How SaaS Companies Can Thrive in An Economic Downturn
Software-as-a-service (SaaS) companies can thrive in an economic downturn by taking advantage of platform payments to drive revenue and improve customer experience. This article outlines how embedded payments can increase revenue, lifetime value and potentially company profitability, all while providing a consistent cash flow to help the company weather any economic challenges.
Global markets have had a strong start to 2023, with major markets around the world posting gains throughout January. The Nasdaq rose 4.71 percent in the final week of January ahead of central bank rate decisions from The Federal Reserve. One might expect that markets may have cooled by now, with central banks worldwide tightening monetary policy since March 2022. However, current market performance and economic indicators such as industrial production, retail sales, the ISM manufacturing index, and the unemployment rate, to name a few, indicate that interest rates likely need to continue rising to slow the economy and curb inflation.
Of course, the prospect of an economic slowdown isn’t what SaaS company executives want to hear, but it may be the reality at some point throughout this year. Bloomberg’s 2022 survey of economists found that there is a 70% chance of a recession in 2023 in the United States.
If company boards and executives haven’t already, now is the time to strategize how to effectively get through what may be a challenging year for business. This article outlines how SaaS companies can thrive through an economic downturn by using embedded payments to build a new revenue stream and deliver wide-reaching long-term benefits across the organization.
Prioritize monetizing payments on your product roadmap
Your product roadmap is likely focused on continually improving your core offering to make the customer experience as seamless as possible. However, monetizing payments can not only drive new revenue for the business, but it provides long-term customer benefits too. These benefits include reduced churn and using payment data gathered over time to continue enhancing every step of the customer journey.
Like any new addition to the roadmap, it takes an investment of time at the outset to ensure functionality and a return on investment (ROI). The ability to increase revenue per customer by 2-5x with embedded payments can provide the consistent cash flow required to survive and thrive through an economic downturn.
When monetizing payments, companies earn a revenue share on every transaction processed. This generates a steady income stream while minimizing development and resourcing costs (if you choose a PayFac®as-a-service model where risk and technology are managed by your partner). It’s a win for your customers, who will enjoy a more seamless experience, and a win for your company, which will have a new revenue stream built on a task that already happens in the business every day.
Consider the numbers: decreased customer churn and increased lifetime value
Generating revenue from payments allows SaaS companies to lower the rate of customer churn and increase lifetime value (LTV). And by simultaneously improving these metrics, companies have the funds to either grow their financial safety net or make investments in driving further growth. For example, if payments could drive LTV up to an average of over $5,000 per customer, companies could hire outbound sales professionals to reduce reliance on channels such as referrals and/or paid acquisition through digital campaigns. While referrals and digital campaigns can drive growth, having the human capital to establish or grow an existing sales team can help SaaS companies secure new customers and large partnerships in an environment where organizations may be at risk of being too defensive in their strategy until the economy recovers. Alternatively, if you are running a product-led model, it may give you the revenue you need to be able to invest more into further developing your core platform.
According to the Harvard Business Review (HBR), the approach that puts companies in good stead to grow throughout and after a recession is that of progressive companies. These companies are selective about their defensive moves, primarily cutting costs through improving operational efficiency rather than immediately resorting to more drastic measures such as reducing headcount. Instead, these companies create new business opportunities by investing in R&D and marketing while also investing in new and better-performing plants and machinery. In short, amongst the 9 percent of companies in the HBR’s study that thrived following the global financial crisis, there was a prudent balance of defensive and offensive moves.
Monetizing payments is one way for SaaS companies to strike a balance between defense and offense by monetizing a process that already occurs while making a long-term investment in the company’s payments and data infrastructure. Apart from establishing a new revenue stream, this investment provides the resources to have a meaningful long-term impact on reducing churn and improving customer retention.
Consider the short and long-term benefits
SaaS companies can enjoy a range of benefits by monetizing payments. Not only do these benefits provide the security of consistent cash flow throughout a recession, but they also contribute to building long-term foundations for growth. Some of the other possibilities include the following:
- Earn revenue on every transaction: By partnering with an embedded payments provider, SaaS companies earn a percentage of every transaction processed on its platform. This can be done on a basis point model, where a certain number of basis points are earned on every transaction. It provides a predictable and steady income stream without the burden of compliance associated with becoming a PayFac®.
- Minimize upfront investment: Partnering with an embedded payments provider with a PayFac®as-a-service solution minimizes the investment in costly payment infrastructure and headcount resources to support your solution. And as a cost-effective investment, it lowers the risk associated with adding to your product stack.
- Increase engagement and retention rates: By making it easy for customers to complete transactions within your platform, it can increase engagement rates and boost customer retention.
- Improve customer experience: Embedded payments can improve the overall customer experience by making it seamless and convenient for platforms to offer payments-as-a-service. As a result, SaaS products become “stickier,” and upselling and cross-selling become easier, which drives increased brand awareness and growth through word-of-mouth referrals.
- Access to valuable data and analytics: Payment processing companies can provide valuable data and insights on customer behavior and purchase patterns. This can drive stronger commercial decision-making about pricing, product development, and marketing strategies, all of which are important to set the foundations for growth in challenging times.
- Strengthen profitability: An economic downturn can cause companies to attract lower valuations than in a growth environment. By monetizing payments, however, a SaaS company can increase its total addressable market (TAM) while increasing revenue, which can boost profitability and even funding interest. This especially relevant for vertically-integrated software companies that otherwise couldn’t have grown their TAM at the same rate without payments.
Grow a new revenue stream and weather the economic downturn with Payrix
The year ahead may be difficult for SaaS companies, but those who strategize now will be well-placed to weather the uncertainty. Partnering with a payments provider like Payrix gives software executives peace of mind that they can not only generate a new stream of revenue by monetizing payments, but provide a better customer experience too. In an industry where reducing churn rates and customer experience is key, working with a supportive team of payments experts is a wise investment in the company’s current and future growth prospects.
Would you like to learn more about how you can monetize your payments to not only weather an economic downturn but thrive through it too? Get in touch today to see how Payrix can transform your SaaS business.