What's a SaaS to do during a recession?
ASEEM CHANDRA | JULY 12, 2022
The prospect of a recession looms large for business owners in 2022. But while that may seem scary, the reality is that recessions impact every type of business differently — and there’s a lot that you can do to prepare.
For instance, the COVID-19 pandemic wreaked havoc on businesses in many industries, leading to around 200,000 permanent business closures in the US alone in the first year.
But at the same time, according to NPR, the US broke a record by opening over 4.4 million new businesses in 2020. And in 2021, we did it again, setting a new record of 5.4 million new businesses!
So as we stare down a potential recession in 2022, how can founders and businesses prepare to be among the most successful? And for Software-as-a-Service (SaaS) businesses in particular, how can you not simply weather the storm, but thrive in it?
Let’s explore the concept of an incoming recession, the potential impact on SaaS businesses, how others have made it through past recessions, and tangible steps you can take to prepare.
Is a recession coming?
As of June 2022, the probability of a recession is high.
Pew Research Center found that 7 out of 10 Americans consider inflation one of the most pressing problems in the US. Deutsche Bank predicts a major recession, and major economists and entrepreneurs are expressing concern about the economy.
There isn’t just one sign pointing to economic issues, but rather a flurry of problems that might coalesce into economic trouble.
Supply chains are facing interruptions due to the war in Ukraine and COVID lockdowns in China. Inflation is occurring at a higher rate than in decades — prices increased by 8.5% in March.
During just the first quarter of this year, GDP declined by 1.4%. Meanwhile, the Federal Reserve is raising rates: most past instances of tightening from the Fed have led to recessions.
So when looking at the current state of the economy and examples from the past, the facts suggest that Software-as-a-Service (SaaS) companies would benefit from preparing for a recession.
Though the probability of a recession is high, if one does strike, it won’t last forever. Typically, recessions last for about 18 months.
But while SaaS companies may not be able to guarantee an economic downturn, it would be smart for companies to take steps with their rev ops and finance teams, explored below, to prepare for a potential recession.
How a recession can impact SaaS companies
As a SaaS company, there are certain symptoms of a recession that can negatively affect your business. A few examples are an increase in churn and a decrease in annual recurring revenue (ARR).
Let’s start with the churn. During a recession, you may lose a large portion of your customers. This may not be in response to your product quality, but slashed budgets resulting in an inability to justify the expense.
Over the long term, you may also see a decrease in ARR (annual recurring revenue) growth. By losing customers or seeing decreases in sales, your overall revenue may not increase as it usually would. This may be due to lower sales and customer churn, attrition/employee churn, or unpreparedness to properly respond to the recession.
As you start to see negative effects from the recession impacting your company, you might find that your runway is becoming increasingly relevant. Your cash burn requires you to rely solely on your current resources, rather than (formerly) predictable revenue.
How have successful businesses survived recessions in the past?
One of the best ways to prepare for a recession is to see how other businesses have survived similar challenges.
During the Great Recession of 2007-2009, successful businesses profited from:
- Product development
- Data-supported marketing
By continuing to develop your product and innovate within your business, you can keep your current customer base engaged while appealing to new potential customers.
During the Great Recession, businesses like Match.com continued developing their products and adding to their services. These efforts helped them to continue growing and retain their current customers.
In addition to development, this is an especially important time to analyze and leverage your data to the fullest extent.
Consider your customers’ needs as you market during a recession. For example, Walmart analyzed its customers’ spending habits during the Great Recession. Then, they focused marketing efforts on what people were more likely to buy during an economic downturn.
By considering how customers respond to economic hardship, you can interact with them in a compassionate and meaningful way. Helping them understand how your products can meet their needs in specific situations — like a recession — is a great way to build loyalty during difficult times.
What can SaaS founders do to prepare for a recession?
Here are some key ways to get your SaaS business and your team ready to tackle a recession head-on.
Optimize your website and SEO
Before a recession starts, your SaaS company can set itself up for success by creating a website that draws in customers. An easy-to-read and well-optimized website that takes advantage of search engine optimization strategies gives your company the best chance to bring in potential customers.
By making your company easy to find and simple to understand, you help your customer base effectively engage with your product.
Leverage email marketing
Email marketing helps engage your customers and keep them updated on your company’s current focus during a recession. Even before a recession, you can involve customers in your company’s efforts and developments by utilizing newsletters and email marketing.
During an economic downturn, you can use data surrounding your customer’s interests and needs to target your email marketing toward what may interest or benefit them.
Brace for fluctuations in valuation and fundraising
Due to fluctuations in the market and possible decreases in valuations, your company should prepare for an economic downturn through focused saving, spending, and fundraising.
Fundraising may not be the best decision for every company, but if you know it’s the right path for your company, it’s best to pursue it before an economic downturn — when it may already be too late.
As the economic downturn threatens resources, your company will need to consider its cash flow and plan to spend carefully in response to a recession. By considering the efficacy of current spending and considering how to stretch your resources further, your company can maximize your cash by spending it most effectively.
As you assess cash flow, it may be necessary to cut spending during a recession. If this is the case, your company will likely need to consider which of its expenses are excessive and whether you can replace certain expenses with cheaper options.
Unfortunately, a recession will often necessitate a lower budget. Because of this, planning budget shifts and understanding how your company can decrease spending will help make that transition easier.
Find new lead sources
Most companies rely heavily on sales and marketing to grow their business. SaaS companies have a unique opportunity to grow with product qualified leads or PQLs as well. By setting up unique connections with your product and your sales team with products like Immersa you can find existing customers who are looking to upgrade immediately.
PQLs are growing in popularity, especially with SaaS and freemium businesses. They are a high converting and low cost to acquire lead. These customers also already know your product and are active with using it. Exploring PQLs and other lead sources can be a great way to get more with what you already have.
Trust your data
During a recession, your company will greatly benefit from obtaining and understanding data regarding its income, spending, and customer base. Specifically, you will want to look at the Magic Number and your company’s customer acquisition cost (CAC) ratio.
Your Magic Number refers to your company’s spending efficiency in producing revenue.
Considering this statistic will help your company identify its needs in reducing spending or refocusing its marketing efforts to produce greater revenue. But don’t let this number be set in stone. Instead, let it help your company strategize as you move into a recession.
Similarly, your CAC ratio tells your company the monetary benefit of gaining a new customer.
If selling your product isn’t adequately helping your business, it may be necessary to reallocate resources, reconsider your pricing, or make other appropriate moves to meet your company’s needs.
Just as the Magic Number alerts your company to a need for strategizing, the CAC ratio allows you to see whether your business is benefitting from new customers. Together, these data points help your team see your needs and guide your company through economic challenges.
Recap: your next steps to prepare for a recession
Though a recession may feel imminent right now, we can never be completely sure of what will happen next. However, many experts and authorities are warning of an extreme economic downturn soon.
Rather than hoping for the best should a recession come about, your Software-as-a-Service (SaaS) company can stay ahead of the game by preparing for a recession now. This preparation can go a long way in securing a successful response to these challenges.
First, take the time to understand how a recession affects SaaS businesses. When you know what you’re facing, you can better prepare to respond to it.
Next, look to other businesses that have survived, and even thrived, during recessions. Your company can learn from those strategies and apply them to your business as you see fit.
Finally, take steps to ensure success for your business. By employing the strategies listed above and considering your business’s unique needs, you can respond confidently and efficiently to the oncoming economic downturn.
A recession feels scary, and the unknown can cause uncertainty for many business owners. However, many businesses have outlasted recessions, and with the right systems in place, your company can prepare to do the same.
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