5 biggest challenges for SaaS companies in 2023
in Monetization and Pricing
January 19, 2023
Learn more about what SaaS companies will face in 2023
When we write this post, it's January 17th, so most of the content and predictions on the internet are already there. I thoroughly analyzed many of them, including the top consulting companies, prominent influencers, and institutions. I've realized that our observations rarely overlap, so sharing some insights we provide for our clients is exemplary.
The big "R" word is the recession. While it's not always the case, country by country, we are in an economic turmoil. It's an emerging theme in most discussions, especially the start-up and software-oriented ones.
The historical figures teach us that when a crisis hits, the average profitability of the companies decreases heavily. This time, it will be the same: fewer deals in the pipeline at worse price points and higher competition.
We see the same situation with the SaaS EBITDA multiples. 2 years ago, we had an all-time-high +17x multiples, while now we rarely see companies getting above 10x.
2022 private SaaS company valuations
It also means that the available capital on the market from VCs shrinks heavily. Quoting a Y combinator letter to their founders: "If you are posting Series A and pre-product market fit, don't expect another round to happen until you hit product market fit. If you are pre-series A, the Series A Milestones we publish here might even be too low."
Therefore, you better focus on your revenue engine and current profitability if you're a SaaS start-up. That's why the top 5 most significant challenges for SaaS companies in 2023 will be about making money.
Challenge 1: Moving away from the "per seat" model
First of all, "per user" pricing was a model of choice of your grandpa when he was working for Microsoft, but with usage-based pricing, and PLG models, we're much further in terms of SaaS sophistication.
It's about something other than the legacy model or the fact that the user-based model is the least preferred. Price Intelligently wrote a whole blog post about it.
The biggest problem is with the layoffs. According to Layoffs.fyi (by the way, what a fantastic site), in 2022, there were 154,336 employees laid off from 1024 companies, around half of it in Q4. In 2023 we already had 26,061 people laid off, only in the US alone!
All these people were using tools like Slack, Zoom, Miro, GSuite, Notion, Jira, etc., and a few smaller applications. Two-thirds are of them user-based.
Now with these employees gone and an average spend of $2,623 per employee on tools, you have at least $0.5bn from the market gone. I predict we will see bad quarterly results for a few publicly traded SaaS products once the yearly subscriptions start to get canceled.
As for you, do everything to either change the standard "per user" pricing or try experimenting with new value metrics. Our research finds that companies with more than two core value metrics charge more than their counterparts with only basic ones. It makes the model less comparable to the competition and provides more levers to push the customer forward in plans.
Challenge 2: Increased discounting pressure
As mentioned at the beginning, one of the first things companies face is the pressure to slice prices when the crisis hits. Your customers will ask you for deeper discounts or threaten to leave you for competition.
You should defend your prices tooth & nail, and luckily, Hermann Simon, the founding father of pricing science, provides us with a few tips & tricks:
· Better preparation for price negotiations
· More profound knowledge of the customer's value chain and business processes
· Quantification of customer benefits
· Clear targets and incentives for sales
· Appointment of competent price negotiators
· Intensified monitoring of realized prices
Whenever your client wants to discuss prices, create battle cards and arguments you will use.
Investigate how they use your tools, read the industry bulletin, and try to talk in their language.
A value-selling approach is necessary, but we'll cover that in a second.
If you have a robust and rock solid negotiator in the sales team, rearrange their work to lead the pricing negotiations with the highest ticket.
What helps is to analyze an exact list price vs. selling price data. You're clearly giving too many discounts if you see too many sales-supported deals ending with lower prices than what you have on your website or internal documents. I had clients who had +50% of their accounts sold below the list price, and while it was acceptable during the bull market, it may retaliate when indices turn red.
Challenge 3: Providing tangible value & contributing to client success
Sounds intuitive, but providing real value is now more critical than ever. You need to understand how you serve your client's needs in a quantified and organized way. How many FTE hours do you save? How many new leads do you bring to the table? How much do you reduce the cybersecurity risk? How can your client know this if you don't know this or don't come up with some bullet points?
The more tangible value you provide, the higher your contribution to the overall client success, and the better and stickier your products are. When the vendor consolidation steps in or procurement starts evaluating the software licenses, you can sleep well if you provide an immediate ROI for clients.
