Welcome to part one of Survive or thrive: How operational efficiency can strengthen SaaS in a downturn, a Paddle report with insights from 100 SaaS CEOs, Founders, and Finance leaders.
There is no one-size-fits-all solution to successfully grappling with a downturn. That said, in our survey of 100 SaaS leaders, we found four common areas of focus for SaaS companies. We look at each in turn below.
1. Cash runway
Cash is king yet again. In May 2022, Y Combinator told founders that “the best way to prepare [for the downturn] is to cut costs and extend your runway”. Meanwhile, Co-Founder of Craft Ventures David Sacks advised his portfolio companies to extend their cash runway to 2-4 years to ride out the storm.
The rationale is clear: extending cash reserves avoids the need to raise investment at a time of limited capital and minimizes the risk of a valuation-busting down round. Even bootstrapped companies should bolster their reserves as a protective buffer.
How are SaaS companies extending their cash runway?
Reducing burn rate
Burn can make or break in a downturn (just ask checkout software Fast, which closed its doors in May 2022 after burning through $10 million a month), so it’s no surprise that reducing burn has been high on the SaaS agenda.
Our survey found that 16% of SaaS companies are prioritizing burn metrics in 2022 with a particular focus on their Burn Multiple, which correlates business spend and ARR generation to determine growth efficiency.
According to David Sacks, who believes the three things that matter most in a downturn “are growth, burn, and margins,” companies should be aiming for a Burn Multiple of <2 (spending less than $2 for every $1 of incremental ARR that you generate). Anything >4 is cause for concern, especially if you are a mid-stage company (early-stage companies tend to have higher costs and thus higher burn multiples).
Minimizing operational costs
During recessions, businesses and consumers audit their expenditures in order to stop paying for things they don’t need. For some businesses that’s re-evaluating non-essential projects, while for others it’s cutting non-essential costs.
Our survey found that nearly a quarter (23%) of SaaS companies have reviewed or consolidated app and software usage across the company in response to the downturn.
After salaries and hosting, apps are often the third largest outlay for a software business, especially if they have built a tech stack in-house with a variety of tools. Analyzing which software is vital and what can be streamlined helps improve margins.
In times of uncertainty, SaaS companies are regularly reviewing their expenses and focusing on the most impactful activities. For instance, SaaS companies are looking at the ROI of their sales & marketing spend (i.e. the value of LinkedIn ad spend), the cost-value (CAC-LTV) ratio of acquiring customers, and the cost of goods sold (COGS) to see where sizable expenses are coming from. By analyzing what works on a quarterly basis and reforecasting the budget accordingly, companies better allocate funds and maintain control over cash spend.
Ultimately, SaaS companies need robust, accurate data to sustain their cash runway for 18-24 months and give themselves the best chance to succeed when the market bounces back.
2. Headcount planning
From recruitment and onboarding costs to salaries and rewards, talent is the number one expenditure for SaaS companies. As companies try to minimize operational expenditure (OPEX), layoffs can seem the only option.
For example, events platform and former unicorn Hopin made 29% of its workforce redundant (242 people) in July 2022. However, SaaS companies are also managing headcount costs without layoffs.
How are SaaS companies managing headcount in a downturn?
Increasing human capital efficiency
Do more with what you have. In times of constraint, SaaS companies are looking to boost the productivity and motivation of the existing team.
This includes analyzing team performance, rethinking learning & development programmes, and investing in areas that enhance human efficiency, such as automating processes and buying tools that free up employees’ time.
Enablement also helps retain the overperformers, who will be less interested in switching companies if a company is performing well in a downturn.
Reducing resource costs
In tandem with boosting efficiency, SaaS companies are streamlining associated workforce costs.
This can include the salary package, by offering equity instead of increased salaries and putting a cap on future deals, and non-essential perks, such as allowances for corporate travel, off-sites and co-working subscriptions.
SaaS companies are also looking at the tools their workforce uses. For example, building and running fragmented software costs considerably more in human resources than a unified platform.
Managing hiring plan
Endless hiring is a growth-at-all-costs strategy. Now, SaaS companies are considering hiring freezes, pulling back from opening new roles and avoiding replacements to natural departures as a way of minimizing headcount spend.
