Yeah. I will say one thing just to quickly add that as I've talked to folks managing our leading usage based businesses, I've actually heard multiple people tell me that when they were talking about their business model to investors, folks said, hey, your metrics are actually best in class. But the way you've talked about your metrics or the way you forecast out ends up actually making you seem like you're not nearly as good as you actually are. And it's because a lot of usage based businesses tend to lean towards being conservative with projections, especially if they don't have that committed revenue or they don't know what's going to happen in an account. And so from a financial leader perspective I'd say, make sure you have the conservative case, but you're also thinking about the optimistic or the upside scenario and you don't want to miss out on that because that's a story that you want to be able to tell and recognize what's really going great in your business.

Sidharth Kakkar
Such a good point. I will say that this is another place where I think cohorts are incredibly valuable, because if you can know with fairly good accuracy what month 13 or month 18 or whatever, that revenue retention ends up looking like you could probably forecast so much better and have more confidence giving the good number and feel like you're not just making it up.

Kyle Poyar
Absolutely. Yeah. And I think that's especially true for folks following kind of a product led growth and usage based pricing approach, because you've got lots of sign ups or lots of folks that are trying out the product at the top of the funnel. Handful of those convert and then a smaller subset of those really take off in their usage. But it starts to become really predictable because you're talking about potentially thousands or tens of thousands or even more accounts. And even though there might be some outliers on the aggregate, it behaves pretty consistently.

Sidharth Kakkar
Yeah. I know a lot of companies think about contractual minimums when they sell so that they can have a little bit more sort of consistency here. But with contractual minimums, almost always they're offering discounts as a way of sort of enticing their customers to commit to the contractual minimums and the trade off there just seems to be lower revenue for more predictability. If you like to look at that as a sliding scale, do you have thoughts on like, how far companies should try to slide on that scale?

Kyle Poyar
Well, yeah, it's a great point. I think there are some companies it's funny where folks maybe start off on a self service basis and they're paying on the sort of pay as you go usage based model, but then sellers are compensated for committed bookings. And so sellers essentially just farm those self serve accounts, turn them into a committed plan, but actually offer a discount and so you're paying Commission and you're actually getting less revenue from a customer. So that's the kind of thing to avoid. Yes, but for companies, having that predictability in terms of the commitment can be helpful to plan the business. You usually collect the cash up front, which is also nice for funding a startup. And there are some cases where when your customer has that commitment, they just put more effort to adopt the product internally, they put more resources behind it, they want to get their money's worth. And so there's some element of like when people are committed to something, they tend to be more serious about it than if they're not committed. So you should certainly see if that dynamic is at play in your customer base. But what I would advocate for is don't make that committed booking too important in terms of the sales comp, make sure that there's an element of actual consumption or realized consumption, because you don't want to try to get too big of a commitment up front, which could slow down a deal, cause someone to not convert in the first place because you're getting too greedy on that initial land. Just have a lot of confidence in a land and expand motion. I also just think that if you only compensate reps for the booking, they have no incentive to make sure that customers are actually successful, which is so critical to the long term value that you're going to be able to generate as a business. So those are the key things I look at. The other thing just to note is how important is predictability for your customer. And there are some folks that say, hey, we only have a budget of X. This is all that we've allocated for the year. It's going to be really painful for me to go back and get more. And so there's some customers that really prefer a committed model because of the way their processes work internally. And so in those cases, you don't necessarily need to offer that much of a discount for the commitment, but you do need to have a committed option available for them.

Sidharth Kakkar
Yeah, that's a really good point. So the discounting itself doesn't need to be extremely steep in all cases. You have to be a little bit more thoughtful about sort of what your customers really value here.

Kyle Poyar
Exactly. And for some companies, they'll do things like say, hey, you're going to get an annual allotment of usage almost like a gift card, and you can drop that down flexibly. There'll be no overages. If you spike one month, you really don't have to worry about some unforeseen usage fee. And it gives the customer time to ramp up their adoption. And that way, if they end up using the product more than they initially expected, they're just doing an early renewal in month nine, month ten, month eleven. And there's some sort of grace period to help them just understand what their true usage is going to look like and then plan for it because you can give them alerts, you can reach out, you can say, hey, based on your trends, here's what we expect. And so you can take something that had previously felt unpredictable and just give folks a lot more confidence around how it looks for their own business.

