SaaS finance leaders: 4 tips for surviving the market downturn

By Danielle Keeven, VP of Finance at Paddle

The economic landscape has shifted. Intense volatility following the Covid-19 pandemic, exacerbated by the Russia-Ukraine war, soaring food and energy prices, and supply shortages across sectors, has triggered one of the worst stock market crashes since 2008.

Like many industries, the software market has already begun to feel the ripple effects. After a decade of unprecedented and sustained growth, the growth of subscription e-commerce is faltering and valuations of Software as a Service (SaaS) companies have begun to fall. With prices rising, demand diminishing and the cost of capital rising by the day, it’s clear that the SaaS market is entering a new phase.

For SaaS finance leaders, the pressure to cut costs is on, and most are already drawing up a roadmap to survive the coming months. However, while acting quickly is critical, knee-jerk reactions could land your company in even more dire straits.

So, what should you do as a SaaS finance leader or CFO to shore up your finances and allow your company to survive in the months ahead?

Be proactive, not reactive

SaaS finance leaders need to adjust their mindset to adapt to this new reality. That means prioritising staying lean rather than the growth at all costs approach that many have embraced in recent years. Proactivity is key, and finance leaders should start taking cost-reducing measures now, before they become urgent. Staying lean will help companies extend their cash runways as much as possible and mitigate the need to fundraise in a tough economic climate.

It’s important to have a realistic idea of what growth is feasible and to invest in the right places to make that happen. While scaling your business is a priority for most SaaS startups, during a recession this objective may need to take a back seat, if the money is better spent elsewhere. Remember: it’s better for your company to emerge smaller and stronger than not all.

Equally, finance leaders need to stay agile. In times of economic uncertainty, nothing is fixed so shifting from an annual planning cycle to more agile monthly forecasting, might be the best approach. Avoid committing to an annual budget or headcount that may not make sense in two months’ time.

Four ways to improve operational efficiency

You can’t control the market, but you can control how you respond to it, and improving operational efficiency and agility will help you avoid potential downrounds and survive market shocks.

Here are four things you can do right now to improve operational efficiency.

1. Review your operating costs

It seems obvious, but your operating costs are your company’s most regular outgoing, so it’s worth submitting them to scrutiny. Take a look at your top 10 OPEX (operating expense) suppliers and ask yourself: where can I save?

With necessary operating expenses like credit card processing fees and invoice service fees, this might involve negotiating a better price with your current provider or evaluating new solutions that are more cost-effective. Make sure you’re not paying more than the market rate for any essential service.

Next, make sure you’re not paying for any redundant services. Remove any subscriptions and applications that are no longer in use, and consolidate the applications your business is using. There’s a fine line between ‘essential’ and ‘nice to have’, and when the purse strings are tightening, this line gets even finer. It’s worth doing an audit to decide what services are truly necessary. Even if you don’t decide to cut all non-essential services now, it’s good to have that list to fall back on if you need to quickly decide where to limit outgoings in the future.

2. Analyse how and where you are incurring expenses

Your cost of goods sold (COGS) will be among your largest outgoings and, as such, you should review them to see how and where your biggest costs are coming from.

There are 4 core COGS SaaS companies should consider reviewing:

1. Hosting costs – including all communication costs and the depreciation costs of any owned assets
2. Internal engineering – the employee costs and salaries needed to keep your business running
3. Customer success – the employee costs needed to ensure customer success and retention, such as sales and customer support teams
4. Direct third-party costs – the costs of any third-party software that’s included in your delivered product

Evaluate each of these in turn and think about how you can negotiate more favourable terms. COGS are variable but, ultimately, essential to delivering your SaaS product, so the wiggle room for saving money here may be limited.

3. Manage your resources

Before cutting employee numbers, take a critical look at your hiring plan and current resources. What can you realistically achieve with what you have, and where will you struggle to progress without additional resources?

Don’t be afraid to invest where necessary. If other companies are tightening budgets, now could be a good time for you to invest in advertising, and enhance your product and customer’s experience to gain a competitive edge.

Remember to stay agile though, and only commit to new hires or expenditure that is sustainable. You want to strike the right balance between efficiency and productivity, and avoid the risk of future layoffs or cuts.

Equally, think about which processes can be automated to free up additional manpower. On a case-by-case basis, ask yourself: is this task mundane? Is it repetitive? Can you put a logis to it? If you can put a tick against those three questions, you can automate it. Ultimately, automation is a force multiplier that allows you to make the most of your existing resources. Used correctly, AI and automation software can optimise existing processes, add value to work and free up your teams for higher brainpower activities.

4. Retain and grow your existing customer base

Last but certainly not least, you need to focus on keeping your happy set of customers happy. Customer acquisition is expensive, so adding value and selling more to your existing customers is the best way of securing additional revenue in a recession.

There are a number of ways to do this.

First, refocus your sales teams on the customers who are most likely to find value in and be receptive to upsell opportunities. From signing them up to more expensive packages, to cross-selling complimentary services, make sure your sales team is making the most out of receptive customers.

Second, optimise your payment and billing processes. Every customer is valuable, so it’s important to reduce friction in the customer experience to reduce churn. This is particularly pertinent during times of recession when your customers are also looking at ways to cut costs and non-essential subscription services. Consider implementing cancellation offers to retain uncertain customers, and make sure you have payment acceptance and recovery plans in place to reduce involuntary passive churn.

Finally, build reactivation campaigns to win back recently lost accounts. A customer lost is not a customer lost forever!

The Road Ahead

If you follow those four initial steps, you’ll have minimised expenses, maximised cash flow and given your company the best chance of surviving the recession.

Now, it’s time to look at the road ahead. In the words of Winston Churchill, you should “never let a good crisis go to waste” and when the economy slumps – and prices are at an all-time low – it’s actually an ideal time to invest to get maximum returns on investment. While being smart with spending is still important, businesses with strong foundations should always have one eye on opportunities for investment that will have a meaningful impact on long-term growth.

With this in mind, SaaS finance leaders can survive, and even thrive, through the upcoming market downturn.