EP 102: How to build profitable businesses at scale. Unit economics. With Sam Jacob's, CEO of Pavilion and WSJ best selling author.

James Mackey: 0:18

Hey everyone, welcome to The Breakthrough Hiring Show. I'm your host, James Mackey. I'm really excited for today's episode. We're joined by Sam Jacobs. Sam, thanks for joining me today. 

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Sam Jacobs: 0:28

It's great to be here, James. I'm glad to be here, happy to be here. 

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James Mackey: 0:32

Yeah, I'm really happy you're here too. So before we jump into it, could you please share a little bit about your background and what you're doing with Pavilion? 

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Sam Jacobs: 0:41

I'm the CEO of a company called Pavilion. Pavilion is the largest and, I would argue, of course, the best premier go-to-market community for high-growth operators in the world, and what that means is it's a paid membership organization for heads of sales, heads of marketing, heads of customer success, anybody involved in revenue generation and go-to-market, including CEOs and founders. And we provide community, we provide events, we provide content, and training. Our goal is to help individual operators lead their best lives and develop and build a great career, and also to help the companies that they work for more than survive, of course, thrive and grow at extraordinary rates, I say in 10,000 members all over the world. We've got communities in pretty much every high-growth city. I've been doing this for a long time and, yeah, and then I also wrote a book called Kind Folks Finish First about some of the principles and values that underpin what we do at Pavilion, and that was a Wall Street Journal bestseller, and is available, as they say, wherever books are sold. 

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James Mackey: 1:49

Nice, everybody tuning in. I'm a member of Pavilion, so I think Sam's point. I really do think it's the best community out there for tech, I mean just in terms of everything from events, relationships, guidance, and education to becoming an effective executive and meeting potential customers. I mean we've actually secured vision. We've landed a couple of customers as a result of certainly learning a lot and I've also been following a lot of your content on LinkedIn for everybody tuning in. We're gonna drop Sam's LinkedIn profile in the description, but in my opinion, I do think you're producing the best content on LinkedIn right now. Well, thanks very much. Yeah, I really like it. One of the things that I'm always talking about when it comes to recruiting and people ops is that the best town acquisition functions and teams are built similarly to revenue works and we need to be analytical and data driven and understand our metrics and just as much as you would in a revenue organization. But, for whatever reason, in tech, we see a lot more sophistication when it comes to revenue than we see in a lot of people organizations, and I actually was. I had the SVP of people and talent at Talkdesk come on the show and she's incredibly right. It was interesting. She started off as a marketing executive and then transitioned into people. I mean, she's crushing it. She was the first US hire for Talkdesk.

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Sam Jacobs: 3:15

Wow.  

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James Mackey: 3:16

And now she is SVP of people. 

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Sam Jacobs: 3:17

And they're an incredible company, so that's fantastic. 

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James Mackey: 3:20

Right, I mean. So it just goes to show. I actually have dropped you a few times on the show, so if people tuning in regular listeners are gonna know this, but I think, like a lot of executives that are accountable for people's talent, anything like that would really benefit from taking a Pavilion CRO course. 

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Sam Jacobs: 3:38

Well, thank you. 

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James Mackey: 3:39

Well, it's all, it's all translatable. 

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Sam Jacobs: 3:41

I taught it yesterday Talking about the importance of unit economics and going through specific mathematical examples. So yeah, that's near and dear to my heart. 

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James Mackey: 3:50

Yeah, for sure, that was nothing short of a masterclass. That was my favorite episode, for sure. Oh well, thank you. Yeah, all right. Well, I guess I was not trying to do a sales pitch up Pavilion, but it just kind of came naturally because I really do find a lot of value from it. But anyways, one of the first topics we were gonna discuss is how to build profitable businesses at scale, and I know that you've been evolving in your role and I feel like I've got an essence to your content that how you're looking at running your company has evolved over the past couple of years. So the, you know, first the crazy market that we had a couple of years ago of course, covid and the crazy market were the upswing, and now we're in this, you know, kind of slow, kind of feels like a recession, at least right. So I'm curious to know, get your thoughts on this. We talked about things, like you know, focusing on smaller teams, finding leverage and top performers. Just wanted to get your thoughts on some of the top lessons that you've learned recently and where your headspace is in terms of how to run successful businesses. 

