Episode 6: AJ Gandhi of Marlin Equity Partners
on 6 Needle Movers for Organic Growth
On this episode
Shiv Narayanan interviews AJ Gandhi, CGO at Marlin Equity Partners.
AJ and Shiv discuss how Marlin Equity Partners’ team of operating professionals create value in their portcos with a hands-on approach to scaling revenue.
Learn about the sales and marketing structures that are the foundation to scaling but are often underdeveloped, and hear how Marlin Equity Partners leverage upselling, demand generation and pricing changes for sustainable growth.
The information contained in this podcast is not intended to constitute, and should not be construed as, investment advice.
- Marlin Equity Partners’ value creation philosophy - 4.19
- How they leverage their team of operating professionals - 9.20
- Why segmentation, the right sales coverage model, and positioning are foundational for value creation - 15.57
- How to proactively approach demand planning - 21.36
- How to increase cross-sell and upsell success in portfolio companies - 33.25
- How to strategically leverage pricing increase for enterprise value creation - 39.08
Click to view transcript
Shiv: Alright AJ, welcome to the show, how's it going?
AJ: Hey, I'm good, Shiv. Happy Friday to you.
Shiv: Yeah, likewise. And it's great to have you on and super excited for the audience to learn about all the things that you're up to at Marlin Equity. So why don't we start with your role at Marlin and specifically about the fund and what you guys are focused on.
AJ: Sure. So I'll tell you about the fund first, then I'll describe my role. So we're a mid-sized private equity firm. We are investors in principally B2B SaaS companies, originally some on-prem that we brought over to SaaS, but now it's pretty much SaaS. I think you could describe us originally as doing much more corporate carve-outs and turnarounds. And we still very much do that, but we're also very much investing in growth companies. And fundamentally, what we're seeking to do is take a software business that we think is in a good market and we feel like that there's an opportunity to take them to the next level by enhancing the growth strategy, M&A, a little bit tighter operational management. And we've done that with - I think we've made 150, 200 acquisitions over our lifespan, which is, I believe, about 18 years. And currently we have 50 platform companies in the portfolio - about two-thirds in North America, about one-third in Europe. And company sizes, you know, I'd say most of them are on the - the majority are in the 20 to 100 million range ARR. Probably about 20+ percent of our companies are, you know, 100 to 500 million ARR. So we've got some good size - good size ones, but fundamentally we're mid-size software investors.
Shiv: And when you refer to platform companies, are you specifically saying like the main investment in a particular space and the size matter there? Because when you look at the 20% of those companies that are 100 million plus, like I'm assuming their makeup looks a lot different than the other companies that are in that 20 to 100 million dollar range.
AJ: No, I think it just - so when we say platform company, we mean it’s an underlying core company. And, you know, we make a - we do a lot of add-on investments, just to enhance the business. So that's just an opportunity. But that's just really a distinction between, you know, what is an add-on versus what is a foundational company from which we're going to build. Maybe an example here would be helpful. You know, we started with an ERP company or a company that did scheduling for workers in the restaurant industry. You know, we recognize, ‘Hey, well, that's a key part of operating restaurants’, but there are many other aspects to it. There's hiring, there's inventory management, there's payments, payroll, etc. So we used that foundational investment in a company called **** and expanded it to - you know, with a bunch of other acquisitions to create much more of a foundational or comprehensive platform to help medium and large-size restaurant chains run their business more efficiently. And so that's an example of - we call that one company even though it's a bunch of acquisitions.
Shiv: Mm-hmm, a bunch of acquisitions merged into that platform. So that's great. And when you look at the value creation philosophy of Marlin overall, is it heavier on the M&A and inorganic side or is organic just as much of a priority when you look at these platform investments?
AJ: Yeah, just as much of a priority. I think fundamentally, to be a software investor these days, you have to - you're paying a reasonable valuation to get into the business. So we feel like we have to apply as many different levels of value creation as possible. So fundamentally, we just help companies run their business efficiently. So there's often a component of that. Second, M&A is very frequently an opportunity, so it's a big part of the portfolio. But especially with software businesses, we recognize you need to manage the product and you need to manage go-to-market well to realize the full potential of the business. When you look at go-to-market in particular, I mean, for a software company, for a public software company, it's over 40% of revenue that's spent on marketing and sales. And private companies, especially the ones that are VC-backed, it's often much higher than 40%. So it's the most expensive thing on the income statement. And oh, by the way, it's also the determinant of growth about how well you kind of manage that. And so we just feel like there's a huge amount of opportunity for improvement. And especially when you think about going to market holistically - the marketing, the sales, customer success - and then also think about holistically with the market and the product and competitive position. So, you know, there's a lot of work we do there. Fundamentally, what we wanna do is we wanna be just very strong collaborative partners for the management teams at our companies to just help them be successful and take it to the next level. And so we've invested quite a bit of energy and resources to develop that capability.
