Weathering a potential economic storm
Updated: Nov 29, 2022
While COVID introduced uncertainty and anxiety into the market, many B2B companies ultimately thrived. Instead of seeing drastic reductions in spending, a good portion of B2B companies maintained or increased their own spending. And, when it came to the selling side, they also fared well.
In response to the new market conditions introduced in 2020, B2B companies quickly digitized their customer experience (CX) channels. They went “virtual-first,” leveraging the remote technologies that enabled them to continue to serve their customers and to build business. They extended their businesses with new products and services, aimed at a market that was hungry for technology. And, they simplified the selling process, even for complex products. However, while these businesses escaped the pandemic relatively unscathed the same is unlikely to hold true over the coming 12-18 months. Economic storm clouds are gathering, and there is already evidence that companies of all sizes are likely to be negatively impacted.
During downturns or recessions, businesses begin to re-evaluate every dollar spent. With stricter priorities and reduced spending from customers, sales drop. This in turn causes suppliers to cut costs and put off investments in people, technology and product development.
So, how can B2B companies capitalize on their recent wins, protect their businesses, and hunker down to weather the storm? When you can’t hire new talent, or increase your sales force, or offer major discounts and incentives, how can you continue to grow? When your own business needs to slash costs, where do you turn first? I’d suggest the logical first place to look is monetization. It is possible to grow while cutting costs by turning a keen eye to your monetization strategies – even in a tough environment.
We’ll cover how to manage both revenue and expenses by following some common principles.
Pricing your products or services
In 2002 after the brutal recession driven by the dotcom bust, HBS published the following in an Harvard Management Update article on how to handle a downturn. “When times are good, pricing sins can be easily forgiven. But when the economy sours, a misguided pricing strategy can shrink profitability, warp customer relationships, and destroy a brand.”
This is equally true in 2022.
Reactively changing your pricing and billing models can prove to be disastrous.
Is the old “price cut strategy” the way to go?
Deloitte would say no. When discussing price cuts, the firm said, “The implications of these practices are often not well considered by the companies; they tend to tackle the immediate challenges at the expense of longer-term profitability.”
Instead, Deloitte suggested that companies lean into
sales team effectiveness
unused capacity deployment.
Be proactive and strategic, not reactive
Too many B2B companies have only revisited pricing and billing once a year, or once every six months at best. Later stage companies may even address pricing and billing with less frequency. But we must ask, is this still the best way forward, given how bumpy and unpredictable the market has been over the past two years? Certainly not.
According to an OpenView Partners survey of 1,800 companies there is a lot of room for improvement in pricing and billing. “The tool accessed whether companies were honing their target market and buyer, conducting pricing research, and using a process to reevaluate pricing. Only 4% of companies received an excellent score, while 44% of companies failed. Later stage companies did marginally better with 13% receiving an excellent score and 26% failing.”
While pricing and billing changes might have been perceived as unnecessary or complicated during the pandemic, today is the time to get serious about the very things that can win/lose money for companies that can’t afford to leave any money on the table right now.
For companies that have static billing models, price cuts might seem like the only option.
But, there is another, smarter way.
Rethink your pricing terms
One way to manage value, sales effectiveness and unused capacity is through usage-based models.
Some of the advantages of usage-based models include pricing that better reflects the value of the product, a model that enables customers to start small, and expansion as customers begin to realize the value of the product while their own businesses begin to grow.
They can pivot quickly, reacting in real-time to changing business conditions, shifting customer demand and real-world disruptions. By creating in-the-moment usage-based models these companies can eek out every bit of revenue possible from current and prospective customers, all while delivering an overall better customer experience. They can offer new, small, or untested customers access to great products and services at a reduced pricing, moving up with expansion or establishment. They can tie pricing to value in specific and measurable ways. They can extend into new markets without cannibalizing a set pricing model that is applied across the board.
Plug revenue leakage to realize more revenue, without a single sale
Chances are that your company, like most, is steadily losing significant revenue – that you have already earned! If you’re leveraging subscription billing today, you’re likely overcharging, or more likely, undercharging your customers. From billing inaccuracies and billing disputes to renewal management to a mismatch between contracts and volumes, there are common causes of revenue leakage. In fact, this is a problem that generally represents 1-5% of realized revenue (according to EY). In tight times this is not insignificant. The decision to deploy usage-based billing models can plug incoming revenue holes, in addition to the benefits above.
Put on your “buyer” hat and analyze your own spend
To briefly shift gears, it is also time to analyze your own costs. Knowing your own corporate visible and invisible costs can protect your bottom line. This is especially true when you look at your current technology investments. According to BetterCloud, companies estimate 70% of the business apps they use today are SaaS-based. How are you paying for those? In this case, as the buyer, you can think through many of the above strategies from the other side of the table.
Paying for a recurring subscription model, based on the number of users, results in oversubscription. The truth is that many companies are overspending on SaaS applications due to platform redundancies, the pernicious auto-renews that are often overlooked, or by simply not negotiating the best terms (or at all).
Contract management and billing are usually separate, but they can work in tandem with each other. Knowing what you have agreed to, assessing whether you’re fully using a selected service or product, and properly processing billing is critical to tightening controls.
There are several specific actions you can take today to reconcile your own contracts and improve your overall spend, all while reducing costs and increasing usage.
Assess your cloud/SaaS services and assign each a value. You’ll want to do this in concert with your IT leader, legal, and any stakeholders using the software itself.
Ask vendors for service usage reports and metrics around usage adoption - who is using what, when, and how?
Revisit the contracts where usage is low and move into a pay-as-you-go model or a commitment + overage model. Importantly, for your most used services, explore an enterprise agreement approach, versus per user model.
If multiple services from the same vendor are used, request a Virtual token model, which can be used for any consumption across the services.
Consolidate individual contracts by different groups in the company. Pooled model. (Groupon).
And, finally, leverage ramp-based usage adoption contracts. e.g. year one 1-100, year two 101-200, year three 201-300, etc.
As demonstrated, when times are challenging, the temptation to resort to discounting is strong, and many companies end up there. But, getting prices back up in better times is nearly impossible. By simply challenging and changing your monetization strategies you can avoid the pricing and billing pitfalls too many companies fall into, and instead protect your business and improve corporate resiliency – now and in the future. And, remember – you're not just a seller, but also a buyer! By protecting both sides of the business and tightening both income and spending, you will be able to go the distance.