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Sam Jacobs: 4:48

Yeah, well, I think you know to the point it's been. It's definitely been a journey, and it's a journey that we've all been on, even those of us that were bootstrapped. I was bootstrapped for, you know, for the entire time that Pavilion existed, through 2021. And then we raised $25 million over two years ago, coming up on two and a half years ago, and I've learned, and I've also seen a lot of companies make some mistakes. The most fundamental thing I would say, which is to the point of you know your pitch for CRO school, the most fundamental mistake I think I see is that companies don't really have, they don't quite fully grasp how money is actually made, and what I mean by that is, you know, there's this function called sales and everybody assumes that the sales team makes the money and that's not quite how it's actually generated. There's a lifecycle of revenue generation. That happens, that begins with the product, that goes to marketing, that goes to the sales Marketing, and really, the pipeline is more important, and the pipeline is, of course, the atomic unit of all growth. Right, it's not possible. Well, maybe it's possible, but it's not often that you can make a lot of money without ever having a meeting with your customer or talking to them when they are a prospect.

 

And so the atomic unit of growth isn't salespeople, it's getting a meeting. And you have to understand how companies get meetings. And so what has that manifested itself over the last couple of years? Well, it manifested itself in terms of people hiring large, large teams, particularly large sales teams, before they had demonstrated that they were able to get the meetings that were required to feed those sales teams and help those people make money for the business. And there are a bunch of reasons for that. Foundationally, one of them is that most revenue models are built with the concept of sort headcount-driven revenue generation, meaning the way that you make money in the spreadsheet is by hiring more salespeople. So, logically, you begin to believe that hiring more salespeople is the key to making more money. And, as I just said, that's not been my experience Maybe sometimes it's experience and like a true enterprise sales motion where the account executive is expected to generate all of their own deals and all of their own pipeline, but most of the time there's a whole group of people that are involved in generating meetings and turning those meetings into money. And so the way that companies make a mistake is first investing in sales teams before they've demonstrated they can generate the demand necessary to meet the needs of those sales teams. And then, I think, relatedly. So what that means in a world where efficient growth is valued is that your cost basis is too high and that you've got too many people that aren't contributing enough return.

 

The second and related issue is your point about the question of headspace and how you make sure that you grow profitably and efficiently. And there is some idea, although maybe the research has to prove whether it's true. But there is the idea that if you wanna be profitable, you're gonna have to sacrifice some level of growth. And that might be okay because today's world is not about growth at any cost. It's about growth at the right cost. And if you're willing to do that, then the best thing to do is to focus. And that's been the biggest lesson that I've learned over the last couple of years is just I had this idea that we were gonna build like pavilion for all different kinds of communities, for legal people and for HR people, and we were just gonna be the catch-all community for every kind of profession, every kind of vocation. Certainly sounds appealing on its face. But that's not really how it works, and what it did was it created a diffusion of focus away from our core customers, who are VPs of sales, VPs in marketing, CRO, and CMOs, and so the lesson is that lack of focus often translates into expense. Again, if we're talking about profitable, efficient growth, how do you do that? You're spending too much money because you're trying to do too many things and you should try to do fewer things and spend less money. And you should understand that. Yeah, there will be a cost to try to do fewer things. You will probably make less money, but hopefully, the proportion of how much you make versus how much you spend is in line, so that you make more than you spend by doing fewer things and focusing on a smaller number of customers. And the biggest mistake I see companies make, besides misunderstanding how money is made, is that they're just focused on doing too many things at once. 

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James Mackey: 9:08

Yeah, I think one of the lessons that I've learned over the past year and I'm pretty sure I heard this from you was that sometimes it's not the right time to aggressively push for new customers because it screws up your LTV to CAC ratio so badly. There's a CAC to LTV I can't remember which one goes first but it messes up your ratios bad enough to where it's like you actually could be losing money on the contract because it costs so much to actually acquire the customer and thus the focus shift to customer success and dialing in on that core customer base and doing everything you can for retention purposes, because that's one of the key challenges that we've had. Is this kind of growth of all costs concept which I think is really prevalent in tech, right, whether just historically hasn't been a huge emphasis on sustainable growth and that's why you see these like wild swings with headcount. 

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Sam Jacobs: 10:06

Yeah, and again a couple of things. The first is that nobody's at fault here, right, like there's no. Well, the market is at fault. But the point is that there are a couple of points. One of them is that the idea that you're doing well maybe your team is 10 people is a total of people, the idea that knowing how to do well at 10 people means that you know how to do well at 50 people is one fallacy that is related to the growth at any cost mindset, and the point is that you can cack, and LTV. CAC is customer acquisition cost, and LTV is lifetime value. The whole point of what we're talking about for the audience is there are four key variables that are at play when you're trying to grow.

