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The tech world is no stranger to change. Whether creating change or responding to change, we all thrive in a constantly changing environment. But the shift that has taken place — from industry pandemic success to mass layoffs in 2022 — has brought whiplash to even the most seasoned tech workers.
Google, Apple, Amazon and Facebook revenue in Q2 2020 $38 billion in profit. Two years later, according to Crunchbase, approximately 41,000 employees By early September 2022, companies in the U.S. tech industry have laid off workers. Why? Because a number of factors, including inflation, rising interest rates and post-pandemic growth deceleration, are causing investors to shift from company valuations based on growth potential to valuations based on profitability and cash flow.
This is forcing tech companies (mostly with a growth mindset from the pandemic) to recalibrate. The list of companies laying off workers shows the scale of economic concerns across the industry.It includes heavyweights such as Netflix, Robinhood, and Better, the latter two performing astoundingly 30% and 50% of employeesrespectively, as described in the Crunchbase article cited above.
So far, most of the conversations surrounding these layoffs have been led by this article, focusing on the market, investors, companies, and affected employees. No one seems to acknowledge that these layoffs will have an impact on customers, especially small and medium-sized businesses (SMBs) that are SaaS customers.
While enterprise SaaS customers shouldn’t feel little changed from these layoffs, SMBs are likely to bear the brunt. I’ll go into more detail below, but the simple explanation is: most SaaS companies aren’t built to serve SMB easily, and the more effort goes into it, the harder it is to accept the marginal ROI of these accounts as wallets are receiving tight.
So as companies pour out their unit economics, customer-facing teams serving SMBs will be slashed, leaving brick-and-mortar customers in the dust. As a result, SMBs need to be more aware of who they buy SaaS products from.
The unit economics of it all
SaaS companies don’t try to fail their SMB customers. But when they create complex products and/or processes that need to be regularly helped get customers up and running, they also cannot ensure the success of their customers (or themselves). It all boils down to unit economics.
Let’s say an SMB customer buys a one-year SaaS subscription for $5000, and an enterprise customer buys one for $100K. If it costs the SaaS company about $5,000 to close a deal, they’re recovering the fees and making a decent profit from enterprise customers, while immediately losing money on SMB customers. Given the cost of configuring, deploying and enabling customers to use complex products, the process involves an ecosystem of employees who are burning cash for smaller customers.
These companies hope to make this money back as SMBs expand and buy more products from them. But when you’re assessed for profitability, that’s a gamble that few companies are willing to take.
This is what leads companies to focus on higher annual contract value (ACV) at these times, even though they are much smaller in number. Because SaaS companies make money from them immediately — by forgoing serving all $5,000 worth of customers and reducing the people responsible for those services — they save money immediately.
Blakes, announced in June They are abandoning their small business customers, which is a great example of a company doing this kind of precise calculation in order to improve profitability.
Unlike Brex, companies that control custom development and support won’t necessarily abandon their SMB customers entirely. However, with the new driver of profitability, the odds are high that these customers will have to figure out the product themselves.
What SMBs should look for with a SaaS offering
Current economic pressures are unlikely to change the way most SaaS companies serve SMBs. Therefore, it is wise for SMEs to adjust their buying criteria accordingly. Here are some of the things they should be looking for:
1. Self-service based products and services. If a company offers a self-service product, it has traditionally been able to provide a great experience for small selling customers without one-on-one assistance. It’s using cheap and powerful configuration and deployment options to get smaller customers up and running. Self-service also enables the company to support a large number of small and medium-sized business customers, which means it has honed the service it offers.
2. The ability to confirm that the tool is suitable before purchasing. It’s a good sign if SMB customers can test a product before committing to it with a free trial or freemium subscription. On the one hand, the company says it has enough confidence in its product that it believes using it will convince customers to buy. On the other hand, customers can experience the product and feel confident in their decision to buy or leave.
3. A frictionless buying experience and a strong reputation for customer support. SMEs should look for Simple, convenient and fast buying experience, as this may indicate that the company is used to serving customers effectively, especially small ones. A company’s customer support reputation may be more important. If a company’s support is praised for being responsive and providing helpful, timely assistance, it means the company has carefully built a support infrastructure for low-touch customers like them who will solve their own problems.
There are many lessons to be learned from the massive layoffs of the past few months, especially for SMEs. While SaaS companies are unlikely to change their approach to serving SMBs, SMBs should change what they look for in a SaaS provider. By finding companies that offer a top-notch self-service experience and still generate profits for the company, SMBs will reduce their risk of being fired when the next period of economic uncertainty inevitably arrives.
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