The good SaaS times will end and challenges are coming

We’ve had a great decade-long run in SaaS — abundant capital, a thriving economy and a massive existing market shift from on-premise to cloud.

But the good times will end and challenges are coming.

I’m not predicting when it will happen — maybe it’s the spread of COVID-19, or perhaps the market recovers and goes on to set new records — but one thing is for sure, recession will come, it always does.

Because a lot of SaaS leaders have never run a business through one, it might be helpful to share some ideas on how to be ready for the inevitable slump. One of the greatest assets a SaaS business has is high-margin, recurring revenue — that should provide more leeway in making changes to get through a downturn than many other types of businesses.

I’ve broken this guide into the macro — things that happen to you, the levers you can impact in your business and some notes on how to keep your stakeholders supportive.

Funding environment

Credit tends to dry up in a recession, but luckily for SaaS, bank debt has never really been available, so it’s unlikely this makes much difference! The new breed of SaaS debt providers should be able to keep providing credit through a recession, as they understand the real asset of recurring revenue. They may get more conservative in the amount of money they will loan, especially if signups are down and churn is up, but debt should be more available for SaaS than in other sectors. Make sure you know your funnel and install base metrics — these should provide confidence to a lender.

Who knows what’ll happen with VC. There has been so much money raised by new and ever-expanding funds that they may keep investing. Valuations are likely to drop and the world will move more investor-friendly than founder-friendly, and check sizes will drop in line with valuation for VCs to get the same equity for less money. Good business is good business in theory, but “growth at all costs” is harder and more expensive in a recession. Where FOMO (fear of missing out) drives VC in good times, plain-old fear holds them back in bad ones.

Customers and the addressable market

This is nuanced, depending on from where you win customers. Do you save them money over their existing solution? Or cost them more money than how they do it today? Even if their current solution isn’t a good one, the sales pitch for change is much harder in a “batten down the hatches” world than a “shoot for the stars” one.

If your customers are moving from old-world on-premise software, you should be in good shape, or even in better shape as they accelerate the move to SaaS, which saves them money and reduces overhead and capital.

Customers who do what you offer in-house could be a slower, harder sell. This model is already tough — it’s all about customer timing and being front-of-mind when they are ready — but you can be sure most projects will get shelved or postponed by customers who are reacting to the downturn and its effects on their business. You’ll have to work extra-hard on white-glove onboarding to remove cost and hassle and make sure you have a credible ROI narrative that will rank your product highly on the new short-list of projects that stay approved.

If you’re winning business from customers moving between SaaS tools — like someone swapping out Jira (a SaaS project management tool) in favor of Asana (another SaaS project management tool), just make sure you are the clear “recession-choice” provider, otherwise the flow might go the other way and not only will new sales drop, churn will increase.

Then there’s the new project sale — selling a solution that doesn’t currently exist inside your target customer.

Maybe it’s a new way of doing things, or a product built for an emerging market with low competition (but low awareness, too). Think recurring revenue billing for SaaS: This problem is SaaS-only, and SaaS is still relatively new — it’s unlikely a customer is using QuickBooks! Or remote team management software — remote teams working on computers all day is a new phenomenon. In a recession, all new projects are going to get ranked by must-do and optional, and the must-do list by impact and speed of impact to the bottom-line. Be able to 100% prove you can deliver value quickly.

Infrastructure costs and credit cards

There’s always some room in the hosting and DevOps setup — you don’t want to take risks — but if you’re like most SaaS companies, cost optimization hasn’t been the top priority because you’re growing and gross margins are already so high. Optimize AWS (or whomever you use) — make sure spot and reserved instances are used where possible, you’re running the appropriate instance sizes and all running instances are actually utilized. Reduce or cut optional monitoring and DevOps tools — there’s always a little overlap here.

Audit your credit card statement — do you really need all those SaaS tools? Or better yet, cancel your credit card and get a new one — only re-add the tools you want as the dunning emails come on. I guarantee you’ll find things you’ve been paying for that you didn’t even know about.

In fact, consider getting rid of company credit cards; they get overused and bad habits seep in. When expenses have to be justified to get reimbursed, the number seems to magically drop a little. The burden of proof makes people act more frugally.

