GROWING YOUR SAAS THROUGH A RECESSION
The effects of an economic downturn can be an unsettling and worrying prospect for SaaS business owners. Although this is certainly not the first modern recession, because of the way in which SaaS has boomed and expanded in recent years, many companies are led by young entrepreneurs encountering their first recession in 2023. Looming economic difficulties will pose a new set of challenges for Saas businesses but it’s important not to panic under these circumstances.
What is useful to remember is that some of the world’s most successful businesses actually started before, during or after a recession. Businesses like IBM, Disney, HP, FedEx, Microsoft, HBO and Electronic Arts were all launched during times of massive economic uncertainty. Even Facebook, Google, and Salesforce launched just before major economic meltdowns – and boomed. Growth is always possible, if you build the right business strategy.
As a result of past challenges, there are plenty of people out there who’ve worked through one or more recessions, and share their experience and advice on not only how to survive, but how to thrive during a recession. With this in mind, SaaStock consulted some of these experienced SaaS industry professionals to get their thoughts on growing your SaaS business through a recession.
Common mistakes SaaS startups make when trying to grow during a recession
Uthish Ranjan, principal at Octopus Ventures, sees over-spending as a key mistake made during a recession. “SaaS start-ups are facing a very different new sales and revenue retention environment compared to H1 2022. Lower growth would mean more cash was burnt over the year than expected, and they end the year with a higher monthly cash-burn. The compounding effect of these two events could easily see SaaS startups with significantly lower cash-runways than originally planned.”
Kevin Stoll, Vice President of Capgemini, agrees: “You still see large organisations overspending in areas that aren’t related to retention of customers. They still have too many focuses: they’re trying to break into multiple geos, launch new products, and they don’t really care about the recession. They just spend and spend and spend. The best way to avoid this would be to have firm cash-burn targets for the year, agreed with the board. Re-budget every quarter and make the tough decisions around further cost-cutting sooner if the lead indicators suggest it’s necessary.
“Probably the biggest mistake companies make is launching net new products in the market. Right now, it’d be a hard time to launch some net new product that people don’t quite understand the value of. In a peak cycle, people are willing to take a bit more financial risk, but right now the spend is going to have to be on ‘motherhood’ and ‘apple pie’ kind of products.”
For Nick Mehta, CEO of Gainsight, “a dangerous mindset is ‘growth at all costs’. Even the most dedicated management teams try this, throwing far too many projects and initiatives at the workforce. Focus is nowhere to be seen. Companies that burn too hot and fast aren’t always built to survive recessions like this one. It’s all about planning ahead of time, and making sure your growth model has a long-term survivability and durability plan built into it.
Here, then, is a set of actionable insights on how to weather the economic storm and come out even stronger on the other side.
Strategies for growing your SaaS through a recession
1. Reserving cash
When entering an economic shock, your profitability is important. Are you able to reach profitability with your current expenses, growth rate and the cash you have in hand? If you’re bootstrapped, you want to look at having a 10% buffer, while venture-backed companies should have an 18-24 month runway.
Kevin Stoll of Capgemini says that reserving cash should be a priority when your business or industry is flying high, not only when things get difficult. In many cases, reserving cash at this stage is way too late. So the lesson here is to think ahead. “There’s a pretty big emphasis on a CFO these days to think much more like a banker or like a Federal Reserve analyst,” explains Stoll.
But if you find yourself without sufficient cash reserves to help you weather the economic downturn, do a careful audit of your finances, looking at cash flow, budget and expenses. From here, identify areas to cut costs or increase efficiency. Try to increase your cash flow with strategies such as discounts and promotions, which encourage customers to pay upfront. Build potential budget freezes and cuts from your customers into your own budgets. Re-evaluate all non-essential projects, and cut those which are unnecessary or can wait.
Nick Mehta of Gainsight shares his experiences on the topic: “We have tried many measures to ensure financial responsibility: We’ve paused hiring and backfills, decreased travel, delayed larger internal events, and reduced a significant amount of expenses in order to reserve cash.”
2. Streamlining tech stacks
When it comes to your tech stacks, you need to pare down the amount of software you pay for in order to run your business more cost-efficiently. One way to do this is to consolidate the technology you use. “Vendor consolidation is one of the biggest forces in Customer Success. CFOs are putting a huge push on reducing the number of vendors they deal with,” says Nick Mehta. When choosing your tech, aim for integration, cost and time efficiency, good support and a smooth user experience.
