A CFO’s guide to SaaS in the time of COVID-19
As everyone who wasn’t previously isolated from humanity knows, the COVID-19 pandemic has taken everyone’s best-laid plans on a hard detour. While we all get inundated with emails on how our online retail stores, local organizations, and even our vets are helping to keep us safe during COVID-19, what isn’t being said is that nothing is normal anymore. To that end, I had a virtual chat with a former colleague of mine who has over two decades of experience as an analyst, financial consultant, and CFO about what he’s seeing happening in the SaaS world right now. What I learned is this: SaaS companies must take actions to survive that are almost in direct conflict with their entire identity as a SaaS organization, and the key ingredient at the end of the day might surprise you.
If you work for, own, or advise a SaaS company—or if you know someone who does, walk by them in the grocery store, or sit near them on an airplane (hopefully not right now)—you’ve heard SaaS terms like growth, CapEx, and time to market. Since the birth of SaaS, “high growth” has been the industry mantra and we love them for it. But what do SaaS companies do now, when our economy is freaking out? Well, according to my much smarter and more awesome former colleague, “it’s time to hunker down.”
No more money to burn
For SaaS companies with lots of cash that are already turning a profit, this is much less of an issue, but for the majority of the industry that operates in the red (you know who you are), the time to burn money is over. Venture Capital (VC) firms and CFOs everywhere are advising a complete change in tactics for SaaS companies to survive the economic rollercoaster we’re now on. Instead of the high growth, fast burn, quick adoption share-of-market popularity contest that is basically the SaaS code of conduct, these companies must now look to cut costs, slow (but not stop) growth, avoid churn, and “hunker down” in order to survive.
This might sound like a tall order. It most definitely is, especially for a business type categorically known for garnering success through throwing money at… well, everything. So now is the time to adapt or die. CFOs are going to be a nightmare, but that’s a good thing. Everything they ask you to cut, to justify, and to renegotiate will be for the survival of the organization. And while it might be painful, it is exactly what needs to be done. So what happens next?
Customer first, but really this time
As SaaS organizations cut growth costs, the biggest threat to existence will be losing current customers. They can’t afford to ignore bugs or experience outages, because every negative experience could mean lost recurring revenue. It’s time to shine for the customer, and that means a focus on interconnectivity, user experience, product quality, and reinforcing their company mission.
SaaS companies need market share to get platform dominance, which means underlying services need to be reliable, smooth, and trusted. However, cost savings usually directly conflicts with quality so there are serious considerations to be made. Is there a provider that can give me quality and savings? Can I find an ideal partner to scale (up or down) with when this is over? Companies should be reviewing everything on the expense side, but keeping customers top of mind is critical to not making a decision they’ll regret later.
The time famine has ended
Prior to COVID-19, many companies were so focused on forward momentum and gaining market share that no one had any time for decisions that may have required deeper analysis, a commitment of resources, or really anything that slowed the time-to-market sprint. That SaaS “time famine” (originally coined, I believe, by Dr. Leslie A. Perlow), has finally been upended and now many companies have more time than they know what to do with. That’s more time to think and have deeper conversations at a leisurely pace that supports endurance, not speed.
It also means more available resources to support structural changes that can ultimately save money. This is the time to reintegrate. SaaS companies can challenge their product teams to “cut the fat” and develop more efficiently. There’s going to be some pain in the form of budget cuts being handed down from the CFO regardless, so SaaS organizations should take the opportunity to give product teams a new project with those budget constraints in mind.
The three Rs of the SaaS Survival Guide to COVID-19
In summary, you will likely see a trend in SaaS business strategy that follows the pattern I’ve listed below, with cleverly applied alliteration so you don’t forget it.
- Renegotiate – Even SaaS businesses use SaaS software or other vendors to support their mission, but it’s possible that the contracts weren’t as carefully negotiated as they could have been when burn strategies were in place, or it’s just time to rethink what you use and how you use it. So don’t be surprised when the next couple months are filled with questions from your finance and contract people as they look at the tools you’re using, how you’re actually using them, and renegotiate based on that.
- Reinforce – For SaaS businesses, acquiring a customer can be 10x more expensive than keeping a customer, so reinforce your product and focus on your current book of business. Growth isn’t as critical as keeping your customers happy and reducing churn as much as possible. Focusing on keeping your existing customers and growing your share of their wallet is a much better use of your resources than solely focusing on acquiring new customers.
- Reintegrate – Cutting costs means making a change, but with smart decision-makers at the helm you should be seeing improvements for the better. For your product people, this means reintegrating new tools that provide better quality at a better price, without the “easy button” premium that comes from similar tools.