War and Recession: How SaaS companies should prepare for it

Thinking along horizontal lines

At a Glance

The escalation of the Russia-Ukraine war and the pandemic-induced economic crisis have put the fear of recession back into people’s hearts. Google Trends shows that war and recession fears are spiking up dramatically too. But, if there is indeed a recession, we may have a saviour in our midst – The SaaS Industry!

Despite trend indications, talks of a recession may still sound overhyped, but the concerns aren’t unfounded as even legendary economists like Bill Gross are buzzing about the threat of an impending recession

Unlike the times of the Great Depression of the ’30s or the 2007-08 Global Financial crisis in the recent past. The world has progressed to a stage where businesses no longer require a physical presence to run efficiently, and business software doesn’t cost an arm and a leg. And this is made possible by the SaaS (Software as a Service) revolution.

But, for SaaS to be the savior today, it must save itself first. Let’s see how SaaS companies can prepare themselves for future recession and leave something for SaaS Industry Magazine to write about and exist tomorrow.

Reducing Customer Churn

During economic instability, the first step is to categorize all your clients based on their financial health and analyze the businesses, and industry sectors affected the most. Financial health planning gives a blueprint for all subsequent actions to slow the churn. 

Once done, 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.

During the pandemic, many SaaS companies like Salesforce and Zoho even went a step further and started offering small business grants to at-risk companies.

Conserving Cash and improving cash-flow

Large receivables and significantly less cash = Disaster. ERP SaaS solutions can lend a helping hand here through their cash-flow automation tools that ensure customers pay on time and don’t forget to renew their licenses. If needed, you could even think of providing incentives likes discounts and coupons to your debtors to pay on time.

Having cash at hand is always prudent and is one of the basic tenets of financial management. It must anticipate and start before the actual recession hits the market. Set aside excess cash for essentials and cut down on splurging.

Carefully plan marketing budget

Sometimes marketing budgets can overshoot even R&D costs and other essential needs. Hence, must be kept in check during a recession or financial crisis. Companies like Salesforce, Tableau, and Oracle dedicated more than 20% of their revenue to marketing. In contrast, Zoho cut down almost entirely on its Google Ad spend to tide over the pandemic despite having a healthy cash flow. 

However, the trick is to find a balance between the two. Cutting investments in sales and marketing leads to lower revenues, creating a vicious cycle. 

Drop unprofitable products/services

A lot of companies have multiple MVP dream projects not making enough revenue. In testing times, it would be best to drop cash-burning products and instead focus on what is working well already. The exceptions to this rule are products/ services that you consider ‘strategic’ that could generate additional sales to compensate for the loss.

SaaS on SaaS model

Lastly, SaaS companies must first run their operations on SaaS solutions rather than legacy products. SaaS offers businesses scalability and flexibility that conventional software licenses and hardware just cannot keep up with. There is an added worry that a high initial cost brings, and the risk is that future revenue won’t be enough to offset it. Meanwhile, SaaS solutions offer a pay-as-you-go alternative that mitigates this risk when there are fluctuations in sales and revenue growth in your company during a financial crisis.

Diversify your products

Your products cater to only a small group of businesses or a single sector that runs the risk of being affected during a recession. It would be wise to include services that have a requirement in other risk-free industries. Diversification of products would mean you are not overly dependent on one line of business. This is why vertical SaaS companies may want to think along horizontal lines.

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