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.