Sidharth Kakkar
I have this sort of slight tangent that I want to ask you about around grace periods, because it's a thing that I've been surprised at, how much it's come up when we've worked with our customers. And it seems like this is just a very I'd say the majority of businesses it's a super common thing where a customer just needs an extra month or extra two months for contract negotiations while they're renewing and it really throws the finance team off. Like, do we have revenue? Do we not have revenue? Which contracts does this revenue come from? Is it the new one, the old one? How do I think about my Churn metrics, my retention metrics? How do I think about what is my ARR during that time period? Do you have a view on any of this.

Kyle Poyar
All challenging. I don't know if I have a silver bullet for every company. I guess the first thing I say is these annual usage allotments just give you more time to plan around that renewal so that you don't really need to offer as much of a grace period because the grace period is just within that contracted amount. I think that there are some folks that overuse these grace periods. So for some customers, they're actually comfortable paying on a usage basis or on a non committed basis, and they don't want to make too big of a commitment up front because maybe they have extra procurement hoops to go through. But there's discretionary budget on a project basis, especially if you sell to a developer or kind of IT audience. There's usually some sort of operating budget that they can tap into and so don't offer grace periods to every customer that exceeds their usage. That's probably not required. But for some folks that are much more conscious in terms of budget and predictability, I think it is a nice show of good faith as something that you can leverage in order to drive a bigger commitment for that next period.

Kyle Poyar
My feedback would be have some flexibility to be able to work with customers and meet them where they are. Don't overuse it. And when possible, try to lean on these annual usage models to give yourself some time outside of leaning on grace period.

Sidharth Kakkar
Yeah, very good point. How do both private market as well as public market investors think about sort of the usage based revenue that is unpredictable. So you talked a little bit about how forecasting CAC play a really big part of it and like, are you forecasting the conservative case or the aggressive case? But then just generally it is sort of like only quasi recurring in that it's not contractually recurring, but it does tend to occur. I don't know what is your advice or not advice necessarily, but how do investors think about it? What should CFOs and founders know?

Kyle Poyar
It's a great question and it's funny even there's questions like do you report an ARR metric? And it's not really annual recurring revenue. And most usage based companies sort of reframe that as annual reoccurring revenue or annual revenue run rate and kind of create their own ARR definition. But to me the thing is to really look at and say, hey, is this acting as if it's recurring or not, right? And so if you have above 100% net dollar retention in your cohorts where there might be some seasonal variability, but on average, does your customer base spend more next year than they spent the year before? If so, the business as a whole acts as a recurring revenue business and you can get the benefits of that. If that's not the case and folks use your product on a project basis or one off and it acts more like a consulting or services business, then you really won't get the credit for it. Right? But to me, what I tend to find is that most usage based businesses actually have above average net dollar retention rates. So when I've looked at public companies, the average net dollar retention rate and usage based companies has been about 120% for the public companies versus 110% for their traditional subscription tiers.

Kyle Poyar
And so for these companies, not only does a usage model act like it's recurring, it's actually your current base of usage based customers is actually generating compound interest for you year in and year out. And it's a more valuable revenue base than a traditional subscript company. And to meet more investors, both public and private investors, Arr starting to recognize that. And so we're not seeing any sort of discount in terms of revenue multiple for usage based companies compared to their traditional subscription peers. In fact, when I've looked at it, public software companies with usage models are getting about 20% to 50% higher revenue multiple premiums, and it's because they're growing faster and have better net dollar attention rates. And that essentially gives folks permission to really back and stand behind these companies.

Sidharth Kakkar
I had this weird thought where because of usage based model aligned the company a little bit more to deliver the value. I also wonder if these companies tend to have higher NPS scores.

