A New Way To Tell if a Company Is Truly Product-Led

Product-led growth (PLG) has emerged as the buzzword of 2021.

In OpenView’s 2020 SaaS benchmarks, we pointed out that public markets were starting to take notice of product-led companies. The companies on OpenView’s PLG index traded at a 50% revenue multiple premium to their SaaS peers, with the valuation gap widening over the course of the year. Buoyed by the siren call of premium valuations, investors and operators alike started to take PLG seriously.

  • Tomasz Tunguz predicted that in 2021, “product-led growth becomes the standard GTM for software and infrastructure companies.”
  • Bessemer called product-led growth one of “three GTM strategies top cloud companies employ in the New Normal” in their State of the Cloud report.
  • There are now more than 400 job postings looking specifically for PLG expertise, up from 100 at the end of 2020, including roles at large SaaS companies like ServiceNow, Toast, and UserTesting.

Historical EV / TTM Revenue

But most companies have only dipped their toe into the PLG waters rather than diving head first. They tend to hire a Head of Product Growth, launch a free trial or freemium product, and then wait for the market to take notice. Only 27% of SaaS companies say that product-led growth is fundamental to their business, a number that hasn’t increased year-over-year.

So how can you tell if a company is truly committed to a product-led growth strategy?

Hint: You have to look beyond the website or pricing page.

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Tip: Look at the ratio between R&D spend vs. Sales and Marketing spend*

Financial statements don’t lie, and they can reveal surprising information.

If a company’s product plays an important role in their revenue generation—whether through acquiring, converting, or expanding customers—we should expect that company to spend relatively more on R&D and relatively less on Sales and Marketing. You can think of the ratio of R&D:S&M as indicating how much of a company’s future prospects depend on their ability to build great product experiences relative to scaling up their sales and marketing activities.

(This new way of thinking about R&D spend also requires companies to rethink the relevance of classic SaaS metrics like CAC payback, which only consider Sales and Marketing costs as part of customer acquisition.)

  • Atlassian has an R&D:S&M ratio of 2.9:1. They spend a whopping 47% of revenue on R&D compared to only 16% on Sales and Marketing. They’re truly committed to building innovative products that sell themselves. (They might even be under-spending on GTM…)
  • DocuSign similarly has the markings of a PLG business—free edition, free trials, and self-service purchasing. But they have the inverse ratio of 1:2.9, spending only 19% of revenue on R&D vs. 55% on Sales and Marketing. PLG is more of an acquisition channel than a company-wide strategy.

I decided to comb through public company data to take a look at who does best and worst on this ratio, as well as how this ratio corresponds to traditional views of whether a company is product-led.

*For private SaaS companies that do not publish their financials, you can alternatively compare R&D headcount with Sales and Marketing headcount using LinkedIn data as an approximation.

The top players: Atlassian, Unity, Dropbox

Among the top ten with the highest R&D:S&M ratio are six classic PLG adherents. It includes some of the best-known PLG companies with highly efficient self-service motions like Atlassian (2.9), Dropbox (1.7), Datadog (1.1), and Shopify (1.0).

Not far behind them are Twilio (0.9), Slack (0.8), Fastly (0.8), and Elastic (0.8). DigitalOcean (2.2) would also be near the top of this list, although they were not included in the dataset having only gone public in March 2021.

Public SaaS companies with the highest spend ratio

You might be surprised to see that four companies on the list—Workday (1.4), Q2 (1.4), Veeva (1.3), and nCino (1.0)—have a more traditional sales-led GTM strategy.

Here’s the thing: All four target a narrow TAM and have an extremely high penetration of their target market. Future growth requires being able to sell more products into their existing customers, which is a different flavor of a product-led growth strategy.

Veeva makes a great case study. According to the company’s most recent investor day presentation:

  • Veeva’s Commercial Cloud customers have adopted an average of 3.72 products each, up from 1.90 in FY14.
  • 20% of Commercial Cloud customers have bought 6 products or more!?
  • Veeva sees similar dynamics among its Vault customers, with 2013/2014 cohorts growing subscription revenue by 26.8x and now adopting 4.4 products on average.

Veeva’s ambitious growth plans require a product-led mindset, constantly building new products that customers love and want to adopt.

Customers adopting more commercial cloud

The bottom players: Zoom, Yext, ZoomInfo

Among the 10 with the lowest R&D:S&M ratio, there are only two companies on OpenView’s PLG index: Zoom and DocuSign.

Lowest spend ratio

I suspect that Zoom’s metrics may have been skewed by the COVID-induced demand for video conferencing. When your revenue is up 369% year-over-year, your first priority is probably to staff up as quickly as possible to fulfill demand. I’ll be following how Zoom’s R&D:S&M ratio evolves given the company’s announcement of the Zoom Events Platform for virtual experiences.

DocuSign, on the other hand, has seen amazing benefits from its product-led motion, counting 1 billion signers and 767,000 paying digital customers. But their future growth bets appear to require a human-centric GTM strategy to expand these existing digital customers into buying ELA agreements complete with complex products like contract lifecycle management.

Customer journey

As a user, I wish DocuSign didn’t require such an abrupt transition from digital to direct sale, forcing the customer to engage with sales if they want to buy for more than 5 users. Deciding to contact sales should be an opt-in, not a requirement for the customer.

Wrapping up

Looking across the public comps, companies on OpenView’s PLG index had an average R&D:S&M ratio of 0.87 compared to 0.58 for their non-PLG peers. This ratio helps uncover which companies are embracing a product-led mindset regardless of what their website or job postings might tell you.

I don’t mean to imply that there’s a golden ratio or that spending more on R&D relative to Sales and Marketing is the right decision for every company. And I recommend proceeding with caution before applying the behavior of mature public companies to an early- or expansion-stage business.

But I would challenge companies to ask themselves: Are you truly committed to product-led growth and do you treat your product as a revenue-generating investment? Your financial statements don’t lie.

Disclaimer: I do not provide personal investment advice. All information found here are for informational, entertainment or educational purposes only and should not be construed as investment advice. While the information provided is believed to be accurate, it may include errors or inaccuracies.

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Kyle Poyar
Kyle Poyar
Partner at OpenView

Kyle helps OpenView’s portfolio companies accelerate top-line growth through segmentation, value proposition, packaging & pricing, customer insights, channel partner programs, new market entry and go-to-market strategy.
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