However, for some companies, it could be the time to hire great talent. Some of the largest names in tech and SaaS have slowed or frozen hiring, such as Salesforce and Meta , which opens up opportunities for smaller SaaS players with cash reserves to hire great talent. Openview’s State of SaaS Talent report found that 64% of New York’s SaaS startups plan on hiring more people in 2022 than they did in 2021.
3. Customer retention
In a market downturn, all companies can expect greater churn as customers feel the pinch. SaaS businesses that retain the most customers will therefore come out of the downturn in the healthiest shape.
Not only does retention guarantee revenue flow and extend cash reserves, but with budget freezes reducing sales & marketing spend, it’s considerably easier and cheaper to retain customers than find new ones.
How are SaaS companies minimizing churn and retaining customers?
Articulating ‘must-have’ value
SaaS companies are creating retention strategies that convince customers their product is indispensable. This includes analyzing product value for each customer segment, cross-referencing this value with customers’ business health, and establishing a verifiable ROI for each customer.
Customer-facing teams are also increasing direct customer communication and explaining the core and additional benefits of the product.
What’s more, customer success teams are creating a playbook for retaining customers with reasonable concessions, such as set rates for customers asking for a discount.
Reducing customer friction
Make it as easy as possible for customers to stay with you. SaaS businesses are optimizing payment processes to avoid losing customers by involuntary churn (i.e. as a result of credit card failures or renewal issues) and removing barriers to service, such as temporarily removing paywalls to certain features.
In addition, SaaS companies are making it easier to activate recently-canceled subscribers by offering promotions and removing the need to re-register if they want to return to service (i.e. one click reactivation).
Making customers rethink cancellations
On the flip side, SaaS companies are adding friction to cancellation decisions. This can be explicit, like adding cancellation flows that entice people to stay with salvage offers and free upgraded plans, or implicit, such as highlighting the wider uses of your products and helping customers make the most out of their package.
In addition, promoting a loyalty programme, extending free trials to particular customers, and encouraging upgrades from monthly to annual subscriptions also make customers think twice about canceling.
4. Account expansion
In a downturn, all the talk is about ‘survive’, but what about ‘thrive’? Happy customers buy more in a recession and the SaaS model enables companies to expand their revenue by focusing on existing customers.
From using in-app analytics to determine customer preferences to monitoring app usage for account expansion opportunities, SaaS companies can use their existing data tools to target specific customers with extras, add-ons, and upsells. What’s more, expansion revenue (increasing customer spend after the initial sign-up) is ready-made for a recession as it enables SaaS companies to increase revenue without needing to acquire new customers.
How are SaaS companies expanding revenue from existing customers?
For SaaS businesses, upselling is selling a higher subscription plan for the same product, such as moving from ‘free’ to ‘paid’ or ‘standard’ to ‘premium’. Whether it’s multiple email accounts (i.e. Calendly) or more messages (i.e. Slack), SaaS businesses are setting limits to encourage existing customers to upgrade to more feature-rich subscriptions.
This includes determining your value metrics, analyzing product usage among various customer segments, optimizing where these limits are set, and using time-limited discounts (i.e. half price for the first three months) to those upgrading.
Cross-selling and add-ons
Cross-sells and add-ons are increasingly used by SaaS businesses looking to expand account revenue. Cross-sells are entirely different products that are suitable to the same user-type, such as Atlassian offering Trello to Jira customers. Add-ons are additional extras that work with the base product, such as Freshdesk offering additional bot sessions to its customer service software (when the customer is at checkout).
In the current climate, some SaaS companies are offering new packages to customers, including additional cloud storage or priority support, while others are even building purposeful add-ons for popular products.
Adjusting your pricing in a downturn might seem risky, but that risk is minimized by data and outweighed by the returns.
For instance, SaaS companies are raising prices based on value metrics: if a product has a NPS over 20 then customers will likely pay more for it. Meanwhile, SaaS companies have added specificity to their pricing.
For some, that’s adding new pricing layers beyond the traditional ‘free, standard, premium’ options, which better capture customer segments. For others, that’s offering localized pricing (country-specific) or creating specific pricing structures per client (client-specific).
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