Shiv: Yeah, and I think that's a great segue into your role in particular because you're the Chief Growth Officer of Marlin and when you look at your operations group, as a firm, Marlin has a lot more operating professionals than a lot of private equity firms out there. So talk a little bit about your mandate and how you go about fulfilling that.
AJ: Yeah, I think the mandate in many ways is simple. It's: help our companies be successful in scaling to the next level. We very much seek to live by rule of X. So people say rule of 40, which is kind of like the EBITDA margin percentage plus the growth rate. So what we want to do is just to help our companies grow, but grow efficiently. And frankly, that sounds quite different than you know, earlier-stage companies have been doing for the past several years. We know it's been a lot of growth at all costs. But you know, we're - you know, most of our companies are control investments. So you know, if the company's losing money, that's an impact on us. So what we want to do just fundamentally is help improve the companies. So I think when we get involved with a company, there's a bunch of, you know, financial management stuff that we put down as foundational. So that's one aspect. And then second, we want to provide distinctive resources from very experienced professionals to support our portfolio companies. So I think they kind of come in three flavors, if you will. So one is, we have some of - it's kind of the “traditional” operating executive. So, ex-CEO, somebody who's sort of been there, done that. And often, that - oftentimes, that person will serve as kind of chairman of the board and be an advisor to the CEO, as well as of course to the board. and running the company. There's a second type of resource that's maybe the functional specialists. So I fall in that category - go to market, product - we even have some folks, one individual who is a - just has a lot of expertise on real estate. And then, of course, we've got resources to help with kind of talent and finance. So that's the functional specialists who go in and work with companies. And I can double-click on that in a moment. And then, third, there's another kind of operating director type of role, which in some ways is sort of the program leader role. So when we invest in a company, we'll work and tend to put the management team to create a value creation plan and sort of just basically a multi-year plan to ensure the businesses hit the next level of sophistication and growth for three to five years down the line. And so we have operating directors who basically manage the full portfolio of value creation initiatives across the different functions. And then oftentimes, those individuals are also playing a lot of the financial management role as well.
Shiv: Got it. And when you look at all those different areas, right - like I get the part about bringing in operating executive and bringing functional resources - how closely tied do you get to the value creation or the investment thesis that went into the investment initially to figure out what to prioritize and then how does that affect the resources that you're bringing in?
AJ: Yeah, sure. So it's significant, is the short answer. First of all, we work very closely with our deal team. So deal teams are always - they've always been very strong investors with a lot of expertise in go-to-market. So they were doing this well before I joined. But I'd like to think that we've helped them take it to the next level. And we've kind of aligned on a kind of a diagnostic approach for evaluating sort of strategy, operations, execution, talent in the companies. I would say most, probably two-thirds of the kind of the diligence process is run by the deal team. We tend to get involved towards the - for lack of a better word, it's the last third of the process, just when we want to go deeper, when we're kind of a shortlisted investor or we have exclusivity. And that's when we'll dive in. We've seen so much, so I think there's a lot of pattern recognition. We know what are the kind of key drivers, key things to look at in a business. We just seek to cause performance and figure out where the strengths and weaknesses are. And then we've got an understanding of what are the typical challenges in the company. And they're pretty straightforward, to be honest, in the good market side. It's like, you know, new logo growth, customer expansion, you know, pricing opportunities, you know, scaling the sales, team scaling pipeline generation over time, so - and then, you know, of course, kind of, you know, getting a sense of, you know, does the management team have all the skills and capabilities needed to help the company succeed at the next level? So we look at all those things and then, you know, we can hypothesize a value creation plan very quickly, just because, you know, we've seen so much.
So that's what happens in diligence. So we're part of the diligence process and developing the investment thesis in almost all instances. Sometimes processes happen really quickly. So there have been examples where it's been different, but that's unusual. We seek to work together as a really strong team.