This push towards vendor consolidation may also benefit your own SaaS business if your products are presented in a suite. “If you are a suite vendor, this means there is an unprecedented opportunity to cross-sell your products and make you more sticky,” shares Nick Mehta.
3. Increasing operational efficiency
“CS Ops has been on a tear in the last two years. With every company looking to improve profitability and efficiency, Ops will continue to thrive,” explains Nick Mehta. To improve your operational efficiency, start by looking to your top operational expense suppliers, and seeing where you can cut down. Can you negotiate a better price, or find a more cost effective provider? Get rid of any unused subscriptions in the process. Then, review your cost of revenue to see where your expenses are coming from and whether you can reduce costs there. Decide on where your current resources will still serve you well, and where you need to invest in additional resources.
4. Customer Success (CS) equals your success
As a business, helping your customers achieve their objectives is paramount. But during a recession, customer success becomes even more vital.
“Customer success is more important in a downturn — downturns increase the premium on retaining and expanding existing customers. On the one hand, it’s harder to get new clients, so Customer Success becomes a necessity. On the other hand, customers scrutinize outcomes and value more, so Customer Success is critical for retention. Given economic pressure, customers are cutting any spend that’s not tied to value. Companies must create value frameworks and arm their teams to deliver and demonstrate value delivery,” says Nick Mehta.
4.1 Focus on and monetize your existing customer base
Kevin Stoll believes that during a recession, rather than focusing on new markets, “it makes more sense to spend time on your existing customer set. The cost of acquisition is quite a bit lower. You already know their preferences and what they do, and they know how they use your product. Most customers are not going to be spending on acquiring new stuff right now. So shift your focus, and reallocate that money to nurturing your existing customer base.
It’s vital to increase the lifetime value (LTV) of customers at a time of economic downturn. Do this by working on renewals, upselling, cross-selling or co-terming contracts which get customers locked in for a longer period of time. You want your existing customer base to spend more money on your product. Or even try increasing prices for your current customer base if you have a high Net Promoter Score. They already find value in your product, and so they’re more likely to pay a bit extra for it.
Evaluate your different segments, and focus on those which are hit less hard by the recession and are more likely to keep spending. And in the same vein, localise your pricing to the relevant markets, making sure you understand how that specific market is affected by the recession.
4.2 Use data to measure and drive CS
Uthish Ranjan at Octopus Ventures believes in the importance of crunching the numbers to ensure customer success. “Make sure your CS team is fully data-driven. If you don’t have good quality customer data, invest in a solution that can help you achieve that,” he advises. “Your churn and your attrition numbers are probably the most important metric,” says Kevin Stoll. “If you’re churning in the double digits, that’s the only thing you should be focused on. Zero is theoretically impossible. But if you were to get down to 7%- 4% churn of customers during a recession cycle, you’d be so far ahead of most of the pack that you’d stand out.”
Focus on CSAT scores, NPS scores, customer satisfaction and adoption of products. Assuming that you’re already measuring data effectively using standard SaaS metrics, keeping this up remains vital.
4.3 Customer feedback is key
At a time when retention becomes more difficult, listen to your customers. “If customers are telling you ‘we need bugs fixed in the platform’, or ‘people aren’t picking up the phone for customer support’ or ‘we don’t understand how to…’ those things are so easy to fix in terms of turning the entire engineering team over to it, and in one whole agile release sprint of doing nothing but bug fixes. People will put up with ‘I don’t have this feature yet’, more than they will put up with ‘I can’t use the features I currently have because they’re not working’. So feedback plays a huge role in that,” says Kevin Stoll.
4.4 Strengthen relationships with customers
In interpersonal relationships, building trust is fundamental. This is no different in the relationships between businesses and their customers. During a recession, your relationships with your customers become even more important than normal because retaining customers is a more difficult task. They’ll stay with you if your communication is good, they find value in your product, they feel valued and their concerns are being addressed. Reaching out and engaging with customers helps to build trust.
4.5 Become a necessity for your customers
At a time like this, customers are looking for products that satisfy their core needs. They want to know about the elements of your product that help them save time and money, or increase their productivity. So put your focus on the return of investment of your core product. Use strong customer testimonials to sell these aspects to current customers and new prospects.