Take a sheet of paper and think of 3-4 most salient sources of value. Type down the necessary factors, and play with accurate data, benchmarks, or assumptions if needed. When clients check every dime spent, you want to be on the right side of the coin.
Challenge 4: Delighting new users into the platform
With the PLG motion in most companies, we make user onboarding automated. Then we test it out to see what works well and what doesn't. It's a brilliant, scalable strategy when you have a constant traffic inflow and trial/freemium users registering. In a recession, there will be fewer of them, and I already see companies complaining about the volume—especially those with the fully automated self-click product and no outbound funnel strategy.
We see among our customers that onboarding new users is one of the most significant pain points. However, we also see that some of our clients figured it out. There are two patterns we observe.
If you previously had a top gear, go one down, and try to do more things that take time to scale. Moving from product-led motion to sales-led motion is a good move. You need to look after every lead and ensure it's well nurtured. In other words, there is far more human touch than pure Intercom interactions.
A short survey at the beginning of a trial with 4-5 most popular use-cases already provides far more information than if you create a hardcore AI/ML predictive modeling on your clickstream data. It drops the initial conversion but provides a higher quality for those who stay (again, an argument for sales-led motion).
Once you get it, you can rearrange the copy on your wizards, showcase different parts of the tool, and ensure you communicate the spot-on value at the beginning. For instance, at Timecamp (a time tracking tool), we have changed the value proposition for custom software development companies from: "An easy-to-use time tracking tool" to "Increase your projects profitability with easy time tracking," and overall conversion increased by 8%. It's simple but very effective and doesn't require much human effort.
Whatever action you decide to take, the pattern still emerges: the volume of good leads will decrease, so you need to care more for those who come to you. Also, saying "sorry" to outbound might not be a bad strategy.
Challenge 5: Laying people off
I have mentioned layoffs in the first section, but rather their industrial aspect. Here, we cover the internal problem. Start-up's growth trajectory might flatten, and you need to revise the plans for the following year. If you look at the data, we see that many companies won't deliver the 2023 budgets and results. Getting funding will be hard. If you've managed to raise a round recently, that might have been your last one within a long, long time.
There might be a situation where you may need to let go of some of your staff. This happens, but no one said it's going to be easy.
While I naturally recommend "Hard Thing About Hard Things" or "Radical Candor", I also help organizations deal with that. There are hundreds of content materials on the matter, most of them far more educated than this one, but here are a few things to remember when things don't go that well and you need to let go of part of your team.
I've taken them from my experience and a few role-model people for me:
· List down your employees and determine who is essential and who is not with a simple question: "Without X, will we go belly up in six months?" Then, extend the period to twelve or more months to see how the list changes. Keep in mind; there might be either a Pareto law of 20% of your staff doing 80% of the work or Price's law: 50% of any given result is generated by the square root of the number of those who contribute to it, e.g., few content creators generate 50% of views.
Only a tiny part of their work contributes to this success. In more prominent organizations (+500 people), the 2% rule applies, so there are many ways to create your threshold.
· Make it private, 1:1, and ideally, in person. Firing people over Zoom sucks. Firing them with a one-call (CLICK to learn more) is a jackass move. There is an old corporate proverb and bon mot, which you can use: "While we can't make it nice, at least we can be sincere with each other."
· Pay your dues. Whatever it takes: salaries, insurance, shareholder options. Try to do as much as possible to make it suitable for people. Even if it's about lending your private money, it's worth it in the long run.
· Try getting them a new job - if you need to lay off someone you know you usually shouldn't, talk to others, and try to get them a safe landing. They might not take it but would appreciate the effort.
· This will hurt you psychologically and may cause stress and trauma. Talking to a professional might help. Processing it worked for me, but I understand it might not always be your case.
Whatever happens, it does not work only situation but a human-to-human interaction. Always show your best self, and adhere to the highest ethical standards. There are no shortcuts here.
Profitability, margin, income - these are the words you can tattoo on your forearm and look at them daily. Great companies don't fear the recession as they have a stockpile of cash accumulated in good years. Small but super-profitable companies are called "hidden champions" for a reason. Laser focusing on these matters should help you survive the crisis and make you more resilient in the future.
You will be accumulating fuel when others are losing it. That's why the five challenges I've proposed are essential for good and bad economic weather.