Kyle Poyar
Absolutely yes. That is the real thing because you're so committed to customer success and because there's no shelf where you're only charging customers when they're actually seeing value, they're not sold some sort of big subscription, and then you check in a year later and they've consumed like 20% or only five users log in at any given point in time. You are very aligned with the success of your customers. It's absolutely true that usage based companies tend to have just stronger customer relationships. I tend to also find that really because every facet of your business is focused on the customer, you start to do things like discover use cases that some of your customers have, but you didn't even think about in the first place. And then you can start to educate the rest of your customer base on how to use the product. Or if there's anything that gets in the way of customers adopting the product or creates friction, you're passing that off to the product team really quickly to improve the product experience. Ongoing usage is the lifeblood of a usage based software company, and so you've really got to be totally committed as a company around customer adoption.

Kyle Poyar
Yeah.

Sidharth Kakkar
Your internal incentives just get aligned all the way, everything from compensation to what the success means for the company. And so you're going to make the right decision. It's so good.

Kyle Poyar
Absolutely. And the magic, I think, also happens when the metric that you charge for and the usage metric aligns with the business outcome your customers trying to achieve. Because that way your customers are not dissatisfied when they're spending more, but they feel good about it because their business is seeing a great result. I think HubSpot has a really great business model. They charge based on the amount of marketing contacts that you're generating. They didn't always do that. Actually, before their IPO they had flat subscription pricing and their net dollar retention rates were around 70 75%. But they added this element of charging based on marketing context, which for their customers. The more contacts they could generate through HubSpot, the more folks they could have turned into customers, the more revenue they can generate as a business. And so to the extent HubSpot helped them generate more contacts, that was a win win. They would spend more on HubSpot, but they would also be on aggregate, just making a lot more money as a business and so they could afford to do that. So your product roadmap can be aligned with ways to help your customers be more successful.

Kyle Poyar
Everything you do from a sales and CS process really drives that kind of outcome that customers are looking for. And ultimately it's a much more healthy business model.

Sidharth Kakkar
I feel like you could write a whole book on how smart HubSpot is about their pricing. I'm sure someone has written a new book. I've been fascinated as a user with all the places where it's not just the usage based stuff, it's also like the base platform fee, and then it's also like the feature stuff. It's very good. So I'm definitely on a couple of plans where I didn't need all of the things, but I needed enough of the things or suddenly find myself paying three times as much to help spot. So it's pretty good.

Kyle Poyar
Yeah, it does work well. Although I was brought up as a pricing consultant at Simon Cooper. That's what I did right out of College and for six years after. And the mindset of pricing is really understand what creates value for your customers, what they're willing to pay for, and align how you charge to that. But what's fascinating with a usage based business model is there's something that you've built that ultimately drives more stickiness and more usage of your product. You don't really want to charge for that separately. You want to ungate access because having more people use it will actually increase customer lifetime value. And so it's a really kind of tricky art and science around pricing to say, hey, is this a feature that everyone needs and we're going to all be better off as a result because we'll make up some money on a usage basis? Or is this something that it's needed by a small group of people? It may be something that is a security feature, a check in the box feature, like it's an SLA or customer success dependent capability. And those are certainly things that enterprises will have separate budgets for.

Kyle Poyar
So it's a fun challenge and an opportunity pricing in these companies.

Sidharth Kakkar
Yeah, I'd love to talk a little bit about benchmarks, because a few months ago you put out the Open Use 2021 Financial Operating Benchmarks report, which is maybe the most red benchmarking report in all of that. So super excited to talk to you about it. And the first thing that I wanted to ask is there's some, like, fairly surprising things in there, and especially changes from a couple of years ago to 2021. And I'm curious if you could talk a little bit about the ones that you surprised you.

Kyle Poyar
Well, first off, it was interesting. When we surveyed in 2020, folks were really grappling with covet. And a lot of companies had been very conservative with hiring. They were very worried about funding landscape. And so whether it was, like, growth rates or burn rates, COVID was a very kind of strange year, especially in 2020. But we started to realize folks were conservative around hiring. They were spending less on sales and marketing, but they still managed to grow, like, fairly well. They just were much more efficient as they did that. And so you started to see folks realizing how mission critical software companies were and how resilient they were in the face of both downturns and companies that needed to kind of go digitally first. They just absolutely required technology to do that. And so in 2021, we started to see growth rates really ramp up because companies had confidence that, hey, not only were they not going to go under because of COVID, but they grew faster than they expected. And now they needed to hire a lot more people to go service that demand. And so I think one of the fascinating insights was just the number of hypergrowth SaaS companies was mind boggling.

