Experts say we are likely headed into a recession. Is your SaaS company going to be able to withstand the economic hardship? Find out how to prepare our business for hard times and set it up for success.
With the rise in global economic instability accompanying the Ukraine vs. Russia war and the Coronavirus pandemic, it’s no surprise that experts now predict a looming recession. And when a recession hits, hardly any sector in the market will go unscathed, including the ever-resilient SaaS business.
With SaaS, just like every other business, a lot could go wrong during a recession. The companies’ growth rate, income, and profit margin could take a severe hit, especially with new SaaS companies that have never experienced one before and have no idea what to prepare for.
You can find out how to keep your business prepared against recession in this article.
Are We Headed Into A Recession?
As of June 8, 2022, the economic growth rate went from 0.9% to 0% due to inflation. To counter the decreasing growth rate, the US Federal Reserve has increased the interest rate by 0.75%, hoping that this would deter the people from borrowing too much from the banks to satisfy their growing wants and stick to spending their money on necessities, and in the process slow down economy demand of other goods and thus, can hopefully reduce prices and inflation.
However, due to the increased interest rate, the US Bureau of Law statistics has now recorded an 8.6% increase in the annual consumer price index. This means that every industry has now recorded a rise in the selling price of their goods and products by an average of 6%.
These values indicate that, if this goes on, there is an impending storm of a recession on its way, characterized by low income by workers and low sales by companies. Also, according to Forbes, TD securities recently concluded that there is more than a 50% chance of a recession in the next 18 months.
Therefore, the answer to the above question is “Yes, we are most likely headed into a recession.”
How Will The Recession Affect SaaS Businesses?
SaaS is a recession-resilient niche, and even during this inflation period, their sales have been relatively stable as about 85% of SaaS companies have recorded a steady sales rate since the end of 2021. However, if this situation later progresses into a recession, SaaS companies might find it hard to maintain their cash flow and retain their customers and also experience other SaaS recession effects.
As viewed in the past recession periods, the hallmark of recession is the controlled spending by both customers and businesses. As a result, customers’ spending habits take a hit as they would have to now resort to sorting out their needs in the order of priority.
Doing this will lead to a significant downgrade in the returns of SaaS businesses if the past recession period is anything to judge. Even the best SaaS companies have experienced growth margin drops from 40% to 10%, indicating that developing companies could even go down harder. This doesn’t mean that growth during a recession is impossible, although it might be expensive.
However, vertical SaaS companies take their hit better than horizontal SaaS companies. This is because both businesses mean pretty differently to their customers, and you will find out why in a bit.
Horizontal vs. Vertical SaaS Companies During a Recession
Vertical SaaS companies cater to a specific niche of businesses. They either deal with this or that and are not available to the general. This feature makes them unique such that the niche of clients/ customers they cater to most definitely needs them for their businesses to run smoothly.
So in recession periods, they are not usually easy to cut off or cancel out, and as a result, they tend to retain their customers easily and can still maintain their cash flow through them. Due to this reason, vertical SaaS is described as an all-weather business model, meaning it can thrive both in good and bad market times.
Horizontal SaaS companies, on the other hand, don’t specialize in a specified niche. It can be used by various companies, businesses, and individuals and, in most cases, doesn’t cater to their client’s essentials, unlike the vertical SaaS companies. As a result, they tend to lose customers faster during the SaaS business recession.
However, this doesn’t mean those horizontal SaaS companies cannot thrive during a recession. It is not illogical to expect growth during this period; it might be at the expense of more money.
Prepare Your SaaS Company for the Recession
Since we know the probability of going into recession is higher, the next best plan for your SaaS company would be to prepare for it. Here are a few ways you can prepare and save your company.
Customer Retention Techniques:
It is quite easy for your customers to let go of you during a recession due to them prioritizing their needs. It is, however, up to you to hold on to them with what you can offer them. During a recession, your company should be focused on retaining loyal customers instead of gaining new ones.
And to retain your customers, you need to create offers they wouldn’t pass on even with the recession. Try to read into their situations and let them know that you care about them. You can do this by offering your services at subsidized values to them. You can approach them with free trials and extended trials, and irresistible bonuses.
You can also take surveys to know what they want and can afford and then create options based on the information you generate.
Invest in Products and Services Diversity:
Another good idea is to invest in providing essential services that would be pretty useful during the recession period. In the same way, Zoom came in handy during the pandemic, and almost every organization uses it to hold meetings and conferences; your services should also be able to maintain value in the face of recession. That way, you would remain a priority, have a chance to stand against the SaaS economy recession, and would not need to be replaced by a more important need.
Grow Your Business in Hard Times
Most businesses often struggle with capital funding during recession periods, especially if their regular cash flow is blocked. Intrepid finance is here to help your business grow during hard times like the recession period. We are a venture capital company, offering our clients and customers (SaaS companies) capital based on their recurring revenue.
If you are looking for help growing your SaaS business during the recession, you can always reach out to us at Intrepid Finance.