Recession-Proof Pricing:
SaaS Growth Strategies for Volatile Times

In this guide, we’ll look at strategies that have worked in periods of heavy inflation and negative growth, and we’ll outline pricing and growth strategies built to handle any market.

Are we heading into the next great recession?

Maybe. Maybe not. (More on this later.)

Regardless, we’re facing a period of global economic instability, with slowed or negative growth and ongoing inflation.

So how should you adjust your growth and pricing strategies to prepare?

In this guide, we’ll look at strategies that have worked in periods of heavy inflation and negative growth, and we’ll outline pricing and growth strategies built to handle any market.

Pricing strategies to combat stagflation. Link to Register for this event happening August 24 11AM PDT and August 25 at 4pm CEST

I. Pricing During Inflation: Lessons from 2021

In 2021, inflation rates rose steadily around the globe.

This year, they continue to surge, with many countries seeing record highs. And economists are expecting global inflation to persist for a while.

In other words, your pricing and growth strategies need to take inflation into consideration for the foreseeable future.

To better understand which strategies may work well, we don’t have to look very far.

The previous 12 months provided us with a unique view into how SaaS and software companies fared in the midst of elevated inflation.

First, let’s take a look at the software market in 2021.

Software Inflation Slowed

High inflation rates and disruptions in the supply chain meant business budget cuts and changes in consumer spending. While global markets were in better shape than they were in 2020, we were all still in a recovery phase.

As a result, software companies were cautious with their pricing.

In June 2021, Capiche published a report that software inflation was lower than the U.S. inflation rate. At the time, the U.S. inflation rate was 5.4%, compared to an uncommonly low software inflation rate of just 1.4% — down from 2020.

Capiche monitors 100 software products to gauge trends in software pricing. They found that only 11% increased their price, 5% lowered their price, and the rest stayed the same.

“Your software likely didn’t get cheaper last year—but it also likely didn’t get much more expensive,” the report summarized.

Startup Growth Slowed

ChartMogul used data from their customer base of software companies to reveal a slowdown in startup growth last year (and this year, as well).

Companies with monthly recurring revenue (MRR) under $10K saw the deepest drop off in growth, as well as companies with the smallest average revenue per account (ARPA).

“As consumers felt the pain, growth initially slowed down for B2C companies i.e. those with lower ARPA. But recently, we are also seeing slowing growth in the B2B segment and startups with higher ARPAs,” the report reads.

Overall, we saw SaaS and software companies hesitating to raise prices and buyers hesitating to buy.

So was decreased growth inevitable?

Not according to our data.

Raising Prices Helped

To see what happened when companies raised their prices, we pulled a random sample of 271 global SaaS and software sellers using FastSpring to process transactions over the past year. We then looked at what happened to growth and revenue for companies that raised prices — and those that didn’t.

We found that 37% of  software sellers raised their prices over 10% between Q1 of 2021 and Q1 of 2022. And those that did increased their revenue by 20% to 33% more than companies that kept their prices the same.

1. Companies that raised prices grew 15% more than companies that didn’t raise prices.

When we looked at overall growth, we found that companies that raised prices in the last year on average saw 15% higher growth than companies that left prices unchanged.

Whatever churn a company experienced as a result of a price increase was consistently offset by the increased revenue generated by the increase.

2. The average price increase was 20%.

On average, companies seemed to choose 20% as the amount they increased their prices.

We saw the biggest increase in price for transactions over $500, with an average of a 34% increase.

Companies with less expensive products increased prices the least.

3. It didn’t matter where a company was headquartered.

There was no statistical difference in growth or revenue based on the location of the companies in our study. 

SaaS companies (and FastSpring’s user base in general) often have customers from all over the world, so this finding is consistent with our expectations.

In SaaS, it matters less where your company is headquartered. What matters is where your customers are located. And if your customers are all over the world, it pays to understand what’s happening globally.

4. B2B companies were more likely to raise prices — but the impact was larger in B2C.

Our B2B sellers were more likely than B2C sellers to raise their prices to offset inflation. In fact, 42% of B2B sellers raised prices in the last year — compared to 34% of B2C sellers.

Interestingly, B2C sellers that raised prices actually saw higher growth than our B2B sellers, even though B2C sellers were less likely to have raised their rates.

Companies with predominantly B2C sales that raised prices saw a 31% increase in their year-over-year revenue growth, while B2B sellers saw a 23% increase.

While intuition might suggest that B2C buyers would be more sensitive to price changes than B2B buyers, our data suggests the opposite, which may imply that B2C companies are more likely to under-price their products relative to their perceived value to buyers.

Three Takeaways From Our Data

As we looked through the data, three primary lessons stood out to us:

1. Increased revenue offset any increase in churn.

Churn is the major worry SaaS leaders have when considering a price increase. But for the companies in our study, the increased revenue from a price increase consistently offset any increase in churn.

In other words, companies that raised prices came out ahead, even if it cost them a few customers in the near term.  One caveat is that this analysis did not take into account the long term impact of a price increase.  If your company’s revenue growth strategy relies heavily on a “land and expand” approach (i.e. cross-sell/upsell more products and features to existing customers over time), the near term tradeoff of increased revenue at the expense of lost customers may not be a beneficial long term strategy.