And then once we do make an investment, we work with the management team to actually go deeper, to understand the business at a more intensive level, you know, get deeper in the management team to understand it. And, you know, that's our way of just, you know, fully getting a grasp of how we can be helpful. And then we will work in partnership with our management teams to actually, you know, create a set of initiatives. There are often some foundational things that we want to put in place that we put in place in all our companies. And then we'll figure out what are the three to five kind of big needle movers. And, you know, sometimes that's something management can do themselves. We provide guidance. Sometimes we get very hands-on to help them. And then on other occasions, you know, we'll pull in specialized third parties. And that's - and we kind of put that into a kind of a formal value creation plan and, you know, seek to execute against that.
Shiv: And those three to five needle movers that you mentioned, in your experience, as you come into companies, regardless of stage or vertical or industry that they're operating in or deal sizes that they're chasing, what are the most common needle movers that you have found or that you as a group at Marlin end up focusing on?
AJ: Yeah, what I'll do is I'll tell you the foundational things first, Shiv that I'll highlight the needle-movers we often get involved with. There are certain things that we want to make sure that are really in place well. And I'd call these more in the foundational category. So the first thing to me is segmentation and targeting. Most of our companies don't have the scale of good market resources to cover their full market opportunity. So we want to do a very intensive job of figuring out where's the ideal customer profile. Where do they have right-to-win by looking at revenue potential, but also propensity to buy and fit and momentum so we can focus the go to market resources on the sweet spot. So that's a foundational thing that oftentimes we have to dig in and we'll work to evolve what's in place already. That's kind of number one.
Number two is just make sure the sales coverage model is right. Most of our companies are more right than... but oftentimes there can be a few things to fine-tune. And then, you know, things like sales compensation and, you know, marketing and sales metrics. So those are things that we just want to upfront make sure are foundationally strong. But those we would kind of say are many ways kind of table stakes to running a business in a competitive market. What we're really trying to do then is, you know, if you think about the needle movers, they're a variety of things. For a lot of companies, you know, the place that we would start - actually one other thing, and this can kind of be a needle mover, positioning and messaging. Look, there's a sea of sameness in software companies. I mean, we all see these crazy logo charts of like in this type of space, there's like these, you know, 50 logos and you know, 5,000 more type companies. So you've got to really have a distinctive story. And you really have to start with what's the problem that your customer's trying to solve? Why does it matter to actually get attention? And how are you distinctive? So that's a key thing to nail. Another,
Shiv: I think just to jump in on that, I think that's a really good insight, is that we find this too, we can come into companies that are 5, 10, and sometimes even 100 million in revenue and they don't have segmentation fully built out or know their ICPs and who they're going after and then their positioning and messaging is off to go after those targets, even if they know their TAM, SAM or SOM. And that kind of plays its way throughout the entire go-to-market strategy if that's not in place because it affects the website, affects sales outreach, it affects overall marketing or go to market overall. So, totally, totally agree on that. That's a great insight.
AJ: Yeah, I know. It's amazing to me how many people just say, ‘Hey, we're in this Gartner category and we do X.’ It's like, well, first of all, it's not differentiated. And I think particularly in this environment where people are being more discerning about what investments they're going to make, I think it starts off with, what is the problem that you are solving for? How important is it? Why does it matter? Is it a mid-level buyer issue or is it an executive-level business criticality issue? And if you're a mid-level kind of B priority problem, you're probably not gonna get investment to actually move forward on that. So I think you have to start at that level. And then - so it's always - I think a lot of it comes back to the things that I think Challenger codified pretty well, that ‘teach, tailor, take control’. So you got to teach, why does it matter? You got to tailor your solution to their particular business. And then, yeah, you've got to be assertive. So I think Challenger continues to be incredibly, incredibly relevant. It's just a foundational way. And that actually maybe leads to another thing that I think is a big needle-mover is, I think a lot of earlier stage companies are over-dependent on a few reps. And if you really want to grow, you've got to have a larger sales team. That means you've got to be able to hire, enable, and ramp up reps at some volume, at some scale. So I think that process is kind of sales enablement. And there's so many different components of it. Like sales methodology, people talk about that, but that's only one component. And even when you talk about sales methodology, a lot of people think about the deal management process and opportunity management. But there's actually opportunity management. There's account planning. There's territory planning. There's regional planning. So - and that's just the sales methodology part. And you got to learn about the customer, the product, competitive, how to get business done internally, you know, et cetera. So there's a huge amount to kind of sales productivity and kind of enabling the sales force to scale. I'd say that's a second one.
