Managing your customer base begins with proper segmentation (have you done that?), which will give you the ability to profile which logos or types of accounts will be most at-risk in a downturn. While every cycle is different (e.g. tech was a terrible segment to sell into during 2000-2001, but much more stable by 2007-2008), you can use the following questions as general guidelines to evaluate risk:
• Industry: How discretionary is the customer’s product? How did they (or a comparable business) fare in the last downturn?
• Size/stage: Is this a small business that will be under a budget crunch quickly? Or a VC-backed startup that may face pressure from investors to get to profitability?
• Geographies: Is the downturn more acute in one part of the world than another? What is the risk that it begins affecting customers in other geographies?
• Functional Group: If your product is mostly used by a particular customer function, how at-risk are they for budget cuts? Is your primary contact / champion likely to be laid off?
Once you’ve completed the above exercise, you will be able to identify which of your customers will be at an elevated risk for churn and work to get in front of any potential issues. This is a great time to be especially responsive to their requests, emphasize how your product is improving their processes, or even – for more strategic accounts – consider financial retention mechanisms like future contract discounts or more lenient billing cycles.
In addition to retention issues, your current customer base will likely be more reluctant to upsell during a downturn. For companies where land-and-expand is a core go-to-market strategy, consider doubling down on the retention mechanisms above for all accounts, or even prolonging your sales cycle to get more users on board up front.
Generally, customers will be harder to acquire during a downturn. The ones you do land will require longer sales cycles, higher CAC, and potentially lower-value contracts, all of which can negatively affect your business (see Your Budget in a Downturn for tips on how to prepare). While it’s always good to demonstrate the ROI of your software on saving money or saving time, this is critically important during a downturn as anything that seems discretionary will likely be shrugged off for lack of budget. This is especially true if the prospect is in a risky market segment, where it may be better in many cases to simply deprioritize these customers for the time being given the difficulty of the sale relative to the expected value.
So, what do you do when your customers run out of money?
Well, you could always pivot into vertical SaaS for bankruptcy attorneys and restructuring consultants. But assuming that’s not an option, expect your customers and prospects to be hurting as much – if not more – than you are during a downturn. Sales dry up, budgets get compressed, and before you know it, your favorite customer is saying “it’s not you, it’s me.”
A downturn will have dramatic effects on your ability to win new business, retain existing customers, and drive meaningful upsell. That said, you can weather the storm and continue to grow with proper management of existing customers and prioritization of new prospects.
Once you’ve identified which prospects are most likely to be hurting in a downturn, you should dramatically deprioritize prospects in these segments, given the likely longer sales process to acquire a disappointing or risky account. If your business model is such that you’re locked into one space (e.g. you’re a vertical SaaS company), in the short term you will need to adjust budgets to reflect the lower likelihood of winning a deal and diminished lifetime customer value. Long-term, companies overexposed to a certain segment may even consider adapting their product to an adjacent space (e.g. upmarket, a new industry) that may be less affected by the downturn.
By the time renewal comes around, there should be no doubt that your product is delivering value, and that your team is working hard on your customers’ behalf. This is doubly true if the customer is in a high-risk segment. You can get in front of any potential problems by investing in processes and technology which maintain customer communication, track usage across your customer base, log bugs / requests, etc. and help you figure out who is using your product effectively and who needs more support to avoid churning.
If your customer is under-resourced and starting to purge every business expense that isn’t nailed down, they may conclude that they don’t have the time, money, or manpower to go through the onboarding process. To avoid getting a signed contract pulled out from under your feet, focus on keeping this window as short – and ideally as hands-free for the customer – as possible.
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