---
title: "PLG \u0026 Profitability : More Product Doesn't Necessarily Mean Greater Profits"
description: "Discover why PLG companies now trail sales-led firms in profitability by 10%. New data reveals shifting SaaS business models and spending patterns in 2023."
categories: ["PLG","sales","data analysis"]
keywords: ["product-led growth","PLG profitability","sales-led growth","SaaS business models","Tomasz Tunguz","software company valuations","customer acquisition cost","research and development spending"]
ai_summary: "PLG companies are now less profitable than sales-led firms, revealing shifts in SaaS spending and business models post-Covid."
date: 2022-12-07
lastmod: 2026-07-30
canonical_url: https://www.tomtunguz.com/plg-less-profitable/
author: "Tomasz Tunguz"
---

Profitability or net income margin has become the [most important correlate to public software company valuations.](https://tomtunguz.com/multiple-correlates-2022/) But public companies are less profitable today than a year ago. Surprisingly, PLG companies' profitability has suffered more than sales-led businesses.

![image](https://res.cloudinary.com/dzawgnnlr/image/upload/br0dwbbbutvecfnlnmeh.png)

Across every quartile, public software & infrastructure companies have seen a 5 percentage point drop in net income since Covid.

![image](https://res.cloudinary.com/dzawgnnlr/image/upload/gcfvrmskchnxtg7oncpg.png)

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). 

![image](https://res.cloudinary.com/dzawgnnlr/image/upload/m08lw8x3bpdbdnhnfhvi.png)

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:

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

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

2. Sales-lead teams cut headcount when account executives don't attain numbers. Engineering teams do this to a lesser extent. 

2. 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.

3. 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](https://tomtunguz.com/cutting_rd_to_grow/). 

4. Management teams ought to be evaluating whether a [PLG or SLG investment](https://tomtunguz.com/asset-allocation/) 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.