 

One of them is how much you spend to acquire the customer. That's the customer acquisition cost. The second is how much they pay you back on average. The third is what it costs you to service them. Right, if you get the customer, you got to deliver the service and there's a cost to that. And then the fourth is how long they stick around. And those four variables, interconnected, are what we refer to as unit economics, and the point is that those numbers you might be willing, in a certain time period, to spend more than they pay you back in one time period because they stick around. And what happens in a difficult market is if they don't stick around as much or they start paying you less, then the math of that relationship starts getting funky. And what it means is that you might and effectively what it means is there's this concept of product market fit and sometimes what is obviously it means, like, you have a product that the market wants and so they're buying it, and that's true.

 

But really there's a deeper level of analysis that's required, which just means not only does the market want it, but you can deliver it at a cost that works for your business, and, again, that they stick around. And in certain environments, you might have product market fit and in others, you might not. And that's really what's happened over the last couple of years in tech, which is that when everybody's got money and everybody wants to buy everything and everybody needs to hire everybody, and everybody's first focus is the retention of their employees and giving them all the benefits that are possible and hiring as many people as possible, then your business, James, and my business might have product market fit because it's the relationship of the product to the market.

 

Well, if one of those variables changes, like the market's down 50%, even if you've improved your product 20%, you're still negative 30%, and so that's sometimes people view it oftentimes and I'm guilty of this too, and every CEO I know is guilty of assigning themselves an inordinate amount of blame when things don't go well and an inordinate amount of credit when they do go well. And the reality is that the market is the stronger variable in both of those equations and so. But perhaps the broader point is, it is a dynamic state. It is not a static state. This is a system that is changing, and when that system is changing, you might slip out of product market fit, which is not the end of the world. What it means is, if you slip out of product market fit, then you're spending too much to acquire the customer relative to how much they pay you back and how long they stick around, and what it means. You got to throttle back on how much you're spending to acquire the customer until you see those numbers line up again. That might mean building new products, that might mean focusing on and hopefully they do come back and hopefully you can fix it so that you can lean into growth. But what we teach and what we talk about is really about what is the level of? How much should you spend to get new customers, based on how well things are working for your business, if they're not working very well, then you shouldn't spend a lot of money to get new customers. 

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James Mackey: 13:40

Right, like, fix the model first. Yeah, exactly, you know it's interesting. I mean one of my advisors, his name is Matthew Caldwell, built a company similar to mine Talent Solutions, like contract recruiting, and embedded RPO and he recently sold it to Kelly Services. Perfect timing 2021, q4, really, really great exit. He crushed it and one of the things that he talked about during COVID as a recruiting company, he was able to maintain an operating income, a very consistent operating income, and run a profitable company through an incredibly difficult time, where a lot of companies similar to ours went out of business or sold for pennies on the dollar Right, so it wasn't really successful acquisitions, like they couldn't make payroll, right, so they had to sell very quickly, and one of the things that I thought was really interesting is that, when he slipped out of product market fit, he was very quick to experiment with new pricing options and switch up the product offering, and so I always and I thought that that was really cool, and the moral thought about it, though, is like that's really challenging, because you don't want to spread yourself then or go in if you don't know exactly if it's going to work.

 

It's kind of a diffusion of focus, as you mentioned, but I think one of the things that he mentioned is just like you got to be fast Like when you start to lose that grip and hopefully when you have experience, you have a better pulse on how to do that but he was able to maintain an operating income which future valuations investors are looking at for our types of businesses services, companies right, they're looking at consistency there and they consider like a lot of investors will actually see consistent when you start.

 

Consistent operating income is like day one when they're actually tracking your growth or your value, essentially as a company. So I don't know if you've thought much about that, but in terms of speed and pricing, that's one thing and I think that's one thing that we should open up and be honest. I wish I had been faster to adjust our strategy, and our pricing experiment with the potential customers in our funnel, as opposed to the kind of sticking to our guns, because I was thinking we need to be focused, stick to what we know, and just deliver value. But I think probably there was a middle ground that could have been achieved and now we're doing it, but I think we probably could have started doing it six months ago, quite honestly. 

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Sam Jacobs: 16:05

Well, I think it's easier said than done. 

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James Mackey: 16:08

Yeah, for sure, it's time. 

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Sam Jacobs: 16:09

I mean, like I wouldn't be yourself too much. It might seem like, oh, we're just going to change pricing, okay, for example, right, like we're going into a recession and our prices are too high, to be honest, right now, nominally Okay, but I've got a lot of people. I've got millions of dollars, millions of dollars of people that have paid the old price. So I could go. So there are two choices. One is I know companies like there's a company called Yacht Po which does customer reviews, which I'm going to call it. There's another, there's a bunch of them, but anyway, there's one world where you don't tell your old customers and you just lower the price for new customers. Okay, you run a big risk there.