A third one - and if you don't have the position messaging, it's those reps in particular that really struggle. And so you've got to, whatever that story is, you really got to make sure it runs all the way through, as you said, through all the aspects of what impacts the buyer's journey, which starts with a website and the content marketing, et cetera. But certainly, the reps have to be able to live it and bring that story consistently. The third thing I would say, and I know this is near and dear to your heart, it's pipeline generation. Like if you want to grow a company, you got to be able to continue to grow a pipeline. You know, when I was in a previous job at RingCentral, we were doing pretty well. I joined at $350 million ARR. I think we got to $500 million, or whatever the number was, within a year. And we were excited. We were accelerating revenue growth. We're growing at 30-plus per year. And we had hit our bookings target, which I think was $200 million, or something like that. And so I remember going to an offsite with the CFO and the finance team. I kind of said, ‘OK, great. We're doing great. $200 million bookings. Awesome.’ Well, guess what? This year, the number is like $250 to $275. And then a year after that, it's going to be a low $300, and it's going to go to $400 million. And guess what? When we get that, we're going to have to generate $1.5 billion to $2 billion in pipeline. And this year, we only generated 500. So we need to be ahead of that curve. It's not just hiring heads. Like, it's about actually having programs. Those programs will need to evolve. So demand generation is a big challenge in many of the companies that we work with. And there are different components of it. There's demand generation that comes from inbound. So the SEO kind of organic stuff. Then there's the paid and social. But then there's outbound, especially if you want to go after medium-sized and large-sized companies. You know, you're doing much more ABM kind of programs and maybe you can leverage partners. And so that's an area that, you know, we often find our companies are good in certain areas, but they're underdeveloped in others, so account-based marketing and sales is a big area that you know we tend to focus on for most of our companies because you know our segmentation targeting will often say, well your ideal customer profile, let's be just laser-focused on identifying who those key accounts are and they're not going to come inbound, you're going to only get a handful of them. You've got to be very proactive outbound, and going after them. And it's actually, you know, it's pretty complex to execute. So you've got to be really, really sharp how you go out.
Shiv: You have proactive about it. I think one of the things that you said, the underdeveloped aspect is - we totally agree on that. We've seen, it's very common that a company that's even doing a hundred million in revenue can have a sophisticated sales process or sales methodology, but very nascent on their marketing planning and strategy because they might be doing some product marketing work or sales enablement work or some events and trade shows, but when it comes to proactively planning, like let's say we need to close 100 million in bookings or 50 million or whatever the number is, what is the amount of marketing support we need in order to be able to hit that number? And then how much budget do we need to deploy across different channels and programs in order to be able to get there? And we find that even sophisticated companies don't have that answer, either because the data is not in place or they haven't thought through all their programs and channels and campaigns to actually be able to. work backwards and come back to a budget number that they can take to the board level.
AJ: Yeah, no, we're that demand planning, we're - we've become increasingly rigorous on it. You know, we built out models in partnership with our portfolio company marketing teams as well as sales teams to just say, ‘Okay, well, you do the exercise of working backwards from bookings in the future of what you want to hit. And when you need to generate that pipe and how it's going to, you know, convert over time. But then applying that, well, let's do that by segment. Let's do that by geo. Let's think about that by channel. Let's think about that by program. And then let's think about what needs to happen month by month in that lead-to-bookings model against all those different slices and filters I just spoke about.’ And so that's something that we seek to put in place such that you actually have goals on a monthly basis for all of those different metrics and you can assess your performance. And nobody's perfect on that stuff, but by being rigorous and thinking it through, you've got a plan. And like every company I've been a part of, especially Salesforce and RingCentral where I was previously, what you evaluate is, well, at the quarter you evaluate how did it all go. But what we were doing was on a weekly basis we're evaluating, hey, we expect to be at this point from a pipeline standpoint, by segment by geo by product line, etc. How are we doing? How are we tracking against that water line? And if we're off track, well, we want to be proactive to address it. So I think that kind of demand planning in demand gen is really key. And then based on where they have sophistication, on where they're less developed, that's where we'll, you know, support them. Oftentimes, we'll pull in specialized partners for things like ABM, just because it is a lot of, you know, intensive, you know, detailed orchestrated work. And I think there's just a big learning curve on it. So we want people to be successful upfront and, you know, learn from experience. So that's a big focus.
