Profitability or net income margin has become the most important correlate to public software company valuations. But public companies are less profitable today than a year ago. Surprisingly, PLG companies’ profitability has suffered more than sales-led businesses.
Across every quartile, public software & infrastructure companies have seen a 5 percentage point drop in net income since Covid.
Product-led growth (PLG) companies – those who educate & convert buyers with product rather than sales & marketing (SLG) – operate at about 5% to 10% less profitability than sales-led motions.
Curiously, this profitability pattern changed during the pandemic. Before, PLG companies operated at better profitability. Since then, PLG companies operate with 10% worse profitability (p-value < 0.001).
What happened?
PLG companies spend comparable amounts on sales & marketing (S&M) to SLG companies, but they spend more on research & development (R&D).
The chart above shows the combined Sales & Marketing + Research & Development Costs divided by revenue. PLG companies spend 9 percentage points of revenue more on S&M + R&D than sales driven companies (p value < 0.001 since Covid). That explains nearly all of the delta in profitability.
Post-Covid Metrics
GTM Motion | S&M Spend / Revenue | R&D Spend / Revenue | Total Spend / Revenue |
---|---|---|---|
PLG | 40% | 35% | 75% |
SLG | 41% | 26% | 67% |
PLG companies R&D spend hasn’t produced new business at the same rate as a dollar invested in sales & marketing post-Covid.
Some observations about the data:
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PLG companies R&D spend hasn’t produced new business at the same rate as a dollar invested in sales & marketing post-Covid.
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PLG motions tend to focus on smaller businesses which may be more susceptible to the economic downturn.
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Sales-lead teams cut headcount when account executives don’t attain numbers. Engineering teams do this to a lesser extent.
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Software sales cycles have lengthened, which SLG companies can mitigate with better sales skills. These longer cycles may reduce the conversion rates of non-sales-assisted PLG motions.
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Some portion of R&D spend should be allocated to customer acquisition cost for all software companies. This should bring PLG sales efficiency closer to SLG figures.
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Management teams ought to be evaluating whether a PLG or SLG investment produces more bookings per dollar invested. The analysis should include customer expansion for several years.
As net income may become a more important metric for valuation, it may replace sales efficiency as a better metric for measuring bookings productivity.
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- Source: https://www.tomtunguz.com/plg-less-profitable/
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