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​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).

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 about the data:

1. PLG companies R&D spend hasn’t produced new business at the same rate as a dollar invested in sales & marketing post-Covid.

2. PLG motions tend to focus on smaller businesses which may be more susceptible to the economic downturn.

3. 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.

4. 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.

5. 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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