Shiv: I think the point about being proactive is also an interesting one because ABM is important for a certain set of companies, right? So if your ACV is over 100,000 and you have maybe only 800 potential targets out there, ABM has to be a core part of your strategy because you're going after large accounts with large deal sizes with likely long sales cycles. And so you have to partner with sales to actively reach out to those folks. If your ACV is more transactional and you're selling 5, 10, $15,000 deals, it can be not that profitable to focus on ABM. So that's the other aspect. Thinking about the strategy of which channels are most relevant within your business model to be able to drive pipeline efficiently enough so that your CAC and payback periods are in check and your EBITDA margins are within range as well, when you look at the overall marketing budget.
AJ: Yeah, totally agree. I mean, it starts with understanding where do you play and what are the life cycle economics of that. And sometimes it's, hey, we look at companies and they're doing too much in SMB and actually look at the lifecycle economics on the cost to acquire, the cost to implement and what's the return rate and just the economics don't really line up. So then you have considerations - well, let's evolve the pricing model. Or maybe let's shift a little bit more resources out of market. So we're doing that with one of our companies right now, supporting the management team as they say, ‘Yep, we get it. We want to move more mid-market enterprise.’ And then we do have quite a number of companies that are actually very strong in SMB, and it's more inbound driven. But they still recognize, ‘You know what? But there are 500 to 1,000 accounts for which our value proposition is extremely important. And so we are going to do some targeted programs there.’ And as you well know, Shiv, ABM can be one-to-one. It can be one to many. It could be one of a few tailoring things to a specialized subvertical. And that can be just as effective. And you just have to vary the investment based on the life cycle economics, as you described.
Shiv: Yeah, I like to think of it like a pyramid, right? So if you have your one-to-many, which is your smaller deal sizes, you need more standardized assets and content and resources to target those types of folks where maybe they're finding you on the website or you're having a webinar for a bunch of those types of accounts. Then you have your one-to-few, which are slightly larger, maybe more specific. You have segmentation around it, but maybe the accounts aren't large enough where you can go one-to-one and dedicate a ton of content resources where it's specifically tailored to that account. And then you have your one to few where every company, even if you're selling to SMB, you might have a list of Dream 1000 or Dream 100 accounts that require that customization because the deal sizes are large enough. And so coming back to your point on segmentation, that's really the starting point to really know what are the different accounts and how much revenue sits within each of those segments so that you can tailor your marketing strategy against those accounts on that pyramid.
AJ: Yeah, and it's all totally knowable. You know, when I was in Salesforce, you know, role in sales strategy globally, or kind of led that team. And one of the big things that we wanted to do - this is way back a while now, this was 2010 - Mark really wanted to focus on winning in the enterprise. So Salesforce was growing, it was doing great, but Siebel still have most of the really large accounts. And there were examples of winning some really big ones. But one of the big things that we recognized that we needed to do and sort of kind of got it, is hey, we've got to win in the enterprise. And so we looked at - at the time, I think the enterprise definition was, an enterprise account has more than 1,000 employees. Well, there's about 11 - if we just take North America, I think there's about 12,000 companies that are greater than 1,000 employees in North America. And that's what was in enterprise. And with those ratios, and the number of sales reps that we had, each enterprise sales rep had 50 accounts. Well, 50 accounts is a lot. Like how do you focus on 50 accounts? So what we did was we did an intensive segmentation targeting exercise to say, all right, well let's focus on the high fit, high revenue potential. And that was gonna be - it was obvious that, okay, well let's focus on more B2B-centric companies for Salesforce and their clients who pretty much just had Sales Cloud. And then let's focus on the ones that have more complex sales cycles, there are a bunch of key verticals that made sense. What happened over the course of two years is that we hired a bunch more reps because we were having success and continued to expand in the enterprise. But that average number of 50 accounts per AE, it went down to seven. And the quotas even went up. So you can guess that we were very popular as we were kind of rolling this out. But it was just focused. And what we showed people was, hey, look, if you actually apply - we have these scoring models and this is what we apply in all our companies at Marlin. If you actually look at it to say, we can perfectly predict, or almost perfectly predict, you know, where are you really going to get your bookings? And it's, frankly, it was pretty straightforward. But it was just explaining that to everybody and saying, we're going to focus you. And then we actually had - you talked about the pyramid, even for the sales reps, we had three different levels within enterprise. We had the tippy top where you actually had on average 1.5 accounts per AE. So in fact, you actually even had some accounts, like I think Wells Fargo at the time made a lot of momentum. We saw a lot of opportunity in multiple buying units. I think we have multiple reps on just a single account Wells Fargo. So that was kind of like the tippy top, the strategics. The next level, the reps had, I think, like seven. And then the bottom tier of enterprise, they had 15. So it's just about, once you figure out where the revenue potential, propensity to buy, and momentum is, you just focus your resources. So that applies - and the marketing budget paralleled that as well, to say, hey, we're going to put more energy on our “dollars per account”, on the top tier versus the medium tier versus the lower tier.