 

I run a community, you know like I have 10,000 customers and if I just decide, screw it, I'm going to lower the price for new customers, but I want to keep my old money, then all of that'll get out, all of our pricing decisions get out, and then you face the backlash of looking like a jerk, and then you're probably going to face the pressure of saying, okay, you know, I'll lower price Now, I will lower price for you, right, and if I, by the way. There was a period recently, where I was like I'm just going to do it. I'm actually just going to lower prices for existing customers too, and I'll take the hit and what you realize is okay, well, and I talked to a bunch of people, including a bunch of members, and they said don't do that. That implies a diminishment in your perception of value. There are strategies for how to do this. You should do some research on it. So we did a little bit of research and they're right that the right way to do it isn't just to lower the price. The right way to do it is to say there's a new service level and this price includes these additional features or benefits. But if you don't want that service level, then you can go down to this price. My point is once you're at a certain size or scale, my experience is you want to be super quick, but it's not, and I've got bigger fish to fry than pricing, actually, because we make a bunch of other mistakes recently. And so, yes, is speed critical? It is, but speed has to be proportional to prioritization, and pricing is your biggest issue. Fair enough, but if you're changing up the product, which is what we're doing, then pricing and packaging might have to wait. It's not going to only sequence so many big changes at a time.

 

James Mackey: 18:31

Right yeah, I think it was in pricing more so from the perspective of holistically thinking about how you're switching up the service offering to be a compelling value proposition or better fit for the specific market. I think that was all. For my industry. It's very tight at the hip. We had to really find a way to do both, as companies were cutting costs and a lot of times recruiters were the first to go. But it's interesting, like one of the things that we did try and I don't know. I mean, I made this decision, I think it was. Sometimes as a business owner, you're only faced with what feels like shitty options and our job is to pick the least shitty one and figure it out. We're not necessarily going to be happy about it, but you do what you have to do, and so what I did initially was like well, I don't want to lower pricing. I knew we didn't want to switch up the model. Potentially I did. I didn't do that either, but I said I'm going to stick to the pricing and I'm going to accept that we're going to turn customers.

 

But what I don't want to do is if I lower pricing, one of my other concerns is it screws up my economics, my economics and basically we're spinning our wheels, working with a lot of unprofitable customers and that's taking focus away from our profitable customers, and so I don't want to dilute focus on clients that aren't making us money. And so my thought process was like well, we'll take the hit if we need to do additional layoffs, as hard as that is, I think it's like mid to long term going to provide the best outcome for the company and job security for the remaining folks. So we basically just decided to take the hit. We did a deeper cut and tried to maintain more profitable customers and really just dial in on serving them and retaining them. So it's just been interesting, right, I feel like over the last year we've been thinking about so many things that historically, I just didn't really have to think about before. 

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Sam Jacobs: 20:19

I, which is why you got to. You know, like I've been listening to Eckhart Tolle the power of now on audible and I've been working out with a trainer who's like, and I've been talking to my coach more often, I've been meditating. It's because this is hard, you know, that's just it. We had a layoff too. It's really hard to know how deep everybody is, for example, the conventional wisdom is cut deeper earlier. You don't want successive layoffs. I did that. I think that was wrong. I think that we cut. We made three decisions over the last nine months that totally messed with our growth. Two of them were strategic and just our fault, and then one of them was the. Was this layoff that we did three months ago? The first thing we did was we got rid of these city-based chapters where we had chapter heads in each geographic city, so we had a Washington DC chapter. That's what you would have been a part of, James if you were in Reston and I didn't realize that they were our field sales organization. I didn't fully comprehend it or internalize it.

 

So I got rid of the field sales arm, which was hundreds of people out in geographic markets that were advocating for Pavilion, that were no longer doing so. And then I got then we had some bad data that monthly pricing churned twice the rate as annual pricing. So we got rid of the monthly option and that totally killed the funnel. And then we figured out that that was incorrect and that monthly churns a little bit more than annual, but not twice as much. So then we just turned monthly back on and now growth has reignited again. And then the final thing is we did this layoff and everybody's saying cut deeper than you need to. Well, we cut our whole B2B sales team. We should have left at least one account executive. And my point is it's impossible. These are hard things to model, these are hard things to predict into the forecast and all you can do is your best and you need to just try and be as conservative as possible.

