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Interest rates are rising in the US, the cost of living crisis is brewing in Europe, and investor appetite is cooling around the world. In the short term, a global recession is likely. In the coming months we can expect to see an increase in anxiety and a decrease in spending and should be prepared for the impact of all areas, especially in software.
There is no shortage of general advice for Businesses facing recession, but general tips are just as useful to founders as a handbrake on a canoe. My expertise is in software, a global market that is expected to grow $692 billion by 2025, so I ran an analysis of over 23,000 signups 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 offer specific advice software businesses can follow to prepare for the coming downturn.
Overall, there are two related trends that show difficulties ahead for SaaS companies, with the growth of subscription e-commerce and B2B SaaS companies leveling off for the first time since unprecedented growth during COVID-19.
SaaS companies should see these trends as an early warning sign. If they act now to strengthen their fundamentals, they can ensure that 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-oriented software businesses – 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 upcoming market trends. This chart breaks down the growth of e-commerce companies, with their monthly recurring revenue tracked as of January 1, 2019.
As you can see, the market accelerated massively during the pandemic and with the help of stimulus payments (or ‘stimuli’). This results in a market gain equivalent to 10 years of standard growth.
But now, all is changing. As COVID subsides, consumers are moving away from beautiful, albeit non-essential, subscription products. Furthermore, as people try to maintain ‘odd’ lifestyles, despite the dwindling economic stimulus packages, consumer debt bubbles are popping up.
So what does all of that mean for software companies?
At best, the growth rate of consumer software companies will not change and monthly revenue will start to increase:
At worst, shrinkage will occur when sales are offset by increased churn (customer loss rate). With sales steady and up 22% in subscription boxes, 16% signup and savings, and 11% in consumer SaaS, it’s clear that consumer companies aren’t replacing customers who already their loss fast enough.
Big or B2B?
That’s the question, and B2B SaaS is where things start to get really interesting. B2B SaaS has experienced unprecedented growth during the pandemic, with revenue more than tripling over the past two years. It’s like Christmas comes early and – stay.
However, B2B SaaS has a similar potential problem to subscription e-commerce: churn and downgrades. While the growth is ongoing – indicating that new sales are consistent – customer churn is accelerating and is beginning to flood the market. Additionally, customers who stay are looking to save on unnecessary business costs wherever they can, downgrading or canceling their subscription altogether.
The line on the chart below shows the discontinuity rate and as you can see, it is getting lower and lower.
In short: business is up, sales are stagnant, and monthly growth is starting to slow. Recessions often hit the consumer world first and then tapered off to B2B. So if we’ve seen the subscription e-commerce market pancake, it’s going to get worse for B2B SaaS. With new sales struggling to keep up with the rapidly increasing churn rate, companies will start to lose revenue along with customers and, exacerbated by the economic downturn, they could be in serious trouble. important.
I have to do with it?
The good news is that we’re not there yet, so the organizations still have time to prepare.
You can increase your SaaS company’s chances of weathering a downturn if you focus on two things: survival and long-term value.
Step 1: Survive
In times of economic crisis, you start by focusing on survival. And when it comes to survival, efficient spending is key.
- Started by Audit all your expenses. Check customer invoices, regular payments, employee documents and ensure that your actual expenses paid are in line with internal policy guidelines and planned spending your. Boring, but necessary.
- Next, let’s check Profitability. When entering an economic shock, you must default is alive: On track to profitability based on current costs, growth, and cash. If your company is bootstrapped, make sure you have at least 10% cache. If it’s venture capital, you’ll need an 18-24 month runway.
- Final, reevaluate all non-core projects. This can be complicated. Scrutinize every strategy, project and proposal we’re working on and ask ourselves, is this necessary for our business model? Of course, that’s not always an easy question to answer and you’ll need to bet long term. However, it is important that you take on any redundant tasks and only continue with the most necessary projects if you want to complete it in a different way.
Step 2: Long-term value
Customers make a business, and in a recession, they can also disrupt it. With new sales dwindling, maximizing the value and longevity of existing customer relationships is key.
How? Let’s get back to the basics.
For starters, subscription growth is fundamental: Optimal monetization and long-term engagement. You may be focusing on the word “get”, but the rest of the sentence is also quite important.
At its core, lasting value is about two things: earning and maintaining.
- Earn money
Congratulations, you have a client! But how to convince your existing people to spend more?
Revenue segmentation and expansion are very important, so you must ensure that you have a solid strategy in place.
- First, let’s focus on cross-selling. Existing happy customers always buy more during a downturn, so think about what other projects you could market to them, along with what they’re currently buying. If you don’t have a bundle, think about creating add. Priority support easy monetization!
- Next, price increase. If your net promotional score (NPS) is greater than 20, increase the price starting September (after a balance sheet check is performed).
- Segment Reviews as soon as possible. As Mark Roberge, former Chief Revenue Officer at HubSpot recommends, trim spending and/or sales in segments hit hard by the recession and build your path in those segments. other song.
- Similarlocalization to stronger economies: Ensure pricing is region-specific and reflects how each market is being impacted by the downturn.
- Final, half pricebecause most are probably already too high.
Most people focus on acquisitions, but the ultimate success is in how many customers you can retain. After all, there’s no point in trying to fill the tub with water if you never bother with plugging in.
From experience, here are four tips for reducing interruptions:
- Fix credit card errors: Your recovery rate could be half of what it normally is, so focus on recovering money and interest on defaulted debt.
- Implement cancellation procedures: Offer rescue offers and maintenance plans – anything that makes the customer think twice before clicking ‘cancel’
- Optimize terms: Offer promotions to attract customers monthly on a quarterly or annual basis, thus reducing the ‘decisive point’ they might think of leaving
- Reactivation campaigns: Make sure you have them 60, 120 and 180 days after a customer cancels and use small offers to entice them back
How can you prepare your SaaS company for a recession?
Start with survival and then focus on creating lasting value. Strengthen fundamentals to minimize turmoil, increase or stabilize revenue, and keep you on the water during forecasted downturns.
Diamonds are made under pressure
There’s a reason people say great companies are made during recessions. If you follow the steps above to optimize your business, you will not only give yourself the best chance of survival, but you will rise to the strongest possible position to be the leader. market in the coming years.
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 focus on community, customer experience, and adding value without increasing costs.
Guiding principles for those companies? “Whoever finishes this with the most users wins.” That will be the mantra for all SaaS companies to prepare for the coming recession.
Patrick Campbell is the Chief Strategy Officer at Rowing and the founder and former CEO of ProfitWell, acquired by Paddle for $200 million. The data in this article is based on an analysis of more than 23,000 registrars and software as a service (SaaS) on the ProfitWell platform.
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