Kyle Poyar
And the expectations for what fast growth means keeps increasing. And I think that's also why you see the fundraising market for early stage companies to be fairly resilient even as public multiples go down. I think that there's just a lot of really great companies that are being founded that are growing really quickly and efficiently, and investors have a lot of confidence that they're going to have the potential to be kind of large and enduring businesses over time.

Sidharth Kakkar
Do you think that's changed in the last few months at all, or do you think it's because it's relatively earlier stage, as opposed to some of the later stage stuff that we're talking about here, that market has kind of ignored the events of the public markets in the last few months?

Kyle Poyar
Yeah, I think the early markets have been fairly robust. I think that there's probably some resetting evaluation expectations, but it's not nearly as it hasn't had nearly as much of a correction in my mind as the public market. And part of that, investors have a pretty large amount of cash that they've already raised from LPs. They're looking to invest that cash in great startups. They have a limited window when they can invest that money. And they also have a lot of confidence of looking at metrics and types of characteristics of companies in the early stage. How does that tend to indicate whether they're going to be able to continue to grow and be really successful companies? And so I think with sort of all of the atbats and all of the experience that folks now have investing in the software market, there's some permission to have a fairly high valuation at an early stage company because there's just so much less kind of perceived risk of uncertainty around how those companies are going to perform. With that said, I do think that there's very high expectations on companies. Right. So there's a belief that if you're seeing all of these companies grow quickly, then you have that expectation in your mind of what's possible and what you're kind of holding other companies to account for.

Kyle Poyar
So I think what's really tricky from a founder perspective is that if you're not able to maintain that hyper growth, you start getting penalized, and that penalty can happen very quickly. And so certainly from a SaaS founder perspective, that kind of leads you to think about, well, I could either really kind of double down on this fast growth venture back path, or I can be more efficient and really control my own destiny, mitigate my burn rate. Maybe if I still grow as quickly as I might have expected, great. But I'm in control of my own destiny if I'm not burning through the capital that I raise. So I think that founders are kind of proactively thinking about the characteristics of their operating model and how they want to build their business to be, I think, more resilient in the face of potential corrections or full markets that's so interesting.

Sidharth Kakkar
So how do you think the sort of changes in almost like for the really fast growing companies that are burning a lot of capital to grow fast? Does it feel like there's a time limit on that? Because as you mature and you get the later stages where the market has changed a little bit, that burn may be viewed a little bit differently. How do you think about managing that growth engine and if you're shoveling tons of cash into it, how do you think about, well, when do I need to stop shoveling tons of cash into it, or how long can I do that?

Kyle Poyar
Yeah, two questions. Again, I don't know if I have the best answer for folks, but I guess to me, folks who think about it's all about the idea of being raised. So there's a lot of expectations for what's going to happen to the business that are baked into valuations that folks might even get at an early stage. And so any additional capital that you raise or any additional kind of growth plans really need to be incremental. So, like, what new products are you going to build? What new markets are you going to enter? And the core business needs to be fairly efficient. It needs to have a strong LCBT, CAC or a reasonable payback and a healthy net dollar retention rate. And then what you're really doing is making additional bets in areas that can expand your Tam or just allow you to kind of continue to scale to become an even bigger company. And that's what folks are investing on, or that's what your incremental valuation is based on. I think to me, I start to treat your business almost as a combination of businesses or portfolio businesses at that growth stage and be really conscious about what needs to stay very efficient and healthy.

Kyle Poyar
And what are you proactively betting on because you think the return outweighs the risk?

Sidharth Kakkar
Yeah. You mentioned sort of looking at LTV CAC, and I think it's like maybe one of the most miscalculated metrics there is on both ends, the LGB part and the CAC part. I'm curious. You mentioned that in the report. You all mentioned that CAC payback is one of those things that seems to frequently be under reported. What are the things that people are doing wrong? Because I'm sure they're not doing it on purpose, but it's like just a confusing thing.

