The SaaS Crash: The More Things Change, the More the Basics Matter
They say a rising tide raises all ships. This certainly held true in the SaaS space over the past several years. For a time, it seemed that nearly every SaaS business was raising money hand over fist, expanding its customer base, marketing heavily and hiring without restraint – in fact, anything (and everything) seemed possible. Valuations reflected this unrestrained optimism. It isn’t an exaggeration to say that business fundamentals seemed to barely matter for a time.
But radical change has come for the market, and SaaS businesses are now facing punishing losses. The great shake-out is already underway, and at the end of the day only the strongest will survive.
When you think about it, those of us who have been around for a while see many parallels to the dot-com crash. The businesses that put growth before profitability, or that worried more about marketability than having a defensible product, are in trouble. Unfortunately, even profitable SaaS businesses are facing a challenging climate. Acquiring new customers is suddenly a lot more challenging – and scaling is no longer the primary objective. Instead, protecting their existing customer base is critical because significant attrition could signal the beginning of the end. As such, churn takes on a whole new importance, with NRR becoming one of the most important measures of business health. Or, consider the Rule of 40, which McKinsey explains, “The popular metric says that a SaaS company’s growth rate when added to its free cash flow rate should equal 40 percent or higher.”
So, what can you do to ensure you don’t fall victim to this changing SaaS tide? Here are some of the areas forward-thinking organizations should focus on to ‘right the ship’ in 2023 and beyond:
GTM Strategies: What did your ideal customer look like, and how has that profile changed? By recalibrating against your new ideal customer profile, shifting marketing budgets accordingly and increasing customer success productivity, you can work to stave off the worst of the fall out. Having said that, giving up on growth altogether is risky. Instead of slashing indiscriminately, focus on your core offerings and double down on supporting those offerings.
Revenue Leakage: Plugging revenue leakage is both an obvious, and even straightforward, endeavor. In October we shared some recommendations on how to quickly address revenue leakage, which include evaluating workflows, assessing foundational systems, automating where possible, and replacing simplistic billing models with those that are customized to the situation and the customer.
Revenue Ops: In addition to reorienting sales objectives, incentives and quotes, realigning pricing is now front and center. In our industry conversations there is a heightened awareness of the value of usage-based pricing for both the SaaS provider and the customer. In fact, we recently published a 2-part series defining the opportunities presented by usage-based and how to get there.
A quick note on what SaaS businesses shouldn’t do:
Don’t jump toward pricing cut! Yes, the downturn is changing buying behaviors, but you shouldn’t immediately assume you’re overcharging. Dropping prices is a reactionary move that can’t be quickly undone and will have long-last reverberations. The implications of sweeping pricing cuts can be significant, even disastrous, to the long-term value of your business and should be avoided.