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U.S. interest rates are rising, Europe’s cost of living crisis is spreading, and investors’ appetites are growing globally Cool down. In short, a global recession may be imminent. Over the next few months, we expect to see an uptick in anxiety and a drop in spending, which should prepare for a ripple effect across all industries, especially in software.
There is no shortage of generic advice for businesses facing a recession, but generic advice can help founders like a handbrake on a canoe. My specialty is software, and this global market is expected to grow to $692 billion by 2025, so I analyzed more than 23,000 subscription and software-as-a-service (SaaS) companies to see what the data tells us about the market. I also want to offer specific advice that software businesses can follow to prepare for the coming downturn.
Overall, two worrying trends point to trouble for SaaS companies, with subscription e-commerce and B2B SaaS companies growing since unprecedented growth during COVID-19 Faltering for the first time.
SaaS companies should consider these trends as early warning signs. If they act now to solidify their fundamentals, they can ensure they are in the best position to weather the storm and emerge stronger than the competition.
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What is the data saying?
Let’s start with the consumer software market.
Consumer-driven 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, tracking their monthly recurring revenue from January 1, 2019.
As you can see, the market accelerated substantially throughout the pandemic, aided by economic stimulus payments (or “stimulus”). This resulted in market growth equivalent to 10 years of standard growth.
But now, that’s all changing. As COVID recedes, consumers are turning away from subscription products that are not essential but nice. Also, a consumer debt bubble is looming as people try to maintain a “stimulus” lifestyle despite the drying up of the economic stimulus package.
So what does this mean for software companies?
At best, growth rates for consumer software companies will remain flat and monthly revenue will start to “pancake”:
In the worst case, the sale The shrinkage will be offset by increased churn (customer churn). With subscription box sales and churn already up 22%, subscriptions and savings up 16%, and consumer SaaS up 11%, it’s clear that consumer companies aren’t replacing lost customers fast enough.
Becoming or B2B?
That’s the problem, 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 in the past two years. It’s like Christmas came early, and then — stayed.
However, B2B SaaS suffers from a latent problem similar to subscription e-commerce: churn and degradation. While the growth is happening — suggesting new sales are consistent — customer churn is accelerating and starting to flood the market. Additionally, those customers who stay, want to save as much as possible on unnecessary business costs, downgrade their subscriptions or cancel them entirely.
The line in the graph below shows the churn rate, and as you can see it’s getting lower and lower.
To recap: Customer churn is rising, sales are stagnant, and the sequential growth rate is starting to slow. Recessions typically hit the consumer world first and then trickle down to B2B. So if we’ve seen pancakes in the subscription e-commerce market, B2B SaaS is only going to get worse. As new sales efforts keep up with increased churn, the company will start losing revenue with customers and, exacerbated by the recession, could find itself in serious trouble.
what do I do?
The good news is that we are not there yet, so there is still time for the organization to prepare.
If you focus on two things: survival and lifetime value, you can increase your SaaS company’s chances of surviving a recession.
Step 1: Survive
In times of economic crisis, your priority is to survive. When it comes to survival, efficient spending is key.
fromBegin Review all your charges.
- Check your customer invoices, standing payments, employee documents, And make sure your actual payments are in line with your internal policy guidelines and planned spending. Boring, but essential.
- Next, check your
- When entering an economic shock, you must be Alive by default : Based on current spending, growth rate and cash on hand, profitability is expected. If your company is self-reliant, make sure you have at least a 10% buffer. If you have VC backing, you need an 18-24 month runway.
- at last, Reassess all non-core items
- . This can be tricky. Go through every strategy, project and ongoing proposal and ask yourself, is this critical to our business model? Of course, this isn’t always an easy question to answer, and you need to make some long-term bets. Still, if you want to get things done on the other side, you have to keep any redundant tasks and work on only the most important items.
- Step 2: Lifetime Value
Customers create business, and in a recession, they can also break it. Maximizing the value and longevity of existing customer relationships is key as new sales taper off.
how? Let’s get back to basics.
First, subscription growth is fundamental: get the best monetized and long-term customers. You might focus on the word “acquire,” but the rest of the sentence is also very important.
At the heart of LTV are two things: monetization and retention.
Congratulations, you have a client! But how do you convince your existing people to spend more?
Segmenting and scaling revenue is critical, so you must make sure you have a solid strategy.
- First, follow cross-selling . Existing satisfied customers continue to buy more during the recession, so consider what other items you can market to them and what they are currently buying. If you don’t cross-sell, consider creating a
- add- superior
- If your Net Promoter Score (NPS) is greater than 20, from September Start raising prices (after completing balance sheet audit).
- ASAP . As former HubSpot Chief Revenue Officer Mark Roberge advises, pull your spend and/or sales out of recession-hit segments and build your pipeline in other areas.
- Failed to support credit card: Your recovery rate may be half what it should be, so focus on recovering from defaulted debt Funds and Interest
- Similarly, localized to stronger economies
- : Make sure pricing is regionally specific and reflects how each market is affected by the recession.
- at last, discount is halved
- because Most are probably already too high.
Most people focus on Acquire, but success ultimately depends on how many customers you can retain. After all, there’s no point trying to pour water into the tub if you never bother to plug it in.
From experience, here are four tips to reduce churn:
Implement the cancellation process
- : Offers salvage offers and maintenance plans – anything that makes customers think twice about hitting “cancel”
- Entry optimization
- : Offers promotions to gain monthly customers on a quarterly or annual schedule, reducing the “decision points” they might consider leaving Reactivate Activity : Make sure to keep using it 60, 120 and 180 days after the customer cancels the order, And use small offers to lure them back How to prepare your SaaS company for a recession?
Start with survival, then focus on creating lifetime value. Consolidate fundamentals to reduce churn, increase or stabilize revenue, and keep your head clear of expected downturns.
Diamonds are made under pressure
There’s a reason people say great companies are born during recessions. If you optimize your business by following the steps above, you will not only give yourself the best chance of survival, but you will be the strongest market leader for years to come.
Disney was founded during the Great Depression: the worst recession in U.S. history. Recently, HubSpot and Salesforce are good example. During the pandemic, they focused on community, customer experience and adding more value without increasing cost.
Those company guidelines? “Whoever ends this with the most users wins.” This should be the mantra for all SaaS companies preparing for the coming recession.
Patrick Campbell is the Chief Strategy Officer of
and founder and former CEO of ProfitWell, a company named by Paddle $200 million acquisition. 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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