Technology SaaS SOS: what you can do to save your...

SaaS SOS: what you can do to save your SaaS business when a recession looms

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Interest rates are rising in the US, a cost of living crisis is emerging in Europe and investor hunger is waning worldwide. In short, a global recession is likely on the way. In the coming months, we can expect fears to rise and spending to fall, and we need to be prepared for a knock-on effect across all sectors, but especially software.

There’s no shortage of generic advice for businesses facing a recession, but generic advice is about as helpful to founders as putting a handbrake on a canoe. My expertise lies in software, a market that is expected to grow worldwide to $692 billion by 2025, so I analyzed more than 23,000 subscription and software-as-a-service (SaaS) companies to find out what the data tells us about the state of the market. I also wanted to provide specific advice that software companies can follow to prepare for the impending downturn.

Overall, there are two worrisome trends that point to the future problems for SaaS businesses, with subscription e-commerce and B2B SaaS businesses faltering for the first time since their unprecedented growth during COVID-19.

SaaS companies should view these trends as an early warning sign. Taking action now to strengthen their foundations can ensure they are in the best possible position to weather the storm and emerge stronger than the competition.

What does the data say?

Let’s start with the consumer software market.

Consumer-driven software companies, such as subscription e-commerce companies, tend to be more market sensitive because consumer behavior changes faster than business behavior. This makes them a good early indicator of emerging market trends. This chart summarizes the growth of e-commerce companies, tracking their monthly recurring revenues since January 1, 2019.

As you can see, the market accelerated tremendously during the pandemic and with the help of economic stimulus payments (or ‘stimmies’). This led to a market increase equivalent to 10 years of standard growth.

But now that is all changing. As COVID subsides, consumers are moving away from fun, but not essential, subscription products. In addition, as people try to maintain a ‘stimmy’ lifestyle despite the drying up of economic stimulus packages, a consumer debt bubble is looming.

What does all this mean for software companies?

At best, growth rates for consumer software businesses will remain flat and monthly revenues will begin to “pancake”:

In the worst case, shrinkage will occur as sales are offset by higher churn (the rate at which customers are lost). With consistent sales and an increase of 22% in subscription boxes, 16% in subscriptions and savings, and 11% in consumer SaaS, it’s clear that consumer businesses just aren’t replacing their lost customers fast enough.

Be or B2B?

That’s the question, and B2B SaaS is where it really starts to get interesting. B2B SaaS experienced unprecedented growth during the pandemic, with revenues more than tripling over the past two years. It’s like Christmas came early and stayed.

However, B2B SaaS has a lurking problem similar to that of subscription e-commerce: churn and downgrades. While there is growth – indicating that the new sales are consistent – customer churn is increasing and the market is starting to flood. In addition, customers who stay where they can want to cut unnecessary operating costs by downgrading or canceling their subscriptions altogether.

The line in the graph below shows the churn rate, and as you can see it is getting lower and lower.

And then?

To sum it up, customer churn is up, sales are stagnating and month-to-month growth rates are starting to slow down. Recession usually hits the consumer world first and then trickles down to B2B. So if we see the pancake of the subscription ecommerce market, things are only going to get worse for B2B SaaS. As new sales struggle to keep up with rising churn rates, businesses along with customers will begin to lose sales and, exacerbated by a recession, could be in serious trouble.

What do I do about it?

The good news is we’re not there yet, so organizations still have time to prepare.

You can improve your SaaS business’s chances of surviving the recession if you focus on two things: survival and lifetime value.

Step 1: Survive

In times of economic crisis you focus on survival first. And when it comes to survival, efficient spending is essential.

  • Start on control all your expenses. Check your customer invoices, revolving payments, employee documentation and ensure that your actual expenses paid match your internal policies and planned expenses. Boring, but essential.
  • Then check your profitability. When you find yourself in an economic shock, you should: standard alive: On track to achieve profitability based on ongoing charges, growth rate and cash. If your company bootstraps, make sure you have a buffer of at least 10%. If you are venture backed, you will need an 18-24 month runway.
  • Finally, re-evaluate all non-core projects. This can be tricky. Examine every strategy, project and ongoing proposal and ask yourself: is this essential to our business model? Of course, that’s not always an easy question to answer, and you’ll have to make some long-term commitments. Nevertheless, it is crucial that you park any redundant tasks and move on to only the most essential projects if you want to get to the other side.

Step 2: Lifetime Value

Customers make a business and in times of recession they can break it. As new sales decline, maximizing the value and longevity of existing customer relationships is critical.

How? Let’s go back to basics.

For starters, subscription growth is simple: acquire a customer that generates optimal revenue and lasts for a long time. You’re probably focusing on the word “acquire,” but the rest of that sentence is pretty important too.

At its core, lifetime value is about two things: monetization and retention.

  1. Generate income

Congratulations, you have a customer! But how are you going to persuade your existing one to spend more?

Segmentation and expansion revenue are crucial, so you need to make sure you have a solid strategy in place.

  • Focus on first cross-sells. Existing satisfied customers consistently buy more in recessions, so think about what other projects you can sell to them, in addition to what they’re currently buying. If you don’t have any cross-sells, consider getting a to add. Priority support is easy money!
  • Next one, increase prices. If your Net Promoter Score (NPS) is above 20, increase prices from September (after the balance sheet audits are done).
  • Evaluate segments as soon as possible. As Mark Roberge, former Chief Revenue Officer at HubSpot, recommends, move your spending and/or sales away from segments hit hard by the recession and build your pipeline into others.
  • likewiselocalize to stronger economies: Make sure pricing is region specific and shows how each market is affected by the recession.
  • Finally, halve discountsas most are probably already too high.
  1. Preservation

Most people focus on acquisition, but success is ultimately about how many of your customers you can keep on board. After all, there’s no point in pouring water into a bathtub if you’ve never bothered to plug it in.

From experience, here are four tips to reduce churn:

  • Correct credit card errors: Your recovery rate is probably half of what it should be, so focus on recovering money and interest from defaulted debts
  • Implement cancellation flows: offer rescue offers and maintenance plans – everything to make the customer think twice before clicking ‘cancel’
  • Term Optimization: Offer a promotion to get monthly customers on quarterly or annual subscriptions, reducing “decision points” where they might consider leaving
  • Reactivation campaigns: keep them active 60, 120 and 180 days after a customer cancels and use small offers to lure them back

How can you prepare your SaaS business for a recession?

Start with survival, then focus on creating lifelong value. Support the fundamentals to reduce churn, increase or stabilize revenue, and stay afloat during the forecast recession.

Diamonds are made under pressure

There’s a reason people say great companies are made during a recession. Following the steps above to optimize your business will not only give you the best chance of survival, but also put you in the strongest possible position to become the industry leader for years to come.

Disney was founded in the midst of the Great Depression: the worst recession America has ever seen. More recently, HubSpot and Salesforce are great examples to follow. During the pandemic, they focused on community, customer experience and adding more value without increasing costs.

The guideline for those companies? “Whoever finishes this with the most users wins.” That should be the mantra for all SaaS companies preparing for the coming recession.

Patrick Campbell is Chief Strategy Officer at paddling and the founder and former CEO of ProfitWell, which was acquired by Paddle for $200 million. The data in this article is based on an analysis of more than 23,000 subscription and software-as-a-service (SaaS) companies on the ProfitWell platform.

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