 

But one of the things you can't really do when you're doing layoffs is you can't cut growth investments and expect to grow. You know it's not just going to cross your fingers, we'll continue to grow it 5% a month, even though we don't have a sales team. And we fired the head of demand. Well, that's not really going to work, you know. So part of it is just really, it's just hard and you got to be really in touch with your customer and really in touch with your market, and then you, and then you got to be mindful about how deeply you're making cuts. The other thing to cut would have been our product and engineering team, and I'm not willing to do that because we only had just built them and I need a digital product and now it's live and you know, 100% of new members are being onboarded into our digital platform. But my point is that these things aren't easy decisions and I wouldn't. Hindsight is 2020, hindsight, certainly 2020 for me, but you know, it's just hard to know. 

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James Mackey: 23:24

You know, I think, when we're looking at our decision-making and looking in hindsight, it's one thing to beat yourself up Like that's obviously not productive. It's another thing, like you know, obviously being critical, and critical from the perspective of not being critical of yourself, but critical in terms of evaluating, you know, lessons learned and so that's really been, it's been interesting and you're right, it's like it's incredibly difficult. I think, just if you in this market, the way that I've seen is like you're stable, right, you know growth is great, but to me, like at this point, what success looks like is, yeah, I would love to see growth by end of the year, but I think success and this would have told my leadership team and just everyone in my company is like, look, if we're stable and we're making long term investments right now that are going to help us to accelerate growth when the market starts to rebound, that's what success looks like. So, you know, don't, don't worry about it. If we're not seeing the type of growth we were seeing a year or two ago, it's okay. We have to adjust our expectations of what success looks like right now. Survive is the new thrive yeah, hopefully for not much longer, but yeah, it'll be about nine more months. 

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Sam Jacobs: 24:30

Unfortunately, I don't want to. 

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James Mackey: 24:34

I don't want to, I'm not. I'm not. 

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Sam Jacobs: 24:35

I'm not a shodama, I don't know shit, but I am because I talk about this on my podcast with AJ and Assad yeah, I'll top line. And there's just a major chunk of Mark Roberge was talking about this, about how there's a lot of companies that raised money that are that. Are you kind of white-knuckling it? Right, they're, they're not able to raise more money right now, but they aren't going to run out of money too. And well, they weren't going to run out of money for a while, a while ago. Now they are going to need to raise. They're going to need to raise in the fall of this year and they're not going to be able to. And I expect we just heard of a company that you and I both know, James, that had everybody sign NDAs and just laid off their entire engineering team, which to me says that they're going to shut down the company and give the money back that they raised. And I think the bottom is going to be October of this year. That will be the bottom and we will start coming back from then, but that means that we haven't hit the bottom yet. 

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James Mackey: 25:42

Yeah, We've seen stabilization over the past few months, so hopefully things don't decline for us. I would say we did our biggest cuts in terms of layoffs and we saw revenue decline and a lot of customers gave notice. Last December, January timeframe, Again from a hiring perspective we saw I mean, we had category leading tech companies partnering with us that it's just like slashing huge engineering teams and figuring out outsourced solutions. But yeah, I hope you're wrong, but I hope. 

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Sam Jacobs: 26:14

I'm wrong. I hope I'm wrong, but I'm planning to not be wrong. 

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James Mackey: 26:21

Yeah, I hear you, man. So one follow-up question I had is you mentioned bad data on monthly versus annual. I would be curious to hear how that happened. I think executives tuning in would be curious to know too. So hopefully we can avoid that. 

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Sam Jacobs: 26:37

Well, I just think it's just like you were talking about, with the speed of pricing changes in your friend, that successful exit. Like I just think that you can, if it just depends on what stage of growth. If you're running a large company, then you probably have already experienced all of these evolutions that I'm experiencing now. We're going from being small to being medium size and we're well, it all depends on the world of startups where medium size. In the world of all, companies were still small. But the point is that you get used to making decisions based on intuition and then you start grabbing a little and we just didn't have good data. Like, we just did not have good data because we were using all these third-party services and we were built by non-technical people like me, and so even our rev ops function, until very recently, was pretty underdeveloped, and so we finally my point is like we saw one, somebody saw one slice of data that was not perfectly accurate and did not fully represent the entire membership, and we didn't do a substantial analysis because I was thinking I just got to stop the bleeding, I just got to stop churn. Ok, if monthly is the thing, that's what's creating the bleeding and it was just a lot of impulsive decision-making last year and we're paying the price. Man, that's all I can say.

