As you might already know, software as a service is among the world’s fastest-moving and most innovative industries. With all its new companies emerging daily and creating new software solutions, the SaaS industry is projected to reach $702.19 billion by 2030, growing at a CAGR of 18.82% from 2021 to 2030.
However, recent events such as the COVID-19 pandemic and the Russia-Ukraine war have caused major fears of a global economic downturn. These fears are not only rising rapidly on a global scale. According to Google Trends, even business media companies like Forbes claim there is a clear warning sign for a recession in the economy and markets. So what does this mean for the immediate future of SaaS?
Well, due to its dependence on adoption rate and churn rate, a recession might negatively affect many companies in this industry. So, how can a SaaS company prepare for an economic downturn? Let’s find out!
This article will cover:
- The SaaS business model
- How economic downturn(s) affect SaaS
- 5 Tips on how to prepare for an economic downturn as a SaaS
- The economic downturn and what it means for your SaaS business
Book a Demo with FROGED to get the SaaS tools and support for your company to be prepared for anything.
The SaaS business model
Before we go over tips and solutions to prepare for an economic downturn, let’s first understand how the SaaS business model works.
SaaS business models are cloud-based subscription services that make software accessible over the Internet. Since it doesn’t require downloading software, it can provide regular updates and support. Let’s look at its main aspects:
SaaS companies offer software services that users can subscribe to via recurring payments. These subscription plans can be annual, monthly, per user, or by package level.
As SaaS companies rely on the service they provide to their customers, each company must stay up-to-date. That means they should always look for new innovative features and integrations. Unlike other companies, SaaS provides small but constant improvements to their services, unlike companies that opt for future “product versions”. Through this, they increase their customer satisfaction and have better customer lifetime value.
Churn Rate and Customer Retention
The churn rate and customer retention are two of the most important aspects of the SaaS industry. Due to the nature of the business model, the only thing that keeps the business from falling is the ability to keep the existing customers. Because of this, SaaS companies put double effort into reducing churn and improving customer happiness.
How economic downturn(s) affect SaaS
Are you wondering how an economic downturn will affect your SaaS company? We have good news, and there’s no need to worry about the SaaS industry’s economic downturn.
As you know, SaaS companies haven’t been around for long. There are only around 17 companies that existed and persisted during the great recession in 2008-2009. And that’s actually quite an important thing to keep in mind. To understand what happened, let’s look at the historical data that The Cloud Analogy team evaluated.
During 2008 and prior to the great recession, there were 17 SaaS companies, including big names such as Concur, Ultimate Software Group, Netsuite, Constant Contact, and DemandTec.
Chart extracted from SaaS capital
As we can see in the chart above, these companies grew by a minimum of 10% during the years of the crisis.
Some of the top SaaS companies like Concur, Communications Success Factors, and AthenaHealth were able to grow their quarterly revenue to $90,000-$100,000.
Chart extracted from Bloomstreet Ventures
In the more detailed chart above, we can see that prior to the recession, these SaaS companies had a median growth rate of 37%-57%. But the fact that these businesses experienced some growth while the overall economy suffered is extremely impressive.
So, based on this historical data, we can conclude that well-performing SaaS companies can survive recessions. Even though the SaaS business model is incredibly adaptable, it will still be challenging to expand during these times.
So, the real question is, how can we prepare for an economic downturn in order to continue to grow? Here are our top 5 tips for the upcoming months.
5 Tips on how to prepare for an economic downturn as a SaaS
Sooner or later, a recession will affect the SaaS industry. But that doesn’t mean there aren’t ways that we can keep SaaS companies afloat. To help you prepare, here are our top 5 tips for SaaS during an economic downturn:
- Reduce churn
Reducing churn is one of the most important things your company can do during recession times. Some strategies like asking for feedback, understanding why churn happens, and maintaining a good relationship with your customers, will increase customer retention.
For example, as reported in this SaaS Industry article, during recession, it would do well to help those companies that land up in the ‘at-risk’ bucket and present them with incentives like free licenses to tide over the crises. This move could create loyal customers who would stick with your company no matter what.
However, the first step to improving churn rate is to determine the level of churn at your company. To do so, try our FROGED Churn Calculator to get a ballpark figure regarding the annual churn rate of your company.
- Examine your company expenditure
Especially during recession times, SaaS companies should examine their company expenditure. Are there unprofitable products or services that should be dropped?
Companies should put more resources into things already performing well during a crisis. This in order to spend their cash more wisely.
- Improve cash flow
One of the most important reasons companies fail during a recession is because they don’t have enough cash on hand when needed. To face this problem, SaaS companies could offer incentives or discounts to clients to help them tide over the crisis.
Providing free trials, adjusting subscription plans, or including live technical support can all help your users pay on time.
- Invest in strategic areas
This advice might seem contradictory to our previous point about only investing in the well-performing areas of your business. But when the economy is struggling, it can also be useful.
SaaS companies must invest in strategic areas such as software development, sales, marketing, or Google search keywords. This way, they get the most return on investment when a recession is over.
- Diversify your products
Think horizontally instead of vertically. A SaaS company that’s only focused on a small group of businesses has more chances of being affected by a recession.
Instead, by expanding your vision and diversifying your products, you won’t be as dependent and will be more capable of growing during crises.
Economic downturn and what it means for your SaaS business
It’s not all doom and gloom. As we have seen, well-performing SaaS companies can succeed regardless of economic conditions. However, SaaS businesses should focus on implementing strategies such as reducing customer churn, investing in strategic areas, examining their expenses, and improving cash flow to grow during a recession. In doing so, they will be able to survive a crisis in the long run.
Are you interested in improving your churn rate? Check our blog post on How Product Marketers can improve SaaS Churn rate, or book a call with us to learn more about how FROGED can help SaaS prepare for economic downturn.