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SaaS SOS: What you can do to save your SaaS business as the recession looms

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Interest rates are rising in the United States, a cost of living crisis is taking hold in Europe, and investor appetite is cooling around the world. In short, a global recession is likely. In the coming months, we can expect to see rising concerns and falling spending and we should be prepared for a ripple effect across all sectors, but particularly software.

There’s no shortage of generic advice for companies facing a recession, but generic advice is about as useful to founders as a handbrake on a canoe. My expertise is in software, a market that is expected to grow globally $692 billion by 2025, so I conducted an analysis of over 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 coming downturn.

Overall, two concerning trends suggest the trouble ahead for SaaS businesses, with the growth of subscription-based e-commerce and B2B SaaS businesses faltering for the first time since their unprecedented growth during COVID-19.

SaaS companies should take these trends as a warning sign. If they act now to solidify their fundamentals, they 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-focused software companies – such as subscription-based e-commerce companies – tend to be more market-aware because consumer behavior changes faster than business behavior. This makes it a good early indicator of upcoming market trends. This chart breaks down the growth of e-commerce businesses, with their monthly recurring revenue tracked since January 1, 2019.

As you can see, the market has accelerated massively throughout the pandemic and with the help of economic stimulus payments (or “stimmies”). This has led to a market increase equivalent to 10 years of standard growth.

But now everything is changing. As COVID subsides, consumers are moving away from nice-to-have, but not essential, subscription products. Moreover, as people try to maintain a “timmy” lifestyle despite economic stimulus packages drying up, a consumer debt bubble is looming.

So what does all of this mean for software vendors?

At best, consumer software vendors’ growth rates will remain flat and monthly revenues will start to creak:

At worst, a contraction will occur when sales are offset by increased churn (the rate at which customers are lost). With steady sales and turnover already up 22% in subscription boxes, 16% in subscription and savings, and 11% in consumer SaaS, it’s clear that consumer businesses are not are simply not replacing their lost customers fast enough.

Being or B2B?

That’s the question, and B2B SaaS is where things start to get really interesting. B2B SaaS has seen unprecedented levels of growth during the pandemic, with revenue more than tripling in the past two years. It’s like Christmas comes early and – stays.

However, B2B SaaS has a similar problem to subscription e-commerce: unsubscribes and downgrades. While growth is happening – indicating that new sales are steady – customer churn is accelerating and starting to flood the market. Additionally, remaining customers are looking to save unnecessary business costs wherever they can, by downgrading their subscriptions or canceling them altogether.

The line on the graph below shows the churn rate, and as you can see, it is decreasing.

So what?

To recap: churn is up, sales are stagnating, and month-over-month growth rates are starting to slow. Recession usually hits the consumer world first, then trickles down to B2B. So, if we are already seeing the pancake of the subscription e-commerce market, it will only get worse for SaaS B2B. As new sales struggle to keep up with accelerating churn, businesses will begin to lose revenue along with customers and, exacerbated by a recession, could find themselves in trouble.

What should I do?

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

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

Stage 1: Survival

In times of economic crisis, you start by focusing on survival. And when it comes to survival, effective spending is key.

  • Starts with verification of all your expenses. Check your client invoices, standing payments, employee documentation and ensure that your actual expenses paid are in line with your internal policy guidelines and planned expenses. Boring, but essential.
  • Then check your profitability. When you enter an economic shock, you must be default alive: On track to achieve profitability based on current expenses, growth rate and available cash. If your business is seeded, make sure you have at least a 10% buffer. If you are backed by a company, you will need an 18-24 month lead.
  • To finish, reassess all non-essential projects. It can be tricky. Take a close look at every ongoing strategy, project and proposal and ask yourself if this is essential to our business model? Of course, that’s not always an easy question to answer, and you’ll have to make long-term bets. Still, it’s crucial that you share any excess tasks and only move forward on the most essential projects if you’re going to get by.

Step 2: lifetime value

Customers make a business, and in a recession, they can break it too. With new sales disappearing, it is essential to maximize the value and longevity of existing customer relationships.

How? Back to basics.

For starters, growth in subscriptions is fundamental: Acquire a customer who is monetized optimally and who stays for a long time. You’re probably focusing on the word “acquire”, but the rest of that sentence is also very important.

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

  1. Monetization

Congratulations, you have a client! But how are you going to convince your existing customers to spend more?

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

  • First, focus on cross-selling. Existing happy customers always buy more during recessions, so think about other projects you could offer them in addition to what they’re buying now. If you don’t have cross-sells, consider creating a To add. Priority support is easy money!
  • Next, raise prices. If your Net Promoter Score (NPS) is above 20, increase prices starting in September (after balance sheet audits).
  • Evaluate the segments as soon as possible. As Mark Roberge, former chief revenue officer at HubSpot, recommends, pull your spending and/or sales from segments hard hit by the recession and build your pipeline in others.
  • In the same waylocalize to stronger economies: Make sure prices are region-specific and reflect how each market is affected by the recession.
  • To finish, halve discountsbecause most are probably already too high.
  1. Retention

Most people focus on acquisition, but success ultimately depends on how many of your customers you can retain. After all, there’s no point trying to pour water into a tub if you’ve never bothered to put a stopper on.

From experience, here are four tips to reduce churn:

  • Back up credit card failures: Your collection rate is probably half of what it should be, so focus on collecting money and interest from overdue debts
  • Implement undo flows: Offer recovery offers and maintenance plans – anything that will make the customer think twice before clicking “cancel”
  • Optimization of terms: Offer a promotion to get monthly customers on quarterly or annual plans, reducing the “decision points” where they might think of leaving
  • Reactivation campaigns: Make sure to keep them running 60, 120 and 180 days after a customer cancels, and use small offers to keep them coming back

How can you prepare your SaaS business for the recession?

Start with survival, then focus on creating lifetime value. Strengthen the fundamentals to reduce churn, increase or stabilize revenue, and keep your head above water during the forecast recession.

Diamonds are made under pressure

There’s a reason people say great companies are created during a recession. If you follow the steps above to optimize your business, you will not only give yourself the best chance of survival, but you will emerge in the strongest possible position to become a market leader in the years to come.

Disney was founded in the midst of the Great Depression: the biggest 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 guiding principle of these companies? “Whoever finishes with the most users will win.” This should be the mantra for all SaaS companies preparing for the next downturn.

Patrick Campbell is Chief Strategy Officer at Paddle 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 over 23,000 subscription and software-as-a-service (SaaS) companies on the ProfitWell platform.

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