 

So now we know we, for our last board meeting, did a deeper analysis of retention by cohort. That's where we figured out that monthly is 20 percent worse, but it's probably I don't know the exact number off the top of my head but it's certainly three to four times more accelerated in terms of velocity. So like we're more than making up for ARR growth than we're losing in conversions. And at the same time, we did the analysis by price because my instinct is actually always to raise the price. My instinct is always to be like, well, they're not committed enough. You know, I got to get people to be committed to my product, so I got to force them to engage. I'm going to raise the price. And then we looked at retention by cohorts and we realized that we're at two seventy-five a month right now and we have 40 percent retention after one year at that price point and the people that pay two, fifteen, ninety percent of them stick around. And so like this is a very obvious thing, but again, it's, it's not that obvious actually, because I can't just flick a switch and I can't go to everybody that's paying two seventy-five and say now you pay two fifteen, without losing millions of dollars in revenue that I need to build because I'm trying to run the business for break even. So long story long it's scratch and claw man. 

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James Mackey: 29:18

Yeah, that's exactly it. I mean I have this conversation with finance at least once a month where it's like all right if we start out offering slightly discounted pricing, like should we do that to our existing customers, not only to keep things consistent of where it gets out, but then also maybe we're more likely to keep them right because they're more budget conscious. But then when we look at our P&L, like well, if we do that, like we're going to be in a worse position. 

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Sam Jacobs: 29:44

Right, instantly negative one hundred thousand dollars. 

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James Mackey: 29:47

It is challenging for sure. I mean just to switch gears a little bit. I wanted to talk to you a little bit about just your focus currently on smaller teams, higher leverage, and top performers. Can you talk to us a little bit about that, just high-level philosophy, and maybe how you've started to implement that thought process at Pavilion? 

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Sam Jacobs: 30:10

Sure Again it's all the same. It's all related to the same stuff, right? What's the number one thing I've been hearing on the road, as I've been meeting with members over the last couple of months? The number one thing I've been hearing is that sales development reps don't work. Outbound sales work less and less well and it's becoming and again, what does work mean? It means conversion rates are falling, right? If you got people on the phone three times out of 100 a few years ago, now it's one time out of 100, right? And if you were closing, the number I saw most recently is 27% of all reps, of all account executives, are hitting quota.

 

That means that three out of four people that work for you, whose salary you're paying and whose health insurance you're paying for, are not producing what you need them to produce in order to sustain your business. That is a crisis, and so everybody is looking for it. Well, what are the better, cheaper paths to market? Is there a different way to get the attention of a prospect that doesn't involve a young, early career person reaching out to them and then handing them off to a middle career person and trying to close that, and having a large team of those people? Is there a different way? And the answer is there are different ways. They involve lots of trade-offs, right? So there's product-led growth, and product-led growth means that you create a free experience or an easy to, that your product has some applications that are free or very, very cheap, but probably free, and that you're trading, putting up a gate at the front door and saying to come through, you gotta pay me money with a much larger number of people that might come through a free system and then you can tantalize them with, first of all, you create something valuable for them, and then you put natural gates and you say, okay, if you want to use this stuff, okay, now you will pay me, right? So it sounds good because you don't need it. And there the strategy is demand Gen and basically using the internet to acquire lots and lots of free people and then hoping on a conversion funnel that gets them to pay money. Sounds great.

 

In practice, most PLG teams still need salespeople, so it's not that much cheaper, and actually, you need a much larger engineering organization because they got to build, because it's not a free trial. That's what I, oh, I'll do PLG. It's a free trial. No, it's not. It's actually like a meaningful part of the product is free, okay, well, you're going to need a bigger engineering team to build that free thing and your R&D costs. And they had public PLG companies like Slack before they were owned by Salesforce. They had much higher R&D costs and they still had expensive sales and marketing costs because they still needed salespeople to close the deals. But it's a different path. What's another path? Partnership or ecosystem-led growth, where you figure out who you're going to compete against and who you're not going to compete against and you figure out who has the same customers but that I'm not competitive with and you try to go to market with those people. So it sounds good, not as transactional, not as sort of instant gratification, as outbound sales much cheaper over time because you're going to trade, you're going to get higher win rates, you might get higher deal values and you'll probably get lower churn, but it's probably going to be nominally longer awareness cycles. It might be a shorter sales cycle, like when the actual opportunity is created, but the time to get to the opportunity is probably going to be longer than outbound sales.

