You're Not a Subscription Business.
Get a billing platform that is built for B2B complexity
Recently we had the pleasure of collaborating with Spendflo and Glenn Hopper, doing a webinar where we shared insights on what CFOs are doing in these changing market conditions. We find that these sessions are super useful for CFOs - knowledge sharing has become exponentially more important in an uncertain economy.
This blog is an effort to put in writing highlights of what we observe or hear from CFOs we work with. A disclaimer - we are not a research firm, but we have been speaking with dozens of CFOs, and gathered enough repeatable information to say something meaningful.
Minimizing Cost - Back to CAC
Let’s skip the obvious. For venture backed companies, everyone is concerned about cashburn and runway, that goes without saying. One trend we are seeing across the board and would like to highlight is an immense pressure on variable costs and unit economics.
Venture-backed companies are expected to show profitability, or a route to that, much earlier than they anticipated. Unit economics, a term that was put aside in the bull market, is making a comeback which is bigger than John Travolta in Pulp Fiction. CFOs we spoke with tell us that the majority of scrutiny on CAC and LTV.
Smart companies look at their entire Customer base, slice and dice it by customer size, geography, industry, and assess the quality of each vintage. CAC payback period has usually been in the 5-12 months range.
Companies are mainly slashing Sales & Marketing budgets, which forces companies to be more creative and cost efficient. We se teams doubling down on systems that really automate and integrate with parts of teh business. Other more manual or lazy acquisition strategies are being reassessed. This possibly marks the death of the paid demo.
Maximizing Revenue - Value Capture in Downturn
A reminder - the first-principle rule of pricing in Software is value-based pricing. It is a journey. When things change - think again, rinse and repeat. Value is the monetary willingness-to-pay (WTP), as the customer perceives it. The old cliche example is that the value of a can of Coke in a Walmart and a can of Coke on the beach on a hot summer day, are very different (try to think - what is your delta?).
The last part is where analytical people find it challenging, since value-based pricing has a strong human and psychological element to it. With Cost-Plus, for example, it’s easy. You slap a margin on your COGS/BOM, or whatever cost metric you choose and you’re done. The value-based price point is driven by the total economic value, the way the Customer perceives it. You do this by taking into account the Reference Value, which is the cost of the next best alternative, and the differential value - the additive delta.
Upgrade an Upsells to your Power Customers
Not all your customers place the same value on your products and services. A good way to think about this customer segmentation is with two parameters: WTP and Usage. In a downmarket, one tactic you might want to take is to focus on the High WTP/High Usage quadrant. These are your super customers, that you can upsell premium offerings to. Now, you might say that you don’t have resources to invest in products and services.
There’s a neat hack that we saw a couple of companies do. Adopt this framework - what value pockets you already deliver or can easily deliver to your Super Customers? What are they willing to pay for, that they are currently getting for free? For example, what if you provide Priority Support? Your Super Customers might be willing to pay for that, while others may be indifferent. You can do price differentiation between customers who are willing to pay to be bumped up, while the ones who are indifferent to Support times, get the same experience and nothing changes for them.
A final thing we’re seeing in the market is pricing models becoming even more complex. The ol’ revenue spaghetti is becoming even more complex in an uncertain market. Why is that? There are two pressures working here that surprisingly act in different directions at the same time.
SaaS companies adding Usage pricing - On one hand, buyers are demanding more flexibility and spend derisking. Buyers are asking to start small, and grow spend as they discover the actual product value. Consequently, pure SaaS companies are being pressured by customers to add Usage pricing. This is a strong trend that we see frequently.
Usage companies adding SaaS pricing - pure Usage companies find the downside of relying exclusively on usage pricing - volatility. In an uncertain market, naturally, churn increases by ten folds. Investors aren't happy with this, since they want to see stability. Remember that the original magic of cloud based software was the recurring element. Investors look for at least 60% recurring revenue in your revenue mix. VCs are putting pressures on their pure-usage portfolio companies to adopt recurring revenue models.
One clever example that we saw with one company is rethinking what can turn into recurring. Services are an inseparable part of a Sales led product. This company’s CFO identified that his company is selling support hours, and decided to experiment with turning Services into a recurring revenue. She did this through offering support hours wrapped inside a premium license tier. So, if you want to strengthen your recurring revenue, you might want to consider giving services, in a premium license tier.
In a volatile market, you can throw a lot of assumptions out the window. Speaking with colleagues has become ever more important. Yesterday’s best practices are no longer as valid. This is especially important for CFOs, as they evolved into mini-founders: scrappy as hell, more creative, helping with everything from fundraising to renegotiating contracts with customers and vendors. Tina Dimitrova, from Bain Capital Ventures, calls it the Chief Everything Officer.
In June 2023, we organized a CFO Roundtable with Stripe and Team8 Capital, with Sarit Firon, once a veteran Software CFO and now Managing Partner at Team8. We were oversubscribed with a full house with 50 CFOs. Let me tell you, the room was electric. Most SaaS Finance Leaders today are millennials who haven't experienced a downturn, which makes this knowledge osmosis invaluable. This is why we keep on asking CFOs and sharing learning within the communities we’re part of. We’ll keep sharing what we see in the market. You are always welcome to schedule a call with us to share insights and thoughts.
Explore Received's billing solutions for B2B software companies.
Get a billing platform that is built for B2B complexity