PLG & Profitability : More Product Doesn't Necessarily Mean Greater Profits
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).
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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
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:
As net income may become a more important metric for valuation, it may replace sales efficiency as a better metric for measuring bookings productivity.
Founder at v01 - The CRM Built for Customers, Not Sellers.
1 个月Tomasz Tunguz PLG is much harder to master than SLG and many PLG fail to meet financial targets due to challenges in PLG. Thus, I am wondering how the top quartile compared would look like. Do you have any data we can look into?
Sales Operations @ SpaceX
1 年Who would’ve thought PLG wouldn’t solve for selling shitty products?
CMO turned CEO | Board Director | High-Growth B2B SaaS | Interim and Fractional CMO | GTM Advisor | Venture Capital | Global Experience
1 年This provocative post make me wonder if the data is surfacing a point of business segment relative profitability. E.G, the large enterprise segment tends to be more profitable than SMB. Regardless of selling motion.
Entrepreneur, Investor, and author of Mastering Product-led Growth
1 年Great summary Tomasz Tunguz! PLG companies became public earlier than SLG and their marketing spend is significantly higher than SLG and as you wrote - tend to focus on smaller businesses that are more susceptible to the economic downturn. That said, PLG companies have a stronger position to bounce back faster as they do not rely heavily on high-touch resources (IMO). The ones that will last longer are the ones that invest in (1) building meaningful value beyond ease of use,(2) investing in stickiness, and (3) will introduce sales/success to go up-market and handle multi-product motion.
Advocate,Solicitor,Broker,Networking entrepreneur, over 28000+ Linkedin connections... Unity is strength...
1 年Debolina Ghosh