Shiv: Right, I mean, yeah, those two functions being aligned on that is super important. What made me think of something as you were talking through that is just how much of a focus, given that M&A is a part of your value creation philosophy, how much effort is being put into the upsell, cross-sell side and then also on pricing because that ends up becoming a way to expand those accounts or generate more revenue from the accounts that we've already landed.
AJ: Yeah, no, those are really significant value-creation levers. So we do do a lot of M&A, and then cross-sell is something we put a lot of energy into. And I think we're getting more and more sophisticated at it. In fact, we just kind of wrote a playbook on how to do cross-sell and all the considerations. Just the reality is, what the data would suggest, if you look at decades of M&A, cross-sell success far lags the goals that were set when the deal was conceived. And it's because there's a lot of things that you have to get right in driving cross-sell. And so we put a lot of energy in. Just like you have a targeting model for a new logo, you need to have a targeting model for cross-sell, for example, to say, well, who are the account? And the benefit of cross-sell is, you know, a lot more about the target account because they're already a customer. So then you think about, well, what are all the attributes of someone who would be a good fit for this? And then, you know, where are we housed? And then you have to think about, you know, what's the selling skill required? And are you selling to the same buyer? So there's a whole framework of all these different elements that we look at to figure out, first of all, where to target, but then what's the right coverage model to go execute that? Because sometimes you just need like the rep to focus on it. You just say, ‘Hey, I'm going to give you some extra cost.’ But sometimes you need specialized resources. It could just be a BDR or maybe you need a sales engineer, or sometimes it actually is just different enough. You know, very different, uh, sales cycle, very different solution complexity, different buyers. So even though you're selling to the same account, you know, it really could be extremely different. And a good example of that, that I think most people know, it's like look at Oracle when they're selling, you know, what they call tech, which is like database and middleware versus apps. For example, financial management software or HR software, they're just super different. So that's why those sales organizations are completely different. So you have to - when they make those acquisitions - so you have to just think it through in a very, very structured way. And then what you also have to do is just measure it rigorously. So you should then be looking at, okay, we've done all this work to figure it out. And... We've educated the customer. There's so many things and so many elements to get right. But then you have to measure it to say, okay, well, let me look rep by rep, like month by month. Are you creating pipeline? Or are you having meetings? Are you creating pipeline? Are you progressing that pipeline? Are you winning deals? What's your win rate? And what you're invariably gonna see is there could be certain reps who are much better at it than others. So, and that's natural. So it's not like, hey, I came up with this great enablement program and everyone's perfect. No, there's a huge learning curve. And so I think that's where, if you're really serious about cross-sell, you have to be intensive about huddling on a continuous basis and the right frequencies weekly to say, how's it going? What's working? What's not? Who's doing it? Who's not? And then, you know, let's problem solve and strengthen it. So I think the companies that are just really rigorous and structured and committed to it are the ones that have more success, but there's a crazy amount of variance in cross-sell. So that’s a good one.
Shiv: Yeah, there's some phenomenal insight there. I think your point about the industry data that says cross-sells are often overestimated. I think that's a really great point because I think often when we're modeling, you look at a bolt-on or an add-on and you're like, obviously, our current customer set will be a good fit for this other product that we're buying. But that doesn't always work out because maybe needs are different or the products are different or, or the sales cycles are different. And I think the other point that you said that's I think worth highlighting is this internal segmentation work, because we talk a lot about the external - how big is our TAM and segmenting that - but within the existing customer base who are the customers that would be ideal fits for the cross-sell and upsell so that we truly understand the whitespace revenue potential there because I think that's often overestimated as well. And then the other piece that jumped out is that I think there's a lot of work that needs to be done on the product side and the packaging side to actually make it worthwhile that even if you have a good fit customer, you kind of have to approach them in the right way with the right kind of offer.
