How SaaS companies can survive recessions
For many SaaS companies and startup leaders, the 2022-2023 recession will be their first. Fortunately, we can learn a lot from bootstrapped startups. Thanks to their lack of VC funding, leaders from bootstrapped startups have first-hand experience growing companies in an environment of capital scarcity. Having been in these trenches, I wanted to share some specific and actionable advice.
First, startup leaders need to implement austerity measures early:
- A company with $2m in the bank and a monthly burn of $250k can only last eight months.
- Reducing burn to $100k will give you twenty months of runway — a much better situation given the average recession lasts eighteen months.
- If you wait a few months to see what happens in the economy before enacting change, your runway will unnecessarily evaporate. Waiting four months before cutting monthly spending to $100k will only afford you ten months of total runway — a meagre improvement from your original position.
- Therefore, inaction is potentially very costly. If your startup is burning cash at a rate that doesn’t afford you at least twenty months of runway and fails to make changes quickly, you may have to cut costs far more dramatically when the time eventually comes. Worse, you could end up with no pathway towards enough runway to weather the storm.
In addition to timing, startup leaders need to be mindful of how much they need to cut costs to make it through a recession. Measure twice, cut once, and be transparent with the remaining team: let them know what position the business is in now that costs have been reduced. This is the best way to keep your team engaged after a traumatic event and maintain their confidence. Failure to cut costs is the biggest mistake of leadership teams in a budget crisis. Suppose your pathway towards profitability, or enough runway to survive a recession, requires a reduction in force. In that case, this will inevitably negatively impact company culture for the remaining team. Individuals will be concerned for their job security. This consequence is significantly amplified if, in the future, you further reduce the team size. Suppose you don’t solve the runway/profitability problem through your initial reduction in force. In that case, your remaining employees could lose confidence in their job security and start to look for other opportunities.
If you are profitable or already have enough runway to survive an extended recession, consider implementing a freeze on hiring or any other significant new costs. Delaying new expenses for a few months could allow you to make it through the recession without any drastic cost-cutting initiatives. If you hire now and the recession gets much worse, you could have to reduce the size of your workforce soon, which could have severe cultural implications for your team.
Make sure you consider every available option in terms of reducing costs. For example, SaaS startups typically spend vast amounts of money on other SaaS products. Hosting and infrastructure vendors tend to deliver hefty bills, too. Many startup founders I’ve worked with struggle to negotiate better pricing or terms with these vendors. If this is not your strength, find someone to help you with negotiations. Someone on your sales team could be better at contract negotiations than your engineering team. Additionally, this is a fantastic way to ask your investors for help — they will likely be more than happy to lead these negotiations on your behalf.
From a product perspective, now is the time to consider your value proposition in a recessionary economy. Most businesses, including your customers, have been in growth mode in recent years. Mindsets are now shifting towards survival mode. How you present your value proposition to existing customers needs to reflect this shift. Many of your customers will reconsider each vendor’s importance to reduce operational costs. You must be ready to make a case for why your product is essential and should not be dropped from their toolkit. One way to do this is to adjust your value proposition to highlight how your product reduces operational costs by automating and streamlining manual processes. You should update your website to reflect this, and outbound marketing to existing customers should start to tell this story.
Another way to assert the value of your product is through analytics. If your product can be shown to provably increase revenue or reduce operational costs for your customers, highlight and celebrate this. The dashboard for your product, your email marketing, your customer success calls, and your website should all empirically outline the value your product is bringing to your customers, both individually and collectively. If you assert the value of your product in a measurable way, it will help customers to appreciate their need for it. A business trying to cut costs won’t turn off a product that they are certain is saving them money.
Even if they know your product is highly valuable, your customers will try to renegotiate their contracts with you in a recession. Usually, it is better to give your customers a deal so that you can retain them through the tough times, even if it means they pay you less for a while. But, throughout this process, make sure you use these negotiations as an opportunity to protect your business. For example, negotiating for longer contract terms can be beneficial during tough times. If a customer believes in the value you bring and is getting a good deal on price in exchange for an annual contract, they are much less likely to look for cheaper solutions during the recession. It could even be a good idea to start these negotiations yourself rather than wait for your customers to come to you, particularly for key accounts.
When tackling churn, be sure to consider unit economics. You may have customers who are paying very little for your product and may even cost more to host and support than what they contribute to your revenue. Try to quantify this, and use it as a guide for how to handle customer churn. Occasionally, customer churn can have a positive impact on the profitability of your company.
- Many bootstrapped startups rely heavily on professional services to pay the bills while recurring revenue slowly builds to sustainable levels. If this isn’t already a significant revenue stream for your business, now might be the time to consider how services could bring in more revenue from new and existing customers.
- Organic marketing and customer referrals are very cost-effective ways to grow. If you haven’t focused on these channels in the past, consider doing so. Improve the SEO of your website, repurpose your support documentation for content marketing, and incentivise your current customers to send more business your way.
- Usage-based SaaS businesses tend to better monetise their customers’ success when compared with subscription-based SaaS companies. At the same time, this makes revenue for these businesses especially vulnerable during a recession where many of their customers are less successful. For example, a startup that earns revenue for every order submitted through its system will see shrinking revenues as order volumes contract through a recession. Usage-based SaaS businesses should consider ways to diversify their revenue streams, potentially by adding subscriptions to the mix.
Lastly, and on a positive note, consider the upsides of startup building during a recession. Leaders who move quickly and ensure their startup has ample runway will be well positioned to continue to invest and build their startup during a time when many of their competitors are not. Startups that are forced to consider the potential for profitability from early on tend to build more robust businesses. Big Tech layoffs will make it easier for startups to recruit top-tier talent at an affordable cost. Many of the greatest technology companies were built during tough economic conditions. If you take this challenge seriously, your startup may emerge from this recession stronger than ever.
20 November, 2022
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