Kyle Poyar
Absolutely. Well, it is LTV to CAC calculated in CAC payback as well. I think LTV to CAC is probably even more egregious. But on the CAC payback side, some folks will think about it on a cash basis. And so when am I spending the cash versus when am I collecting the cash? And if they've collected cash up front for an annual deal, they might think that they've kind of paid off their customer acquisition cost, but there's still ongoing costs to service that customer, to manage infrastructure, any sort of professional services and implementation. And so I think that to me, you have to really be mindful of understanding the fully loaded costs of acquiring and servicing customers and also think about the payback is happening over time based on the revenue that you're recognizing rather than just when you're collecting the cash.

Sidharth Kakkar
And to pay particular attention to your cogs and that revenue as well, and then not ignoring it entirely. Especially a lot of more modern, fast businesses don't necessarily have 95% margins, right?

Kyle Poyar
Yeah, exactly. There's almost this belief of software businesses because it's software are extremely high gross margin businesses. But when you look at public companies, it's not uncommon to see 65, 70, 75% gross margins on software and then obviously potentially negative margins on any services component of the business. And so if you're ignoring that from the equation, then your tax payback might look really great on paper, but not actually be that great in reality because you have to keep serving your customers.

Sidharth Kakkar
Yeah. I mean, if it's 70%, it's off by double or something. No, one third something like that. So, yeah, I wanted to ask you about retention benchmarks. This is something that when we talk to our customers and prospects and stuff, we see a lot of confusion around that because people often like, I don't know what the right NDR benchmark is for my business, which is understandable because it is quite different for different businesses. I don't know if you have thoughts on how to even navigate that means it's like, well, how should I think about my NDR?

Kyle Poyar
Well, I guess the first thing I think of it is like, put NDR in context with other metrics. So if your cash payback is really low, maybe because you have a self service motion product and growth motion, or maybe you're selling to an SMB with a one call, close type of sales cycle that faster payback kind of gives you permission to have a lower NDR, or they kind of go hand in hand. If your tax payback is very high, you really need to prove there's a lot of pressure to prove that you're keeping your customers and you're expanding them. And that's the only way to really believe that you'll eventually pay off that 18 months, 24 months of payback is to really think about the characteristics of your customer acquisition alongside your retention rate. That said, I do think that for me, NDR net dollar retention rates are so predictive of the long term health of the business. A lot of folks focus on growth in terms of sales and marketing, but long term growth comes from retaining and expanding customers just as much as acquiring new customers. And the better you are at retaining and expanding folks, the more money you can put into acquiring customers.

Kyle Poyar
So you can just build a healthy business for public companies. These days, we used to think of it as 100% net dollar retention with salad. Right. But now companies are showing 120% plus Snowflake, I think, in their last earnings at 178%. And so the possibility of kind of what's out there from a net dollar attention and then therefore the expectations are going up and 120% or higher might be unrealistic for your business. But challenge yourself to really think about what's your plan for getting close to that. And does pricing align with it? Does your resourcing kind of post sale align with it? Does your product strategy align with being able to expand customers? Because that might be not consequential for whether you're going to hit your number next quarter, but it's going to be really consequential for if you hit your number a year from now, two years from now.

Sidharth Kakkar
Yeah, I know. We're coming up on time. So just one last question for you. Our audience is largely series B-C-D finance leaders and I wanted to ask if there's anything that you think that would be useful for them to hear or should be top of mind for them or general advice.

Kyle Poyar
General advice for finance leaders. Your job is harder than it's ever been. I guess for me, the key thing is just that finance can play a very strategic role in the business. We've talked about usage based pricing, we've talked a bit about product led growth. These businesses start to have different KPIs and the way you manage them, predict them, the way you kind of set them up for success, the way you tell the story about those businesses to the market are just going to look different. And so if you think about a business like a Snowflake that has 178% NDR what's a healthy cash payback? How much do you spend on customer acquisition? It's actually really challenging because a customer might spend $1,000 in year one, but then $10,000 in year five. I think for the finance leaders standpoint, your job is getting a lot harder. But I think that you can play a really strategic role in driving the success of a company. And so I guess for me, for financial leaders out there just really kind of get closely connected to the business in terms of decision making and understanding really the drivers of the business because you're playing a more important role than ever.