AJ: Kind of offer and then also you have to, of course, there's a whole product element to this too of like, you know, is it, you know, is the product really well integrated? And is it a good, you know, customer user experience? I mean, I think there - I won't pick on companies, but you know, I see a lot of go to market software companies. And you know, like there's this one company in the sales enablement space that's made this really smart acquisition of a complimentary capability. But then when you get to the product, yes, okay, great. It's one login, but then it takes you to a separate page. Having two apps and two tabs, and it's just not fully done. And look, there are short-term and medium-term and long-term implications of product. You don't get product integration overnight, but obviously that's a huge component as well.
Shiv: Yeah, yeah, that's great. And then last thing worth touching on is just pricing. So tell us about like how much work are you doing into that and what type of analysis is going into creating value on the pricing side?
AJ: Yeah, so pricing is a huge lever and I think most private equity companies get that as well. So we've been quite structured in terms of kind of going after it. What we have done in particular is, well, first of all, our companies get it and so they've been pretty proactive on it. There's a variety of different opportunities. I think the issue is, well, first of all, why is it such a compelling lever? It's because if you make a change in price, a.k.a. raise price by 1%, it basically flows to the bottom line. So in a 10% EBITDA company, raise price by 1%, you can have pretty close to 11% EBITDA. So that 1% drives a 10% EBITDA increase. So that's pretty cool. I think most people kind of like that.
But companies also just want to be very mindful to you know, raise prices in a smart way, and they're not often that experienced in how to do it. So we see the typical bias is companies are more timid about changing pricing or raising pricing, and that really limits their long-term growth potential. And we feel like that's a huge opportunity for us to help them. And so we've actually done a, you know, we did a big pricing assessment across all our 50 portfolio companies last year and found a bunch that we could help further. They were already doing quite a bit because this has been a focus for us. But it starts off with pricing strategy. So you want to align the pricing model with how the customer gets value. And then you want to be mindful of, you know, you might tier that based on different customer segments or different product capabilities. So without going super deep there, you start with pricing strategy to get a sense of what makes sense. And then next, you go into a pricing model design. So what is the metric that's actually going to determine pricing? Is it a seat? Is it usage of some sort? There's all kinds of different metrics that you can apply. And then how do you structure them? How does it scale with greater - for lack of better word - usage by the company, and how do you measure that? And then third is price tag. So thinking through what's the value to the customer, how do you match versus competitors? And your offerings aren't going to be identical, so you need to calibrate for some competitors might have a more complete offering, some might have a narrower offering. So it's sort of how do you communicate your price differentiation. And then when you're doing these things, these are big decisions. So there's a lot of testing that you can do. And then once you make sure you get it right if you're making changes. And then once you run all this through, you're like, execution of the pricing program is huge. So how do you communicate the business value in the best way to communicate price? I was in management consulting. So at a particular firm, I had a client. When they find out what our prices were, they were just mortified. I was with one of the top strategy firms. They were just absolutely mortified. It's like, I can't believe that's what you charge per month. And they're like, how on earth could you justify that? And what we showed is, hey, well, we'll do some diagnostic work and we feel like we can get a 10X EBITDA versus our fees, because we see all these different opportunities that we've seen before. So suddenly it's like, ‘Oh wait, so you charge me a dollar and I get $10.’ Because we could help them save tens of millions of dollars, we charged them many millions of dollars. And it was a win-win. So how do you do that? And then, of course, you've got to flow that all the way through, contract terms, et cetera. And then there's a lot of pricing governance work to make sure that you're actually being mindful where you do discounting and how deals are reviewed, especially when they're big ones, what kind of terms, how do you get feedback from the market about when price is working versus not working. So there's a lot to pricing. And just being, you know, holistic and sort of thinking through pricing strategy is really important. So that's something that we focus on. And oftentimes we'll pull in a partner to do it because there are specialty pricing firms out there. We have the capability to do it and we'll play a role in overseeing the work. But we find it helpful to, you know, pull in an expert. There's a lot of specialized analysis and customer interviews that you got to do too.
Shiv: Yeah, I think you touched on a bunch of great points there. I think in general, a lot of solutions are underpriced for the value they bring. You mentioned this idea of value-based pricing, which is the consulting model. Like thinking about the value they bring. That's kind of how we think about our consulting fees as well. And for us, if we can drive 30 percent more pipeline on a recurring basis, like what's that worth to a company's worth millions of dollars? We kind of price accordingly. Right. And so for software businesses, I think it's, it's different, but at the same time, a lot of them are underpriced and founders in general are kind of hesitant to charge more. They feel like this, this fear that the market will just reject their offer. And so a lot of the modelling and some of the, the scientific approaches to pricing, like the Van Westendorp model and things like that, that you kind of have to look at to find those optimal price points. I think there's a ton of work that needs to go into there. And I think one thing worth touching on would be the modeling around as you increase prices, you experience an increase in expansion revenue, but then you kind of also have to model against the expected increase in churn and your net retention metrics, right? So can you talk a little bit about that?