4.6 Focus on retention
Ultimately, your success will depend on whether you’re able to keep your customers onboard when the seas are rough. To reduce churn, improve your credit card payment recovery rate, put in place cancellation flows, offer term optimisation and use reactivation campaigns if a customer does cancel.
5.Utilise a smart marketing and sales strategy
5.1 Run cold outreach campaigns
Even when money is tight, sales and marketing can’t fall by the wayside. But there ways of reducing spend drastically. Cold email and LinkedIn automation campaigns are methods of generating conversations with prospects which require zero ad spend. They can be a good way to generate sales calls or sign-ups while reducing burn.
5.2 Keep running paid campaigns
If you do still have budget to run paid campaigns, you may be able to advertise in a less competitive and more affordable space, as many other competitors become more conservative with spending. This could be an opportunity to get new customers, at a reduced acquisition cost.
5.3 Generate new leads
Tough times offer an opportunity to innovate, increase sales activities and find fresh ways to lock in new customers. Customers may have new pain points, which you’ll need to identify. And try out new strategies to reach customers. This could be through a landing page, a webinar, or a social media campaign.
5.4 Use a proof of concept
When times are challenging for customers, they want proof that your product or service will work well for them. They want to try it before they buy it. Give them that opportunity by treating them like a customer even before they commit. In the end, while it may take a bit longer, it’s more likely to end up with a closed deal.
6. Leverage PLG
Efficient development of your product should become your number one priority. Put your product at the centre of the customer experience. For Kevin Stoll, product-led growth should be standard practice, recession or no recession, and Nick Mehta echoes this sentiment. “We learned from the Product-Led Growth Index 2022 that almost half of SaaS companies plan to double their investment in PLG strategies. The community angle is massively important here, too. We have received and shipped hundreds of product enhancements requested based upon the passionate feedback from our GameChanger Community.”
7. Reduce your burn multiple
Burn multiple is the gold standard for evaluating your company if you have recurring revenue. Learn how to calculate your burn multiple, and then know when and how to reduce it.
8. Diversify your revenue streams
Relying on a single source of revenue can be risky, especially during a recession. Look for opportunities to diversify your revenue streams, whether through new products or services or partnerships with other companies.
9. Invest in your own development, and innovate
Although it may seem counter-productive at a time when money is tight, investing in training allows SaaS teams to stay competitive and up to date with a fast-changing industry. This helps you to spot new opportunities and understand how best to position products and services. And it may well put you ahead of the race when it comes to your ability to be agile and innovative.
10. Plan for the worst but hope for the best
Alex Zekoff, Co-Founder and CEO of Thoughtful, believes that employing an A, B, Z plan is effective. “Plan A is what happens during a high-growth environment. Plan B is what you do in good times. And Plan Z kicks in when you have to become profitable in the next three months to make sure you don’t die. When you have those plans, you feel much better about how you’re running the company, and you know that you can pick the right path for the right time.”
So where possible, stay ahead of the curve. Don’t wait for the worst of the recession to hit before taking meaningful action. Have a plan, and start preparing when you’re in a strong position.
Measuring the success of your growth strategies
According to Uthish Ranjan at Octopus Ventures, “The key to measuring success is understanding if growth has been delivered efficiently. In other words, how much did you spend to deliver that ARR growth? Key metrics for assessing this include pay-back periods, the burn multiple, quick ratio and the rule 40. Try to end this year as close as possible to a 1x burn multiple.”
Nick Mehta says that at Gainsight “efficiency is a measure of growth vs. cost ‒ so we pay close attention to the balancing act between those two and use efficiency metrics as our north star. In particular, efficiency metrics like Rule of 40 and Customer Acquisition Cost (CAC) become even more important.”
For Kevin Stoll at Capgemini, measuring CAC against annual contract value is very important. You should be working efficiently to nurture your existing customers, rather than facing the high cost of acquisition for new customers.
As SaaS business owners, thriving through a recession is going to mean leaning into challenges and looking for, or creating, new opportunities. As Uthish Ranjan says, “embrace the new reality rather than trying to fight it. This is the year to demonstrate that your business is resilient in challenging times.”
Nick Mehta echoes this. “History tells us that business is cyclical. It’s a rollercoaster ride, and the best SaaS leaders don’t just strap in; they enjoy it. The bad times instil a level of discipline and attitude that accelerates your growth in the good times, so use opportunities like this one for learning. The more efficiently you operate, the more the market will reward you. You need to have valleys in order to have peaks!”
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