Case Study 3: Cost of Revenue
Morimoto in Napa is busy with the Tuesday lunch crowd. On the walls, you see touches of Japanese calligraphy, abstract and fluid, alongside smooth glass panels that shimmer with light reflections, adding a sense of movement. The ceiling is high, softened by hanging lanterns, creating a delicate interplay of shadow and light over the guests below.
Julie, CFO, is having a heated discussion with Ken, CRO as you approach the table, say hello, and sit down.
“We spent $40M last year on sales and marketing,” Ken says, forcing a smile. “We need $43M next year to hit the sales plan and grow 15% to $115M in my division. We’ve done our bottoms-up analysis. We need to hire more salespeople to hit the targets.”
Julie shakes her head. “You don’t need $43M to grow only 15%, Ken. Please check the math. What is $43M divided by $115M? It’s more than 35%. If we’re growing 15%, we really shouldn’t be spending more than 35% of revenues on sales and marketing. Money doesn’t grow on trees.”
The company has had financial challenges and recently went from being a public company to a private company with a very aggressive, prescriptive cost-cutting investor.
You chime in. “I hear you, Julie. That’s not what the board expects.”
Julie smiles at you. “Great to see you, Marie. How is your memory, is it better?”
You smile back, brushing your hair off your face. “There are good days and bad days. Just like in sales. Today is a good day.” You turn to Ken. “Ken, you and I have been working together for a while now, so you already know my coaching questions and SOBER frameworks.”
Ken smiles. “Yes, Marie. What would Mark Hawkins, former CFO of Salesforce ask me in this situation, to model better results?”
Julie takes a sip of her tea. “Show me the money, Ken.” We all laugh. “Show me the yellow brick road.”
Ken looks at Jule. “A better question to ask would be, ‘How much will we be paying for each $1 of net new revenue?’ We are all stewards and leaders. We should spend money like it is our own.”
Julie nods. “More than $2.50 cost for every $1.00 of revenue is not sustainable. Our AI costs are already too high. Kyle Poyar talks about how AI is even impacting the definition of Annual Recurring Revenue (ARR). We can all learn from that.”
How do coach and advise post this meeting, leveraging the SOBER framework?
You look at your HeroMash watch. Einstein said that the only reason for time is so that everything doesn’t happen at once.
You are Marie. How would you encourage and coach Ken (CRO) and Julie (CFO) to channel their best role models to demo stewardship, fellowship, mentorship, leadership and sponsorship as they run the business and adapt their strategy?