SaaS is still open for business, but it’s going to take longer to buy and sell
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 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.
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.
