As we head into the final stretch of the year, here’s a look at some of the top operational and business trends that we are hearing about. Most SaaS and Software companies are starting to gear up for end of the year budgeting and planning exercises. Part of that exercise requires forecasting both the close of the year, while also considering how a company will evolve over the coming year – what is changing and what is not. Here are a few of the trends that we are hearing about from CFOs, investors and lenders:
Flexible pricing models and payment terms:
A couple of things are happening here. Many companies lost a little ground during March and April and are now trying to make up for lost time. They need to end the year with strong numbers and doing everything possible to close as many contracts as they can before December 31 or January 31. Many are experimenting with changing subscription lengths to accommodate new customers and conversely, extending contracts beyond 12 months to lock in enterprise customers. Most enterprise SaaS companies had settled on at least 12 month/annual subscription terms, but now many are being more flexible about offering 3 or 6-month subscription terms where necessary. At the same time, some enterprise SaaS companies are working to lengthen subscription terms beyond 12 months where they can lock customers in now. Obviously, considerations need to be made about how any changes in pricing/packaging and subscription terms will affect retention rates.
In addition, SaaS companies are relying more heavily on data analysis to correlate pricing with packaging and customer segments to find optimal combinations that will keep net retention rates high, and keep sales cycles from extending out (something we were seeing a lot of in the sector in April and May).
Many SaaS companies are also being more lenient with payment terms, especially for customers in harder hit sectors of the economy. This seems to be especially true for companies selling in the SMB space as compared to large enterprise customers.
Rolling, dynamic budgeting/planning processes:
The rollercoaster of planning in 2020 is driving more software and SaaS companies to dynamic budgeting and planning. As we go into the last quarter of the year, on the one hand, companies have some momentum to estimate the end of the year forecast off of which the 2021 budget will be based, but on the other hand, does anyone really feel confident that they know what the world will look like in December? All the messaging from the budgeting and planning experts is about flexible and dynamic planning.
Most CFOs we speak with are recommending:
- Working with what you know now – it will never be perfect.
- Keep it iterative.
- If you didn’t invest time over the summer to improve your budgeting and planning processes, do it now.
- Do scenario planning – at a minimum, have a best case, worst case, and likely case version of the budget.
- Keep the lines of communication going, not just within the company but outside the company as well, with suppliers, customers, investors.
- Support your team. This budgeting and planning process will be like no other that anyone has experienced. And remember that your team isn’t just the Finance team, it includes the entire management team, including the ones who may drive you crazy looking for more analysis, but they are dealing with a lot of uncertainty as well. Be kind and laugh a lot.
Remote work isn’t going away
Most tech companies pushed in person work out until at least January, and now many are moving to either June or July, or whenever a vaccine becomes available. Plus, with most schools moving to a hybrid or remote model, parents and families are moving to lower-cost locations where there is room for everyone to work/play at home all the time. More skilled tech workers are opting to never go back to the office again.
Fun fact: real estate prices in Vermont, New Hampshire, and remote areas of Maine have been increasing over the past few months. Reports say that it is mostly people looking to move out of expensive cities for more space, plus second home purchasers who want to work remotely in beautiful surroundings with low COVID rates.
Most CFOs we speak with have revised all facility and office space plans. Many are setting assumptions of at least 25-30% permanently remote workers for the 2021 plan (not including traditionally remote workers like single-person sales offices).
A faster transition to digital worldwide is a good thing:
If you are in a market with a large TAM and small SaaS footprint, you’re probably already planning higher growth rates for 2021 and 2022. SaaS begets SaaS – the more customers get used to or are forced to use digital systems, the more they need. This is a partial explanation of why the U.S. stock market has been so on fire. Many segments are planning higher growth rates than they would have planned before COVID-19.
A faster transition to digital worldwide can mean more competition:
On-premises software companies are running to catch-up with the SaaS bandwagon. Vertical SaaS players should beware as there are more on-premises software companies in vertical markets than in horizontal markets, as they could maintain strong customer relationships and keep new SaaS companies out. More of those on-prem and hybrid companies are transitioning right now and will be fighting for market share.
In addition, PE firms have goals for how much money they need to invest by the end of 2020, and they may have fallen behind in March and April. They’ll have to be even more active to catch up by the end of the year to satisfy LPs, so expect an active M&A scene. In addition to that, with a hot stock market, some of the SaaS companies that were expected to IPO in 2020 and 2021 are expected to push to get out to the public markets before the end of 2020.
More M&A will lead to more consolidation, fewer point solutions, more platform, and suite plays.
Overall, this is a time of change, uncertainty, and creativity. All these trends will mean more competition in the sector, and often that’s when big changes come to both technology and business models. We will be doing an update of our 2020 benchmarking in the next month – stay tuned to find out more. Contact us if you want to make benchmarking part of your budgeting and planning process.