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6 biggest challenges for SaaS companies in 2022

by
in
Maciej Wilczyński
Managing Partner, Founder Valueships
December 28, 2021
SaaS
challange
strategy

Three things always come at the end of the year for many SaaS providers: 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 prove our hypotheses with the data and expert judgment.

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

1.  Inflation and increased product development cost

2.  Constant commoditization 

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 in the SaaS industry

Inflation has risen substantially worldwide, and the US, being the source of most SaaS businesses, 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 high scores 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. There is no place for big discounts.

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 by your current clients. 

Also, it's more expensive to develop a product. 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 track with $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. the 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 Software as a Service

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't need to remind you of Clayton Christensen's concepts.

With:

  • NFTs, 
  • blockchain contracts, 
  • web3, 
  • quantum computing, 
  • and metaverse, 

they're not the coolest kid in school anymore. 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 more roles as COOs, pricing chiefs, and more "cow-milking" corporate-level people.

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Market consolidation by big players

SaaS businesses face big sharks that 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, but with a good strategy, as SaaS valuation multiples, surprise, surprise, are record-high.

Decreasing willingness-to-pay for paid products

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 "game in 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 twofold within the last few years. According to the data, by 2023, we may observe that 79% of companies will adopt or rest usage-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 pricing pressure as previously user/seat-based models don't capture 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 cost is higher.
  • The 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 well-being potential"?

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

Managing mindsets and 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 the upcoming 2022

Improve your marketing and sales strategies and be ready for 2022

SaaS companies face significant challenges in 2022. Inflation and increased product development costs put pressure on founders and C-level executives, making it crucial to focus on net dollar retention and managing cash flow. 

The constant commoditization of SaaS solutions in a crowded market requires finding unique value propositions and differentiation strategies. Market consolidation by big players through mergers and acquisitions presents both opportunities and threats for smaller SaaS providers. 

Decreasing willingness-to-pay for paid products and the rise of freemium models require rethinking monetization strategies. Adoption of usage-based pricing models is on the rise, but implementing such changes can be complex. Add to this hybrid work and managing dispersed teams - this adds additional complexity, requiring careful attention to collaboration, productivity, and well-being. SaaS businesses must stay agile and adapt to these challenges to thrive in 2022.

Stay ahead of the game with our insights. 

Check out our blog or click here to meet the 5 biggest challenges for SaaS companies in 2023.

FAQ

#1 What are the main challenges faced by SaaS companies in 2022?

The main challenges for SaaS companies in 2022 are inflation and increased development costs, constant commoditization, market consolidation, decreasing willingness to pay, adoption of usage-based pricing, and managing hybrid work and dispersed teams.

#2 How can SaaS companies attract and retain customers?

SaaS companies can attract and retain customers by offering valuable content, powerful tools, seamless integration, and a strong marketing strategy targeting their ideal customers.

#3 What are the common pricing models for SaaS solutions?

Common pricing models for SaaS solutions include subscription-based pricing, usage-based pricing, and tiered pricing based on features or user levels.

#4 How can SaaS companies ensure the security of sensitive customer data?

SaaS companies must implement robust security measures, such as encryption, access controls, and regular audits, to protect sensitive customer data from potential breaches.

#5 What are the best marketing and sales strategies for SaaS companies?

SaaS companies can benefit from marketing and sales strategies like social media campaigns, valuable content creation, targeted advertising, and leveraging customer referrals.

#6 How can SaaS companies effectively manage their sales teams?

SaaS companies can manage their sales teams by providing them with the right tools, setting clear goals, fostering a collaborative environment, and continuously training and supporting them.

#7 What are the key challenges in implementing cloud-based services?

Challenges in implementing cloud-based services include technical expertise, seamless integration with existing systems, data migration, and ensuring the right balance between cost savings and performance.

#8 How can SaaS companies reduce customer churn and increase customer lifetime value?

SaaS companies can reduce churn and increase customer lifetime value by providing exceptional customer support, regularly releasing new features and updates, and offering personalized experiences.

#9 What are the risks associated with data breaches in the SaaS industry?

Data breaches in the SaaS industry can lead to reputational damage, legal consequences, and loss of customer trust. SaaS companies must prioritize risk management and invest in robust security measures.

#10 What are the unique challenges faced by SaaS startups?

- SaaS startups face challenges such as establishing product-market fit, building a customer base, attracting investors, hiring skilled professionals, and competing against established players in the market.


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Maciej Wilczyński
Managing Partner, Founder Valueships

Expert in B2B pricing, monetization and value-based selling strategies. Over the past year, he has completed over 40 consulting projects in Europe. Prior to founding Valueships, he worked at McKinsey & Company, mainly in the TelCo, software, and banking industries. He completed his doctorate in pricing in SaaS start-ups at the University of Economics in Wrocław, where he also lectures.

Schedlue a free consultation
Maciej Wilczyński
Managing Partner, Founder Valueships

Expert in B2B pricing, monetization and value-based selling strategies. Over the past year, he has completed over 40 consulting projects in Europe. Prior to founding Valueships, he worked at McKinsey & Company, mainly in the TelCo, software, and banking industries. He completed his doctorate in pricing in SaaS start-ups at the University of Economics in Wrocław, where he also lectures.