Cutting R&D to Grow GTM Spend : Is it Happening Across Software Companies?

  

During Office Hours with Lee Kirkpatrick, Lee recalled managing a startup through a downturn. The business cut R&D spending to conserve cash. By prioritizing sales & marketing, the company successfully lengthened its runway to increase revenue, which eased the subsequent fundraising.

I wondered if a similar pattern existed in the public software markets. Actually, the opposite is true: software companies spend more on R&D (research & development) & less on Sales & Marketing (S&M) as a per cent of revenue today than six years ago.

I suspect it’s because of PLG motions.

R&D as a per cent of revenue across all public software companies increased from 24% to 28% in the last six years.

The trend is consistent & apparent across all quartiles.

I categorized these companies by their primary motion: sales or product-led. Sales-led companies have oscillated around the 25% mark.

However, PLG companies are a different story. Starting in 2017 when the data is richer, the PLG companies increased R&D spending from 27.5% to 33%.

Sales & marketing costs as a per cent of revenue are down across both PLG & Sales-led companies. The sales efficiencies of the second half of Covid are apparent, especially in sales-led businesses.

It’s curious that sales efficiency has been declining at the same time as S&M spending as a percentage of revenue has fallen. Perhaps it implies declining growth rates across the industry, but it’s worthy of closer inspection. The last three quarters show a trend reversal to increased spending, however.

There’s no doubt from this data PLG companies spend more on R&D to grow. Carilu Dietrich & I chatted about this during her office hours. Atlassian followed this model to great success inspiring an increasing number of software companies to follow suit.

Because of their larger balance sheets & ability to raise capital in the public markets, public software companies spent more on R&D rather than less.

This article was originally written by Tomasz Tunguz, and republished with permission.

Share this:

Submit a Comment

Your email address will not be published. Required fields are marked *

WHAT OUR CLIENTS ARE SAYING

GET WEEKLY INSIGHTS + TRENDS ON SAAS METRICS

Why join our email list? Get important insights delivered straight to your inbox and receive access to reports before public release. We promise not to spam you or sell your name to anyone. You can always unsubscribe from our content at any time.

Brilliantly

SAFE!

2022