 

So all of that is the prologue to one of the things I've been thinking a lot about what we did at Pavilion. We got rid of our go-to-market organization largely, but we still maintained our VP of growth, who does a great job leading teams, and what we did was that we said, okay, we still have a pipeline that we want to be closed. Actually, what we did and he hasn't closed his first deal yet, but he's going to soon as we went out. There are hundreds of sales executives that are out-of-work executives, not just account executives, like VPs of sales hundreds, and many of them are members of Pavilion. So we went out to one of those people and we said will you do commission, only sales? But this person is in their 40s. This person is your age, James, and this person is a buyer, that is, a seller that buyers want to talk to. This person used to run sales for big conference organizations and got a lot of interesting insights. He's a charming guy. So then our buyers talk to that person and they want to buy from that person and he's more sophisticated. And so the point is can you flow all of your leads to a smaller team of more seasoned, experienced salespeople, instead of thinking that you have to build a very large team of people that, in today's environment, three out of four of which are not going to achieve quota, and yesterday was still only six out of 10. 

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James Mackey: 34:55

Yeah, it's interesting. I've been hearing a lot about partnerships lately as partnerships being the future and I just mean it makes sense. I think from a cost perspective, you can get a lot higher leverage with a smaller team. I mean, it's something that I'm investing in at Secure Vision. I sort of wonder, as I mean, that should have been something that companies were working on all along. If you're going to do an app-down strategy, that's great, but why? I'm just wondering. It seems like there's this aha moment when it comes to partnerships over the last year, but I don't know if you've been hearing that too, but it just seems that there's this aggressive push in terms of on LinkedIn, I'm seeing like, oh, 2024, it's all going to be about partnerships, right, I'm seeing it being pushed in that direction. 

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Sam Jacobs: 35:37

I'm seeing it for a couple of reasons, one of which is that I become friends with some partners, so I'm probably seeing it more in my algorithm. But second, the issue with partnership specifically is that there hasn't anybody knows what a partnership is. We've had a partnership conversation, right? There's a great partnership Pavilion plus Winning by Design. Right, winning by Design is a sales consulting firm. They teach people how to build great businesses. They're like McKinsey for sales. I don't want to do consulting, they don't want to do community work. They are offering free courses that they've built to Pavilion members, free courses. They didn't know the licensing model. They're giving it to us for free and they've enhanced the value of Pavilion membership and in exchange, we want to send people their way and we decide that they have. That's a great partnership, right? And because we are taking a long-term view but that requires a long-term view, right, that requires somebody to have a point of view that like yeah, it's not about like instinct gratification, it's about I'm building an ecosystem.

 

The second thing is the other reason that people have been talking about it is that look at Gong and Outreach and Clary right, when you raise $100 million and when you raise all this money, your mandate is I'm going to do everything, so why would you partner with anybody? I'm going to build the sales engagement platform. I'm going to build the call conversational intelligence platform. I'm going to build the forecasting platform. I'm going to do it all right, and in a tougher environment, you're forced to say I can't do it all. I got to focus and, instead of me competing with this company, I got to partner with them because I'm not going to do the thing that they're doing. Meanwhile, there's another company that we've been trying to partner with, but this person whose company is one-quarter the size of Pavilion right, one quarter? They are 25%. What they do in a year, we do in a quarter in terms of revenue right?

 

And he and I said you got to give us some of your content. We're not going to pay you for it, but I promise you that we're going to put our muscle behind creating awareness for what you're doing and we're going to send you as much business as you can handle and you don't have to pay us a referral fee. And he just couldn't wrap his head around it. He just couldn't wrap his head around it. He's like well, I don't see what's the point of doing that. That's not a part, and he didn't. His idea of a partnership is you tell all your people that they can get 20% off my thing when they sign up for my thing, and I'll tell all my people that they can get 20% off your thing and I'm like, well, that's, that's just a waste of time. That's just not right for me right. A partnership is you are enhancing the value of my product and I am enhancing the value of your product, not let's trade email lists and spam people. 

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James Mackey: 38:20

Yeah, well, that makes a lot of sense. It's a little more sophisticated than a lot of the content on partnerships that I've seen online, so so, thank you. I wanted to jump in. We have a little bit of time left. I talk a little bit about working from home. Yeah, what are your thoughts there? What are you seeing? And just curious to get your opinion. 

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Sam Jacobs: 38:41

My opinion is that it's super hard to put the toothpaste back in the toothpaste tube. I think I'm working from home. Do I like it? There's a lot about it that I like. If you have two groups of people, one of whom is working fully remotely and one of whom is working in the office, and they're the same people, which group are you going to? 

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James Mackey: 39:06

I would probably bet on an office.

