Ryan Neu
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The “Great Restructuring” continues and Layoffs.fyi tracked 80,000 lost jobs in tech in January 2023. This brings the total to well over 230,000 from more than 1,000 companies since 2022. Yet, despite all the negative headlines, the SaaS market continues to see steady growth. Gartner predicts software spending will increase by 11.3% this year, but my company’s internal data leads me to be slightly more bullish.
The fourth quarter of 2022 and the first quarter of 2023 show steady increases in both spending and requests for new purchases. We analyzed more than $2.5 billion in SaaS spending from 18,000 deals across 2,500 suppliers and anticipate that SaaS spending will increase 18% this year.
Yet while software spending continues to grow, buyers and sellers face immense challenges dealing with the impact that layoffs and underlying economic uncertainty will have on the software market.
The bottom line? In 2023, SaaS is still open for business; it’s just going to take longer to buy and sell.
A flat renewal is the new “upsell”
One of the most direct and immediate impacts of recent tech layoffs on the SaaS sector is a decline in seat licenses. A quarter of a million layoffs equals tens of millions of individual seat licenses lost for SaaS suppliers.
We have seen average contract value (ACV) going up in some of the most popular software categories. This includes cloud data integration (which includes products like Fivetran and Celigo) up 82% as a category, mobile device management (which includes products like Jamf and Kandji) up 84% as a category and project management tools (which includes products like Asana and Monday.com) up 78% as a category. Even so, we predict that SaaS vendors across the board will see contraction at renewal, not expansion.
Suppliers can expect a distinct downturn in both the growth rate and share of wallet (the amount a customer spends regularly on a particular software vs. buying from a competitor). We have seen suppliers attempt to recoup lost revenue with renewal uplifts as high as 20% (compared to the typical 3%-5%). Unfortunately, many customers aren’t in the position to approve that much of an increase. The sooner SaaS vendors can normalize the idea that even a flat renewal is a massive win in this economy, the better off they will be.
Mitigate the impact of layoffs on purchase and renewal cycles
Over the past six quarters, renewal cycles have remained consistently above 60 days on average. The fourth quarter of 2022 represented a breakthrough, as renewal cycle time decreased 11% — from 63 days in Q3 to 56 in Q4.
Unfortunately, we predict that continued layoffs and restructuring will drive that number back up in 2023. Early Q1 data validates this hypothesis, with renewals increasing 2% to 57 days and net new sales cycles increasing 10% to 46 days.
A study by SAP showed that 55% of companies with more than 50,000 employees claimed that staff shortages have significantly slowed their procurement operations. Two-thirds of those same companies blame increasingly distributed teams for purchase decision delays.
This is where buyers can look to technology to help them improve their procurement process — automation enables anyone to collect and share product data, manage renewal deadlines and bring the right people together to make decisions, regardless of where they are located.
Scrutinize software the same way you scrutinize personnel decisions
Layoffs are a typical response to companies recognizing they hired too many people during times of plenty. Likewise, when organizations put tech budgets under a microscope, they’re likely to find an inherently fragmented software stack that has grown unchecked over the past few years, nurtured by big software budgets, low-interest rates and non-IT spending.
CFOs need access and visibility into how SaaS is leveraged in their organizations, as well as an understanding of what is critical vs. nice to have. Decentralized purchasing (mostly done on credit cards by non-IT business units) and shadow IT can be costly when left unchecked. A February 2023 report indicated that 49.96% of all software installed by companies goes unused by employees.
In 2023, any software purchase or renewal must be above the line of critical functionality and demonstrate a quick and tangible return on investment. Looking at our data from the top 10 categories for SaaS deals (new and renewal) in 2020, only 16% were connected to revenue generation. In 2022, companies were tightening their belts and keeping a more diligent eye on their IT spending — as a result that number jumped to 31%.
Prepare for the Year of the Price Hike (especially for sticky software)
Over the last three years, our data has shown a steady decline in multiyear deals. Yet we have also seen a significant increase in ACV from purchase to renewal in mission-critical and sticky software categories, like CRM or email.
With the decline of multiyear contracts, the share of wallet for these top-selling categories has also decreased by 9% from 2021 to 2022. When you combine all these factors, you create a perfect storm for a price hike, most notably for top sellers who have survived the reenvisioning of organizations’ software tech stack.
It is reasonable for SaaS vendors to raise prices to account for increased costs incurred by inflation. We expect more of the same moving forward, particularly from the 800-pound gorillas that are already entrenched in a buyer’s operations and workflow. Smaller, less mission-critical SaaS suppliers may face tougher negotiations and renewals, as mentioned earlier.
Buyers can prepare for the Year of the Price Hike by evaluating their tech stack and formalizing and automating their procurement process, starting with:
- Using technology to efficiently evaluate software with a cost vs. benefit framework.
- Identifying overspending, software duplications and gaps in the software stack.
- Insisting on reviewing at least two additional vendors for every piece of software in your stack. The worse the economy, the more important this becomes.
Buyers need to understand that they are not doing this to gain some fake leverage over sellers but should use these tips in order to develop a genuine understanding of their options, empowering them to pivot quickly if things take a wrong turn.
“Prioritize survival”
David Sacks, one of our board members, recently received more than five million views on a simple but prescient tweet, when he said that the best advice for 2023 was to “prioritize survival.” In the tech space, survival has meant reductions in force and restructuring, and now other top line expenses, like software, are in the spotlight. Suppliers are being asked for higher discounts, buyers are being asked to commit to upfront growth and scrutiny on every purchase is higher than ever.
The good news is that SaaS continues to grow like a daisy through a crack in the concrete. To keep that momentum, the industry needs to reduce friction in the procurement process. This is why we predict a movement toward standardized, transparent pricing. An infusion of trust and transparency on both sides of the table will allow more energy to flow into creating the best products, finding the best solutions and letting software empower teams to do their best work.
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