Authored By Louis Stevens
These ideas so important and so incredibly accurate in terms of illustrating the value of Multi-Product Platform businesses that I wanted to share them in a devoted Brief that can be easily referenced in the future.
Moreover, in my Equity Research notes, I apply these seven points of value so frequently that I wanted to create an easy to reference Brief to which I can link when mentioning the seven points of multi-product value.
Here are the seven points of value from which a business benefits when it fields a multi-product platform:
- Enables a company to spend more aggressively on sales & marketing because CLTV (customer lifetime value) is now larger in the equation of LTV/CAC (customer acquisition cost), and this serves to push competitors out of their various markets, as oftentimes these competitors simply cannot keep up with the sales and marketing spend, especially if they themselves struggled to go multi-product. As time passes, consistent, high quality marketing and the elevated spend buttressing it create brand equity, and, as I noted on a recent podcast, a brand most is the highest form of an economic moat. That is, once a users' identity/self-preservation becomes associated with a brand, they will go to great lengths before they decide to part with that brand, and, in some ideological brand situations, they may even sacrifice their lives. It's a powerful moat!
- Diversifies the sources from which a company generates sales; which thereby reduces the risk of the business. Imagine you have one income in a volatile industry. Then imagine you had five different sources of income in a variety of industries. Which would you believe to be the riskier situation? Of course, having a diversified set of incomes leads to reduced risk for the entity to which the revenue accrues. Because risk = return, and return is a function of starting valuations (where higher valuation = lower return = lower risk), a more diversified company should naturally command a higher valuation, which provides benefits such as allowing the company to leverage its equity value as currency for employee compensation and/or future acquisitions.
- Expands a company's total addressable market, which serves to expand a company's runway for growth. Instead of having a revenue generation ceiling of $1B with one product, with five likewise commercially viable products, a company's revenue generation ceiling could be $5B, which obviously would result in a higher future free cash flow per share, an, by extension, share price. Going multi-product creates an snowball of compounding growth for a company via a series of multi-hundred million or multi-billion dollar revenue businesses, as has been the case for Crowdstrike, Adyen, Salesforce, SentinelOne, and many other companies L.A. Stevens shares with you.
- Expands a company's avenues to go to market. This is very important to note in that a company can be more efficient with its marketing spend. This is often not discussed, but it's very much worth noting that, with five or ten avenues to go to market, a company can adjust its marketing in such a way that it capitalizes on the avenue through which it gets the highest ROI on its marketing spend in any given month or quarter or year. Moreover, because the business is multi-product, it knows that it can wedge into a customers' wallet with one of its five or ten products, then gradually upsell over time after engendering trust via its quality products with the customer that it captured through one of its avenues to go to market. With only one avenue, marketing spend is less efficient, and there's less opportunity to "wedge" into a customer's wallet.
- Creates the opportunity to vertically integrate, which can create greater consumer surplus. Enterprises have sprawling tech stacks, with hundreds of software vendors comprising those tech stacks. While no enterprise will go all in on one software vendor, many will want to do more business with the best ones, so having a vertically or horizontally integrated platform can create greater consumer surplus for these buyer personas.
- Expands the LTV of a customer through upsells and cross-sells. I've shared it often in the past, but it certainly bears repeating: Remember the Splunk case study in which the company added essentially no new logos over three years, but still 2-3x'd its ARR (annual recurring revenue) in that period. This demonstrates the value of having multiple products to sell to an existing installed base.
- Lastly, a multi-product platform increases a business' switching costs, or embedding, moat. For instance, if I, as a CISO (Chief Information Security Officer) or IT director, chose SentinelOne's end point security product to augment my company's security posture, the decision to "rip and replace" this offering later on might be difficult, but it wouldn't be too much of a reversal of course. But, if I chose S1's end point, cloud, identity, AI, threat intel, and SIEM products, bundling them into a platform, and essentially going "all in" on S1, 1) it would be more technologically difficult to rip and replace S1, and 2) it would represent a public mistake on my part, as the CISO or IT director, to choose to bet so big on S1. In short, going multi-product creates a switching costs, or embedding, moat for a company, and this makes "point three" of equity value much stronger, i.e., a stronger embedding moat makes a company's free cash flow more durable, which makes it more valuable to us as investors.