AJ: Yeah, so I think as you highlighted, there's a bunch of specialized analytical techniques to go do this. But yeah, you want to model and at a simple level, you could say it's scenario planning to say, hey, if I raise price by - and price increasing is a meaningful strategy, and you can do it because you are providing value and you have that opportunity. You need to simultaneously be thinking about, you know, what is the true impact? And you don't just do it in aggregate. I think one of the big mistakes or misnumbers people have is like, oh, like when prices were going up, inflation was shooting up, like, you know, some people would just say, hey, let's just raise everybody's prices 10 percent. Well, that's actually a really, it's overly simplistic and fundamentally flawed strategy. There's certain people getting a ton of value. where you're highly embedded in their workflow, you've got multiple champions, you've been there for a long period of time, you actually have much more pricing power than temporary, and you haven't raised price in a while. You have much more pricing power than that. You might be able to do 20%, 30%, and you may not do it all at once, you might phase it over time, and then you might have others who are more cost-sensitive or they've had some delivery issues or there's been a change in kind of you've lost your key sponsor. And or, so there are just other factors to think about to segment it and you might want to be more conservative in the price increase for them. So that ‘just raise everybody by X percent’, we think that is generally a very flawed strategy that will underperform. But you've got to model it out to say, well, what are the attributes to think about? Let's divide those into segments. And then let's have a scenario plan that says, all right, if we make this percentage change in price, what do we think the potential churn rate is going to be? And how will it change? And let's compare those dollars to say, well, how much money are we getting on the price increase versus the dollars that we're losing on churn? And you just have to run that analysis there.
Shiv: Yeah, and test and constantly measure.
AJ: That is a big opportunity, especially more PLG, B2C, SMB-ish kind of businesses too.
Shiv: I know. Yeah, yeah, and especially with that EBITDA impact, it's usually one of the top three revenue drivers are in the investment thesis. So thank you for the insight on that. I know we're coming up on time. So I just want to just summarize all the things that we kind of talked about. We talked about segmentation, the sales coverage model, positioning and messaging, the go-to-market and the pipeline generation side of it, the demand gen, cross-sell, upsell, and obviously pricing. And I think this was a phenomenal conversation. So thank you for your insights on that. For the audience, if they want to learn more about Marlin or the work that you're doing, where can they go to get more information?
AJ: You know, marlinequity.com is a good place to go. That gives a little bit of a sense of us and, you know, lots of good professionals to contact at our firm. What we really seek to do is, you know, we actually follow companies for companies that we like for years and build relationships with the management teams and just, you know, talk about how we can help them. And fundamentally, we see ourselves as business partners for growing companies. And so I work with a really wonderful set of colleagues. So I'd invite you to please get to know us. And it's been a pleasure. And I think we touched on a lot of great stuff. We have 40 value-creation levers for go-to-market. I think we hit on the top ones. So I think you and I are aligned on that. But there's other stuff, too.
Shiv: There's tons of other stuff. We could do like a four-hour session on that. But we'll be sure to put up links to Marlin Equity on the podcast notes. So thanks for that. And we'll share any other resources that you wanna include for the audience so that they can follow up and get in touch as well. But overall, AJ, thanks for doing this. I appreciate you being on
AJ: Yeah, my pleasure, Shiv. Wish you a great weekend.
Shiv: All right, thanks a lot.
AJ: All right, I'll see you soon.
Ep.3 - Mike Devine
How Marketing Needs to Evolve for a High-Growth Company
How the Fortra marketing function has adapted and scaled to suit the company’s changing needs and consistently drive growth.
Ep.4: Zane Tarence of Founders Advisors
What Makes a Business Investment Grade
What investors look for in potential acquisitions, and how founders can make their business investment grade.
Ep.5: Mariza Warshawsky of Assembly Group
How to Hire the Right Team To Grow Your Portfolio Companies
Hear about Assembly Group’s tried-and-tested process to source and hire for key roles for PE-backed software companies.