The “Great Restructuring” is ongoing, with Layoffs.fyi reporting 80,000 job losses in the tech sector in January 2023 alone. This accumulates to a total of over 230,000 job cuts across more than 1,000 companies since 2022. Despite the bleak headlines, the Software as a Service (SaaS) sector remains robust, showing continuous growth. Gartner projects an 11.3% increase in software spending this year, but based on our internal data, I am more optimistic.
Data from the last quarter of 2022 and the first quarter of 2023 indicate sustained increases in software spending and new purchase inquiries. Our analysis covers over $2.5 billion in SaaS transactions from 18,000 deals involving 2,500 suppliers, leading us to forecast an 18% rise in SaaS spending for this year.
However, the software market faces significant hurdles due to layoffs and the broader economic uncertainty affecting both buyers and sellers.
In conclusion, the SaaS market remains active in 2023, but purchasing and selling processes are expected to slow down.
A flat renewal is the new “upsell”
A flat renewal has become the new “upsell” in the SaaS industry, a direct result of the extensive layoffs in the tech sector. These layoffs have led to a substantial reduction in seat licenses, with a quarter of a million job cuts potentially translating into the loss of tens of millions of seat licenses for SaaS providers. Despite this, some SaaS categories are experiencing notable increases in average contract value (ACV). For instance, cloud data integration products like Fivetran and Celigo have seen an 82% rise, mobile device management products like Jamf and Kandji are up 84%, and project management tools such as Asana and Monday.com have increased by 78%.
However, it’s anticipated that SaaS vendors will generally face a contraction rather than expansion at renewal time. The industry should brace for a slowdown in both growth rate and share of wallet (the proportion of a customer’s spending allocated to a specific software versus competitors). In efforts to recover lost revenues, some suppliers have introduced renewal uplifts as high as 20%, a significant jump from the usual 3%-5%. Unfortunately, many customers are currently unable to accommodate such steep increases.
For SaaS vendors, recognizing that maintaining current subscription levels in this economic climate is a significant achievement will be crucial for stability. Embracing the concept of a flat renewal as a victory will be vital for adapting to the current market realities.
Mitigating the Impact of Layoffs on Purchase and Renewal Cycles
Over the last year and a half, renewal cycles for SaaS products have consistently averaged above 60 days. The final quarter of 2022 marked a significant improvement, with the renewal cycle time dropping by 11% — from 63 days in the third quarter to 56 days in the fourth.
However, the trend of continued layoffs and organizational restructuring is expected to reverse these gains in 2023. Early data from the first quarter supports this, showing a slight increase in renewal times to 57 days, and a 10% increase in the duration of new sales cycles to 46 days.
A SAP study found that 55% of large companies (with over 50,000 employees) report that staffing shortages have significantly slowed their procurement processes. Furthermore, two-thirds attribute delays in purchasing decisions to the challenges of coordinating increasingly distributed teams.
To address these issues, buyers are turning to technology to streamline their procurement processes. Automation tools are proving invaluable for gathering and sharing product data, managing renewal deadlines, and facilitating decision-making, regardless of geographic location.
Scrutinizing Software as Rigorously as Personnel Decisions
During economic prosperity, companies often expand their workforce extensively. Similarly, tech budgets are scrutinized more closely during downturns, revealing a fragmented and often unchecked growth of software stacks. This growth has been spurred by large budgets, low interest rates, and spending outside traditional IT channels.
As of February 2023, nearly half of all software installed by companies remains unused by employees. Going forward, it is crucial that any software purchase or renewal must not only meet essential functionality requirements but also show a quick and tangible ROI. Analysis of SaaS deals from 2020 to 2022 shows a significant shift: only 16% of deals were connected to revenue generation in 2020, which increased to 31% by 2022 as companies tightened their fiscal belts.
Preparing for the Year of the Price Hike
In recent years, the trend away from multi-year contracts has coincided with a rise in average contract value (ACV) at renewal for critical and “sticky” software categories like CRM and email. This reduction in longer-term commitments and the consequent drop in spending share for top-selling categories sets the stage for inevitable price increases, particularly among market leaders.
SaaS vendors are justified in raising prices to offset the higher costs brought on by inflation. Moving forward, we expect price increases to continue, especially from major providers deeply integrated into customer operations and workflows. However, smaller and less critical SaaS providers may find themselves facing more challenging negotiations and renewals.
Buyers can brace for these price hikes by:
- Using technology to apply a cost vs. benefit analysis to software evaluations.
- Identifying areas of overspending, software duplication, and gaps in their tech stacks.
- Ensuring they review at least two additional vendors for every software component, which becomes increasingly important in a tough economy.
David Sacks, a board member, emphasized the need for companies to “prioritize survival” in his widely viewed tweet. In the tech sector, this means not only workforce reductions but also stringent management of top-line expenses like software. The demand for higher discounts and more stringent scrutiny of purchases is rising.
Despite these challenges, the SaaS sector continues to thrive, reminiscent of a daisy growing through a concrete crack. To maintain this growth, the industry must focus on reducing procurement friction and moving towards standardized, transparent pricing. This approach will foster trust and transparency, energizing the sector to create superior products and solutions, thereby enabling teams to perform optimally.