2. Not raising prices meant a negative growth rate (when considering inflation).

For those companies that didn’t increase prices, we saw growth rates that were 5% or below, which is a negative growth rate overall when adjusting for inflation.

This was true across our entire sample of companies, no matter where they were in the world.

In other words, not increasing prices to respond to inflation was a riskier choice than raising prices — even when factoring in churn.

3. Increasing prices was an effective tactic in both B2B and B2C markets.

Raising prices was an equally effective tactic for both B2B and B2C sellers. Both saw double-digit growth rates when raising their prices in the last year.

II. Growth Strategies During a Recession: Lessons From 2009

To get a sense of what companies may expect in this upcoming downturn, let’s look back at 2009. The following section looks at three different data reports from 2009.

Don’t Rely On Outside Capital

According to Crunchbase data, venture funding decreased in 2009 for everything but seed rounds. In the U.S., Series A, B, and C round investments dropped 10% to 46%. 

Globally, while the number of companies raising seed funding increased, series A, B, and C round investments decreased between 27% and 28%. Crunchbase explains that one-third fewer early stage startups were funded in 2009.

Funding began to increase again in 2010, but it took until 2011 for the investment levels to bounce back to where they were in 2007.

“Today, as then, companies are advised to plan for two years without raising new funding,” Gené Teare writes for Crunchbase. “All startups have to throw out previous business plans, reassess expenses, sales projections and risks.”

Expect Decreased Valuations

Pulling from different data, venture capitalist Tomasz Tunguz saw a steady number of deal counts but smaller investments. Once again, seed rounds recovered the quickest, while series C was hit the hardest. Between 2008 and 2009, series C funding dropped 40%, from $14M to $8.5M.

Tunguz explains: “In a more challenging financial environment, startups typically burn less, so they grow less quickly. Slower growth means slower appreciation in company value, so the valuation multiple on ARR should be less. At least that’s my theory.”

 

Don’t Switch Your Differentiators

So who fared well?

Business professors Michael Greiner and Scott Julian studied data from 5,278 publicly-traded firms to see how they fared during the Great Recession. (And while this isn’t tech data, we still believe it’s relevant.)

They looked for how these firms differentiated themselves, whether it was by cost or a “pure differentiator” such as quality or service.

While cost differentiators were less likely to suffer from reduced revenue during the downturn, this was only true if they were cost leaders from the start. 

“When differentiators moved toward a cost leadership strategy such efforts did not help them. In fact, we found that changing strategy did not increase firm chances of surviving the recession, nor did it improve the firm’s revenues or its finances.”

Reducing their prices did not help: “Unless you are the industry’s low-cost leader, there will always be someone who can provide your goods or services at a lower price.”

III. Strategies for 2023 and Beyond

How long will high inflation rates persist? Will global economies go into recession?

The difficult answer is: Economists don’t know. 

On the topic of global inflation, economists at The International Monetary Fund published an article titled “Will Inflation Remain High?” that essentially concluded, “It depends on what central banks do.”

As for a recession, The World Bank isn’t predicting one, but it has sharply lowered its forecast for global growth in 2022:

Global growth is expected to slump from 5.7 percent in 2021 to 2.9 percent in 2022 — significantly lower than 4.1 percent that was anticipated in January. It is expected to hover around that pace over 2023-24, as the war in Ukraine disrupts activity, investment, and trade in the near term, pent-up demand fades, and fiscal and monetary policy accommodation is withdrawn. 

What does this mean for software sellers?

It means we can’t predict what will happen, so we need to explore and consider strategies that work under any market conditions.

Better yet, consider strategies that have market changes built into them.

We asked two FastSpring leaders, VP of Revenue Operations Brian McTeague and Chief Product Officer Kurt Smith, for their insights.

1. Test Willingness to Pay

How elastic are your prices?

SaaS tends to be overly risk averse when it comes to pricing. This happens because we underestimate people’s willingness to pay.

But what they’re willing to pay should be tested regularly by segment.

Regularly test pricing changes by industry or region — however you segment your customers.

2. Automate Price Increases

For multi-year contracts, include an annual inflation-based increase into your plans. Even when these agreements are found in a contract, companies don’t always enforce them. 

Consider running an audit to check whether agreed upon price increases are happening in your billing platform and, whenever possible, automate these changes.

3. Justify Price Increases With Increased Value

In all circumstances, if you’re raising your prices, tie it back to increased value for your customers. If you have a sticky product, customers will be willing to pay more if they see the increased benefit of your product to their company.

Bottom Line

The bottom line is: Don’t be afraid to raise prices, but always tie your choices back to customer value.

The trends we see suggest that increasing prices is an effective way to at least protect yourself from the negative growth many SaaS companies are struggling with in this environment of elevated inflation.

And it’s not too late.

If you haven’t raised prices, the difficult business truth is that right now is probably the best time to make a change.

Gaining new customers is only going to be more difficult in the coming months and years.

FastSpring Helps SaaS Companies Go Farther, Faster

FastSpring helps SaaS and software companies grow faster. As a merchant of record, we take responsibility for every part of your payments process — including sales taxes, VAT, payment compliance, fraud detection, payment processing, localization — and more. Our goal? To free you from the complexity of payments, so you can get back to doing what you do best — building great software.

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