6 biggest challenges for SaaS companies in 2022

by 

Maciej Wilczyński

 in Monetization and Pricing

Trends & Insigts

December 28, 2021

What are the 6 biggest challenges for SaaS companies in 2022? How CxOs can prepare for that?

6 biggest challenges for SaaS companies in 2022

 

Three thing salways come within the end of the year: new year's resolutions, past year summaries (including myself publishing books read), and of course, predictions for the upcoming year.

We're going in with the flow while at the same time trying to rely on more prominent macro trends and trying to proveour hypotheses with the data and expert judgment.

 

tl;dr if my client asks me for the six biggest challenges for SaaS companies in 2022, I will name this list:

1.  Inflation and increased product development cost

2.  Constant commoditization of SaaS

3.  Market consolidation among big players

4.  Decreasing willingness-to-pay for paid products

5.  Push towards usage-based pricing and monetization reengineering

6.  Hybrid work and dispersed teams management

Inflation and increased NPD cost

Inflation has risen substantially worldwide, and the US, being the most significant SaaS market, is in the peloton in this inglorious race. Even traditionally stable Western Europe also falls under the same pattern. Not to mention Eastern European countries with historically strong start-up hubs: Estonia or Poland, which face record highscores unseen before 2000.

https://www.pewresearch.org/fact-tank/2021/11/24/inflation-has-risen-around-the-world-but-the-u-s-has-seen-one-of-the-biggest-increases/

 

The facts are straight: everything gets more expensive, increasing the pressure on founders and C-Levels. If you can't continuously increase the ARPU through cross/up-sell efforts and don't have a way to hunt enterprise elephants with your product, that may create a potential threat. Net Dollar Retention is your BFF from now. It's especially crucial if you're bootstrapped and rely on the cash flow created from your current clients.

 

Also, it's more expensive to develop aproduct. At the same time, no-code wave and indie hacking make the MVP and prototyping easier. If you have a well-established tool on the growth trac kwith $100-150k MRR that might be a challenge to work on a legacy product and pay the technical debt continuously. As I'm writing this post, it takes six months to hire a developer in Germany, and only in the US do the tech salaries increase three times faster vs. inflation rate. If you're from a country with solid custom software development and IT providers market, recruiting an engineer to a product company is hard. One client told me recently: "Well,it's been much easier to create a product with a full team of engineers five years ago."

[1]https://crn.pl/aktualnosci/place-it-rosna-w-niespotykanym-tempie-juz-44-tys-zl-miesiecznie/

[2]https://businesschief.com/technology-and-ai/tech-salaries-us-continue-rise-report-dice

Constant commoditization of SaaS

If you look at the number of SaaS entities created every year, there are more and more of them, and the overall sector has become pretty crowded. If you take the G2.com only categories taxonomy, there are 42 main categories divided into 2017 sub-categories (sic!). It means that another marketing automation CRM might not find a niche.

(FYI, if you want to receive the sheet with all category names, shoot us an e-mail.)

SaaS tools became a commodity like anything in the world. That's the sad story of every innovation, as I don'tneed to remind you of Clayton Christensen's concepts.

With NFTs, blockchain contracts, web3, quantum computing, and metaverse, they're not the coolest kid in schoola nymore. While software still drives an enormous economic value-added, like no sector in the world, we already work with cloud tools on a day-to-day basis.

It's pretty much what Innovation Curve, Product Life Cycle, or Gartner Hype Cycle is all about.

Our clients start to see this in their P&L statements - before they come to us, the margins drop, the overall growth rate flattens, and while business is still far better than the average mom-and-pop shop, we need to look further. Social media management platforms are well-established for those who need newsletter software already have it.

Look at the SaaS revenue growth rate trajectory - it's still positive, but the overall velocity decreases.

It's a good moment for consultants, optimization experts, and business practitioners - we will see more and moreroles as COOs, pricing chiefs, and more "cow-milking" corporate-levelpeople.

Market consolidation by big players

Big sharks constantly look for new growth opportunities, either by capturing more value by expanding to new functions & verticals, e.g., the Salesforce model, or by becoming a natural connector of all your business functions through integrations, e.g., Slack.

The M&A activity is record high -only in 3Q 2021, we have seen 933 transactions on public markets. Just for context, in 2019, the overall aggregate was 700.

What has changed significantly is the volume of mega transactions, including Afterpay's acquisition by Square ($28.6B, 42.7x EV/Revenue), Medallia's acquisition by Thoma Bravo ($6.1B, 12.3xEV/Revenue), Cornerstone OnDemand's acquisition by Clearlake Capital Group ($5.2B, 6.3x EV/Revenue), and Frame.io's acquisition by Adobe ($1.3B).

If you're thinking of an exit, that might be the right year to do so, as SaaS valuation multiples, surprise, surprise, are record high.

Decreasing willingness-to-pay for paidproducts

Freemium is eating the world. According to pretty much every report, there is a visible increase in freemium offerings across the market. Considering the solid product-led-growth trend, decreasing willingness-to-pay in time, and the fact that almost any "gamein the app store has a free version," it's a challenge you might need to rethink.

Last year, some notable companies shifted to the free model, including Stack Overflow, ServiceNow, or NewRelic.

While the model is great for acquisition, it may hamper the monetization aspects of the business. If you're bootstrapped, that might create a challenge vs. your VC-backed peers

Usage-based pricing adoption

Founders and execs went crazy after the usage-based pricing model in 2021. It went mainstream as the adoption of usage-based pricing increased two fold within the last years. According to thedata, by 2023 we may observe that 79% of companies will adopt or restusage-based monetization.

Forecasts are one thing, but the trend won't stop for sure. In 2021, 25% of SaaS companies declared usage/transaction-based model vs. 20% in 2019. That's a huge change and trust us, reengineering your entire billing model is not an easy task.

Considering everything, more companies will face the pricing pressure as previously user/seat-based models don'tcapture enough value under the demand curve.

 

Hybrid work and dispersed teams

Almost half of the employees nowadays are thriving in the vision of hybrid work. Not only that, 83% declare that the hybrid model is optimal in the future.

Take every aspect we have just covered:

·  Stuff is more expensive.

·  The customer acquisition costis higher.

·  Willingness to pay gets lower.

·  It's almost impossible to recruit the right engineer.

You don't need an office, which has a heavy impact on costs. In fact, at Valueships, we're entirely remote, meeting from time to time, and the model works quite well.

The challenge, however, is not to ask,"how do you want to work?" It's instead "how we need to set up the workplace to unleash the full collaboration, productivity, and wellbeing potential"?

Companies spend more and more on unified communication software, which is excellent, but no tool is a solution in itself.

Managing mindsets, attitudes, changing the rigor of meetings, and fighting Zoom fatigue -these are the post/trans-covid challenges we will face.

While 2020 was full of BS webinars about going remote, we can now learn from actual experiences, successful case studies, and patterns that work. We will definitely need that.

 

All the best in upcoming 2022!