Instant recurring revenues, high margins and a seemingly ever-expanding pool of other startups to sell to — not to mention the slow but steady march of digitisation of bricks-and-mortar businesses — made SaaS seem like the safe bet in tech.
But now the squeeze is on at venture-backed startups, and the same VCs who turned to SaaS for an easy win are now ordering their portfolio to increase runway and reduce costs — which means founders are being forced to think hard about which SaaS tools they actually need in tough times.
So, how is spending on SaaS changing, and which products are most affected?
Overall SaaS spend
According to research from SaaS subscription management platform Cledara, companies reduced their spending on software by 2.9% in December 2022, following a trend of a decline in growth of SaaS spending from August onwards.
The research — based on 199 of Cledara’s clients (mostly tech companies and scaleups) — was split into four quartiles, based on the overall spend of the organisation.
It showed that the smallest spenders (those who spend less than $31k a year on software) saw the biggest dropoff in the growth of their SaaS investment between May and December last year. The data supports the idea that smaller startups will be less reliable customers for software providers than larger companies through this tough economic period.
That said, software spending did recover somewhat across the board in January this year. Companies who spend more than $142k a year are actually increasing their spending on software at a higher rate than they were in May last year.
Cledara says: “This growth is a positive sign of recovery from the current economic downturn, with companies investing more in software tools and solutions.”
Which types of software are getting hurt in the downturn?
While overall SaaS spending might have recovered in January (1.3%), the rate of growth in investment in software is still down from May 2022 (7.3%).
Not all types of software tools are being affected equally. Cledara’s data shows that spending on SaaS tools for HR, analytics and product shrunk the most in the last three months, compared to the previous three-month period.
Software for IT and security and sales increased the most in that same time period — showing that “mission critical” tools, such as those that support generating revenue, are the most resilient in a downturn. The strong growth in design software also demonstrates the premium on standing out from the crowd in tough times.
Another set of data from SaaS payment platform Vertice, drawing on numbers from more than 1,000 software providers, compares the percentage of total SaaS spend, broken down by different types of tools, in January 2021 and January 2023.
From 2021 to 2023 the biggest increase, in terms of share of total SaaS spend, has been in sales tools (3.8%). Software products for marketing and productivity are also up, by 1.2% and 1.3% respectively.
The biggest drop-offs were in HR tools (2.2%), finance (1.4%) and customer success (1.2%).
Joel Windels, VP of marketing at SaaS management tool Vertice, tells Sifted that while sales and marketing platforms are growing fast, many companies are now also renegotiating contracts with software providers as they try to cut costs.
“The past 12 months have been tough on many businesses and SaaS now represents a significant chunk of the expense line. CFOs are poring over spend, looking for efficiencies,” he says. “That means re-negotiating software contracts, consolidating vendors and rebalancing their investments to become leaner and more competitive.”
So, while many software products are still resilient in tough times, it’s clear that spending priorities are shifting as business leaders become more focused on their bottom line. SaaS companies working in HR tech particularly seem to be in for a tough downturn, while sales products might thrive more than ever.