Cash and finance

Know your cash. A simple statement, but unfortunately, it’s rarely the case. You can’t rely on stories, promises and spreadsheets — you need to log in to your bank account multiple times a week. This isn’t hard and you’ll build a gut feel for your cash position and its movements quickly.

Know your cash revenue. Annual and Monthly Run Rate (ARR/MRR) matters, the Profit and Loss account matters, but in tough times, cash is king. If you get low on cash, and think you’re profitable because your P&L says so, you run a serious risk of going out of business.

Cash forecasting is essential — your run rate and your cash often don’t correlate — any pre-payments show up in revenue, but you don’t get that cash every month, so it may already be gone. The same goes for booked revenue that hasn’t paid and sits in aged accounts receivable (AR) — again, revenue but no cash.

Optimize your Deferred Revenue and Accounts Receivable. Try to get more pre-payments without giving too steep a discount — bolstering your cash position. Who owes you money? Chase it. You can’t afford to have a system on — regardless of the margins — if a customer isn’t paying for it.

You must take the “no-surprises” approach to running finance. Any payments above a (low-dollar value in recession world) threshold — the CEO should approve.

People

The team is the most expensive and important asset in every SaaS company. But, if you go out of business, you’ll lose all of these assets, so it’s essential to make the hard choices in time.

That might mean voluntary or involuntary exits. You could literally ask those who believe in the vision and long-term to raise their hands and tell you who they are. It might mean the end of a bonus structure. It might mean asking people to take salary reductions (it’s pay cuts or headcount reductions — depending on the team, the leaders need to figure out which puts the business in better shape).

Assess your cultural norms — do people really value free snacks, lunches, a book allowance and so on? You don’t have to zero-out your culture, but there’s lots of things you can do (like a potluck where everyone brings in food and cooks for each other) that are great fun, build camaraderie and are cheap or don’t cost anything.

Existing customer base

In a recession, these are your most prized assets. You need to show them you are here for the long-haul and are still investing in providing the best product, service and support. Start customer advocacy programs, share more customer success stories and connect groups of like-minded customers together. When new sales drop, retaining existing customers is absolutely essential for the survival of your business. Invest more here during a recession.

Pricing

Many people’s first reaction in a downturn is to reduce price. Resist this! First off — it instantly reduces your margins and your free cash flow. Then, if you don’t reduce price for existing customers, you’ve frustrated your install base as well as hurt your bottom line.

Price is a signal — to customers, the market and your team. Businesses that price-cut send a signal that they are in trouble, need cash and are prepared to take a hit to get it. This is not a strategy to attract long-term customers!

Additionally, it’s damaging to a business to attempt one-off “recession pricing,” because once you come out of it, it’s nearly impossible to regain the premium brand and price you once commanded. Price decreasing is a one-way street.

You do have levers — work with customers on payment plans, on ramp-ups or regular usage audits and on pre-payment discounts. You can tweak your pricing model to keep prices where they should be while reducing the burden on your customers — a policy that can easily be retracted post-recession.

Communicate

With customers, with stakeholders, with employees.

Lots of companies are so focused on building the business that they forget to give “business updates” to their community. That’s okay when the updates are great and everything is praiseworthy. But when the world is shaky — regardless of whether your business is or not — all your stakeholders will be nervous. Tell them what’s happening, give them confidence that you’re in the details and have a plan to address every area of concern and risk.

Do this early — not when you’re already in trouble — and your community will realize you’re one of the few solid companies with your heads firmly fixed to your shoulders.

Summary

Recessions come and go. This is the first test of the durability and resilience of SaaS companies — but there are sources of power with recurring high-margin revenue. Be conservative. Increase transparent communication. You can, and should, think long-term during a recession: make it through the short-term but don’t destroy your brand, community and company cultural equity to do it.

Whatever you do — remember your customers and employees will remember it when the economy starts growing again. Act responsibly.

This is by no means intended to be an exhaustive list or complete plan — I’d love any recommendations to other articles and guides that might be helpful for our SaaS community in Scaleworks — message me @edbyrne or email ed@scaleworks.com. Thanks!