Why 2023 will be a make or break year for SaaS companies
And how to plan for it
Happy New Year and welcome to the first issue of 2023! I hope you had a good break and managed to get in some downtime — we spent the holiday period in my hometown London visiting my family and friends who I hadn’t seen for more than three-and-a-half years. It was great to be reunited!
I like to kick off a new year thinking about the key industry trends that will make or break the businesses I’m involved in and the clear standout trend for me in 2023 is market consolidation. It’s being driven by 4 things:
Category overcrowding — there are well over 25,000 SaaS startups, dozens deep in every niche, all competing for buyers’ attention and budgets. Software has eaten the world in many of these niches with only the late adopters and laggards remaining to be won as new customers.
Channel saturation — competition for attention has driven sales and marketing teams to overwhelm buyers with emails, phone calls, LinkedIn messages and ads, causing response rates to decline across all channels. It’s only going to get harder and more expensive for vendors to stand out.
Point solution fatigue — whereas customers bought into the promise of automation in the boom years of SaaS, they are now living the reality of managing multiple point solutions across multiple vendors. The pain of doing this was papered over by overstaffing in the boom years but has been brought to the fore by recent downsizing. Customers are looking to consolidate their business with fewer vendors to reduce this pain.
Cost scrutiny — budgets have been frozen or cut due to economic uncertainty, which is forcing customers to seek better pricing, identify overlapping functionality and consolidate with fewer vendors to save money.
In light of the drivers and the overall trend towards market consolidation, the top 3 things startups need to plan for in 2023 are:
Finding growth from existing customers
Finding efficiency in customer acquisition
Being realistic about exit options
1. Finding growth from existing customers
As customers look to consolidate their business with fewer vendors, startups can no longer rely on new logos to fuel growth. Instead, we need to find more growth from our current customers, which requires focusing on both the “software” and “service” aspects of “software-as-a-service”, rather than just letting the software “speak for itself”. There are 3 strategies to implement here:
Building multi-threaded relationships with your customers. Too many CS teams fall into the trap of spending all their effort on servicing the day-to-day user and end up losing touch with the broader buying team, only to find themselves scrambling to engage decision makers for the renewal. It’s essential to establish and maintain multiple points of contact with every customer throughout the customer journey. Use your ICP to identify the relevant persona matches at each customer, make sure they are added as contacts in your CRM, track your CS team’s activity against each contact and ensure your CS team’s goals include conducting a business review with all buyer personas at least twice per contract period.
Demonstrating recurring impact to all buyer personas. Recurring revenue is a direct function of recurring impact and recurring impact is the foundation for growing revenue because it positions you at the front of the queue to ask your customers, “what else can we do together?” Make sure your customer journey playbook is built around demonstrating impact at the end of your onboarding phase and in each subsequent touchpoint with your customer, both in-person and in-product. For a deeper look at this topic, see my earlier post on how to drive more growth from your existing customers.
Identifying adjacent problem spaces. Finding additional use cases that you can quickly solve with new products is the key to finding material growth opportunities, with the key word being “quickly”. Your chances of moving quickly are directly related to the extent to which you leverage your existing buyers, workflows, data and codebase, as doing so shortens your development timeline and sales cycle. Develop ideas for problems you can solve, identify customers with whom you are close and prepare discovery questions to validate your ideas and potential solutions. For more tips on this see my earlier post on how to empower your product team to unlock revenue growth.
2. Finding efficiency in customer acquisition
Channel saturation (along with media consolidation and salary inflation) has driven acquisition costs to all-time highs. The only way to fight this (without gobs of venture capital) is by focusing on quality over quantity, which comes down to doing 3 things:
Taking a reality-check on your TAM. Your target market is always smaller than you think and there’s nothing like an economic slowdown to shine a light on this. Focus on the customers you can realistically solve for with the product you have today. If you have Tier 1, Tier 2 and Tier 3 accounts, cut the Tier 3’s and take a hard look at the Tier 2’s.
Cutting underperforming channels. Every marketing team I’ve worked with over the last 20 years has active programs that bring in minimal leads but are reluctant to cut because “they don’t require any work”. The reality is everything requires work to maintain and importantly, consumes mental bandwidth. Use the 80/20 rule to identify activities that aren’t driving results but are sucking up your time and money and cut them. Pay particular attention to top of funnel programs—if the attribution isn’t clear, stop doing it. And focus on improving conversion before increasing volume.
Asking for referrals. Every marketing team will tell you that their highest value leads are “organic”; buyers who came to you through word-of-mouth, yet very few SaaS companies are set up to capitalize on the goodwill of their customers. Fortunately, we can learn from industries like financial services and real estate where referrals are the primary driver of growth and adapt their playbooks to SaaS. For a deeper look at this see my earlier post on how to ask for referrals.
3. Be realistic about exit options
The two best pieces of advice I ever got from a venture capitalist were from Alan Patricof, the legendary founder of Apax and Greycroft. The first was, “be a good steward of capital” and the second was, “be realistic about your exit options”. Most founders and CEOs find it easy to do the first by reigning in costs but find it harder to do the second as can feel like admitting defeat (even though its actually the opposite). To work through this its helpful to ask yourself 3 questions:
Are you a product or a feature? Overcrowding and point solution fatigue indicates that most SaaS companies are features. If you are finding yourself losing to competitors who have broader product offerings, it’s a good sign that you are a feature and should be looking for a home where you can be part of a product suite.
Who is the clear startup winner in your category? If it’s not you and you are not number 2 or 3, chances are you are going to struggle to survive in the long term unless you get very focused on a niche (see the point above about taking a reality check on your TAM) and can manage your costs accordingly.
Who are the big players looking to get into your space? Corporate M&A always picks up in economic downturns, as valuations soften, especially for companies who are not the clear winners in their categories. Start by identifying the big companies who are likely to enter your space through acquisition and then start building relationships with the relevant business unit executives to understand how they view the space, how they plan to enter and position yourself top of mind for when they make their build vs buy decision.
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