SaaS SOS: What you can do to save your SaaS business as the recession looms

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Interest rates are rising in the United States, a cost of living crisis is taking hold in Europe, and investor appetite is cooling around the world. In short, a global recession is likely. In the coming months, we can expect to see rising concerns and falling spending and we should be prepared for a ripple effect across all sectors, but particularly software.

There's no shortage of generic advice for businesses facing a recession, but generic advice is about as useful to founders as a handbrake on a canoe. My expertise is in software, a global market that is expected to reach $692 billion by 2025, so I conducted an analysis of over 23,000 subscription and Software as a Service (SaaS) companies to find out what the data tells us about the state of the market. I also wanted to provide some specific advice that software companies can follow to prepare for the coming downturn.

Overall, two worrying trends suggest the trouble ahead for SaaS businesses, with the growth of subscription-based e-commerce and SaaS B2B businesses faltering for the first time since their unprecedented growth during COVID-19 .

SaaS companies should take these trends as a warning sign. If they act now to solidify their fundamentals, they can ensure they are in the best possible position to weather the storm and emerge stronger than the competition.

Let's start with the consumer software market.

Consumer-focused software companies, such as subscription-based e-commerce companies, tend to be more market-aware because consumer behavior changes faster than business behavior. This makes it a good early indicator of upcoming market trends. This chart breaks down the growth of e-commerce businesses, with their monthly recurring revenue tracked since January 1, 2019.

As you can see , the market has accelerated massively throughout the pandemic and with the help of economic stimulus payments (or "stimmies"). This has led to a market increase equivalent to 10 years of standard growth.

But now everything is changing. As COVID subsides, consumers are moving away from nice-to-have, but not essential, subscription products. Moreover, as people try to maintain a “stimmy” lifestyle, despite economic stimulus packages drying up, a consumer debt bubble is looming.

So what does all of this mean for software vendors?

At best, consumer software vendors' growth rates will remain flat, and monthly revenues will start to creak:

At worst , a contraction will occur as sales are offset by an increase in churn rates (the rate at which customers are lost). With steady sales and turnover already up 22% in subscription boxes, 16% in subscription and savings, and 11% in consumer SaaS, it's clear that consumer businesses are not are simply not replacing their lost customers fast enough.

That's the question, and B2B SaaS is where things start to get really interesting. SaaS B2B has seen unprecedented levels of growth during the pandemic, with revenue more than tripling over the past two years. It's like Christmas comes early and - stays.

However, B2B SaaS has a hidden problem similar to subscription e-commerce: unsubscribes and downgrades. Although growth is occurring - indicating that new...