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Sam Jacobs: 39:12

It's a fallacy that this is more productive. That's not true. It's not productive, it's not. It might be more pleasurable, it might be more enjoyable. It is not more productive, it's just not. That reality is something we're all going to have to grapple with. We're a fully remote company. We've got people all over the country. Do I think we're as productive as we would be if we all just came into the office five days a week? No, I don't think we would. I also think the last thing I'll say, but that doesn't make any of this easy. Commuting sucks If you have to trade a nice place to live for having to travel an hour and a half. A lot of people don't like doing that. The last thing is I think that actually, burnout and working from home are closely related. I think the reason people feel exhausted and disengaged is because there's no separation in their life between a place. Howard Schultz created Starbucks because he wanted third place. You're not supposed to do everything in one place. You're supposed to go to a place. There needs to be the separation, the psychological separation. This place where you're like I can compartmentalize. It's not the yelling baby and the barking dog and all of my personal life completely intermingled with my professional life. I guess what I think, generally speaking, is that there's a group of companies that are going to be started over the next five years that are going to be in office and they're going to be better positioned to the fully remote companies.

 

James Mackey: 40:47

I think the way that I look at it is really just about leveraging Companies, that I'm competing for talent from what they are doing. If they're offering remote, then I pretty much do too. If I want to get the best people. If those folks have the ability to get remote, the way I look at it, at the end of the day, I still would rather have, if it opens me up to top-tier talent, I would still rather have those people remote than maybe hire the people that don't have as many options but that would come in an office. I think as a small business, it's different if you're a big brand and you have leverage because you could throw money at people to get them to come into the office. For where my company is at, it's something that I have to offer. I feel like, while you're talking about productivity, I think it's relative to the talent you're competing for too, and what opportunities they have. If your competitors, for instance, are on the same page and aligned from a standpoint of being at home, then it's not like you're being any less productive than them too. Does that make sense?

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Sam Jacobs: 42:00

I just feel like it. I think the fundamental point, which is, if you want to hire the best talent, you're going to have to accommodate their needs, is probably true. I think there's a lot of research and data that we just don't have. I think that if you want to build a sales team or you want to build a team of people, maybe in the middle you start your office wherever your best executive lives. I don't know, but I think young people in their early careers need an office. 

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James Mackey: 42:35

Yeah, I think so too. I think particularly when people are growing and learning, and I think that that's something that's often missed, because, since most of us came up working in offices, we probably don't understand, maybe we don't fully grasp the benefit or how challenging it might be for people coming up without I mean some of you do, but a lot of people don't. 

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Sam Jacobs: 42:55

I don't think about that in terms of how important that is. You graduated during COVID from college. We couldn't show up drunk, obviously. We had to shower and shave, we had to look nice, we had to be there at a certain time, and, whatever you think about FaceTime or whatever, we had to stay there at a certain time. They haven't learned any of those social skills. We don't really know what these people sound like, such a crotchety old guy, but just the basics of work professionalism have not. That is conveyed tacitly. They're not verbally spoken. You just watch your peers and you're like oh, that's how I'm supposed to behave. None of that has happened for a generation of people. It's pretty wild. 

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James Mackey: 43:42

Yeah, it's definitely pretty crazy. I do agree with you. I think in an ideal world I would love to be in office. I don't think that that's ever going to happen. Based on the type of profile that I'm hiring for these recruiters, they have enough options to go elsewhere where they're able to work remotely. For me, it's like well, all right, I would rather have that A player. I think too, it's like as you get bigger, maybe with more structure and process, where roles are a little bit tighter in scope, Maybe that also influences where you don't need somebody who's quite as well rounded or there are more people available that could fill those positions. Maybe it also has to do with where you're at in terms of a stage as a company. The bigger you are, maybe it's just not quite as important to have that person that fits 95% of the profile you need.

 

Sam Jacobs: 44:40

I think the market will tell us if it's more important to have a bunch of people who's raw talent, raw intelligence, whatever you want to call it, like eight out of 10, but they all work together in the office. Does that team beat a group of people that are scattered all over the world but is a nine out of 10? Yeah, there are arguments for both. 

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James Mackey: 45:01

The data on this topic is problematic because it is likely biased. We tend to find studies that align with our preconceived beliefs, which is just human nature. Most individuals operate in this way. We cannot be certain about the truth behind the data or whether people are more productive in specific locations. However, as a recruiter, I must follow the market and hire top talent, regardless of the accuracy of the information. 

 

Sam, thank you for being a part of the show. For those who tuned in, I hope you found this episode valuable. Whether you are a CEO, chief people officer, or talent acquisition executive, it is crucial to grasp the business's overall strategy, North Star Metrics, and unit economics to drive value in your department. It was fascinating to zoom out and gain insight into how Sam is scaling his company. 

 

Thank you again, Sam, for joining us today. Take care, and we'll see you all next time.

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