Bracing your SaaS Business in an Economic Downturn

In a time characterized by high inflation and interest rates, concerns of a recession are well-justified. Even if you are not as pessimistic, it is impossible to deny the economy is in a period of deceleration— growth is slowing and companies need to actively adapt to weather the storm. Thus, the focus of this article is optimizing internal processes you can control and holding on to what your company already has whether that be revenue or customers. 

Historically, most early-stage SaaS companies have been able to rely on growth via funding. However, in these economic conditions, funds are tightening their wallets as the cost of capital and credit are rising. Still, this does not mean VCs and PE firms lack committed capital: instead, it means their requirements are far more stringent, prioritizing sustainable and efficient business units.

So how do you showcase sustainability?

The first step is having clear, actionable data and KPI metrics–and this is not just for investors’ benefit. Many SaaS businesses, especially in the early stage, have their data trapped in disparate spreadsheets and hubs which makes it difficult for decision-makers to understand their own company’s financial health and operations.

This is especially relevant for subscription-based SaaS companies. Subscription-based models are ahead of the game since recurring revenue means more predictable forecasts. But many SaaS companies still lack accurate subscription-specific metrics that are critical to evolving your operations and increasing the company’s valuation.

Among these are ARR, ACV (Average Contract Value), Churn rate, ARPA (Average Revenue per Account), CAC (Customer Acquisition Cost), and LTV (Customer Lifetime Value. In fact, BCG states that using these to understand ratios such as LTV/CAC are critical to both investments and operations of a subscription company.

Manually tracking and analyzing these metrics can be time-consuming and prone to errors. To streamline the process and ensure accurate, up-to-date data, we recommend implementing a subscription management software that is connected to your quote to cash process. This will automate the tracking of subscription-specific metrics and provide valuable insights into the health and sustainability of your business. That way, not only does your company have clean data to support your decision-making, VCs and other funders can feel confident in your fundamentals as well.

To the point of automating tracking, manual processes in quote to cash and billing processes are the main source of revenue leakage for subscription-based companies. EY estimates that companies are losing up to 5% of their EBITDA through revenue leakage. Considering the fact that a 1% improvement in EBITDA typically requires a 10% increase in revenue, the implications for this are staggering.

During periods of slow growth, retaining—or recovering—the revenue that your sales team has already generated directly improves your company’s bottom-line without deploying extra resources.

Sources of revenue leakage are often human error, especially if your billing process is mostly manual. This results in missed invoices, renewals, upsells, and cross-selling opportunities. Another common cause is poor communication such as the sales and finance departments operating on different data which can result in incorrect billing and artificially extend time spent on reconciliation.

Optimizing and automating your recurring billing system can ensure simple billing steps are not overlooked. Furthermore, such a system can help identify at-risk clients that are typically late on payments or renewals by automating these and tracking them.

Customer retention is a key factor in the sustainability of any business, but especially in times of economic uncertainty. With decreased demand and reduced customer spending, it's important to focus on keeping the clients you already have.

One effective way to do this is by using a subscription management software to track customer behavior and identify opportunities to improve the customer experience. What features do your customers like the most? Which part of your SaaS platform or business generates the revenue? Maybe you can apply discounts for add-ons that do not comprise the majority of your revenue stream. 

In addition to these strategies, it is also important to be proactive in communicating with your customers during economic downturns. This could include offering flexible payment plans or promotions to help them continue using your service. By prioritizing customer retention and maintaining strong relationships with your existing customer base, you can weather the economic storm more effectively.

In addition to customer retention, operational efficiency is another area that is within your control as a company. One way to improve efficiency is by identifying and addressing any inefficient processes. In our understanding, we have found that due to the complex nature of B2B subscriptions, the quote-to-cash process is both costly and untimely. This ranges from breaks in communication between finance and sales processes, excess time spent on billing and monthly closes, and lack of automation.

Ultimately, optimizing the quote to cash process comes down to “striking the right balance between standardization and customization,” as mentioned in a report by top management consulting firm McKinsey. In other words, a solution that not only serves as a hub for the streamlining of the quote-to-cash process, but also allows for complex and customized quotes that enables your sales team the freedom to secure deals without exchanging 100 emails to get from quote to invoice.

It may seem daunting to take on implementation projects at a time like this. But, not only can subscription solutions generate value by automating billing and tracking key financial metrics, it can be a quick process if you choose a solution that can first address your immediate needs before scaling your business for the future when you are ready to invest in growth. We advise you to look for a solution that is flexible and can grow with your business, and you'll be well-equipped to navigate any challenges that come your way.