4 tips to survive the market downturn

By Danielle Kevin, VP of Finance at Paddle

The economic landscape has changed. The intense volatility that followed the Covid-19 pandemic, exacerbated by the war between Russia and Ukraine, soaring food and energy prices, and supply shortages across all sectors, has triggered one of the worst stock market crashes since 2008.

Like many industries, the software market has already started to feel the ripple effect. After a decade of sustained and unprecedented growth, subscription e-commerce growth is weakening and valuations of software-as-a-service (SaaS) companies have started to slide. With prices rising, demand falling, and the cost of capital rising daily, it’s clear that the SaaS market is entering a new phase.

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

So what do you need to do as a CFO or SaaS CFO to shore up your finances and enable your business to survive in the coming months?

Be proactive, not reactive

SaaS finance leaders need to adjust their mindsets to accommodate this new reality. That means prioritizing staying lean over the growth-at-all-costs approach that many have taken in recent years. Proactivity is key, and finance leaders should start taking steps to cut costs now, before they become urgent. Staying lean will help companies stretch their cash flows as much as possible and mitigate the need to raise funds in a tough economic climate.

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

Likewise, finance leaders must remain agile. In times of economic uncertainty, nothing is fixed, so moving from an annual planning cycle to a more streamlined monthly forecast might be the best approach. Avoid committing to an annual budget or template that may not make sense two months from now.

Four ways to improve operational efficiency

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

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 the most regular expenses of your company, so they are worth scrutinizing. Take a look at your top 10 OPEX (operating expense) providers and ask yourself: where can I save?

With necessary operating expenses like credit card processing fees and billing service fees, this could mean negotiating a better price with your current provider or evaluating new solutions that are more cost-effective. Make sure you don’t pay more than the market rate for any essential services.

Next, make sure you don’t pay for any redundant services. Delete subscriptions and apps that are no longer in use, and consolidate the apps your business uses. There is a fine line between ‘essential’ and ‘nice to have’, and when the bag’s threads tighten, this line becomes even finer. It is worth doing an audit to decide what services are really necessary. Even if you don’t decide to cut all non-essential services now, it’s good to have that list to turn to if you need to quickly decide where to limit spending in the future.

2. Analyze how and where you are spending

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

There are 4 main COGS SaaS companies that you should consider checking out:

  1. Accommodation costs, including all communication costs and depreciation costs of any owned assets
  2. In-house engineering: the costs and employee wages required to keep your business running
  3. Customer Success: The costs of employees required to ensure customer success and retention, such as sales and customer service teams.
  4. Direct Third Party Costs: The costs of any third party software that is included in your delivered product

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

3. Manage your resources

Before reducing the number of employees, take a critical look at your hiring plan and current resources. What can you realistically accomplish with what you have, and where will you struggle to progress without additional resources?

Don’t be afraid to invest where you need to. If other companies are tightening budgets, now might be a good time to invest in advertising and improve your product and customer experience to gain a competitive advantage.

However, remember to stay nimble and only commit to new hires or expenses that are sustainable. You want to strike the right balance between efficiency and productivity, and avoid the risk of future layoffs or cutbacks.

Similarly, think about what processes can be automated to free up additional manpower. Ask yourself on a case-by-case basis: is this task mundane? Is it repetitive? Can you put a logis on it? If you can check off 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 streamline existing processes, add value to work, and free up your teams for more brainpower activities.

4. Retain and grow your existing customer base

Last but not least, you need to focus on keeping your happy customers happy. Customer acquisition is expensive, so adding value and upselling your existing customers is the best way to earn extra income in a recession.

there are many ways to do this.

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

Second, streamline 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 for ways to cut costs and non-essential subscription services. Consider implementing cancellation offers to retain insecure customers and ensure you have payback and payment acceptance plans in place to reduce involuntary passive churn.

Finally, create reactivation campaigns to recover recently lost accounts. A lost customer is not a lost customer forever!

the road ahead

By following those four initial steps, you’ll have minimized expenses, maximized cash flow, and give your business 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 is in a slump, and prices are at their lowest point, it is actually an ideal time to invest and get the most out of the investment. While being smart about spending is still important, companies with solid foundations should always be on the lookout for investment opportunities that will have a significant impact on long-term growth.

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

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