Home > Marketing > 7 ideas explaining why the B2B SaaS sector is sluggish right now

7 ideas explaining why the B2B SaaS sector is sluggish right now

Too many B2B SaaS companies went after ‘bad fit customers’ under a mandate of ‘growth at all costs’ – along with these other trends – is the cliff notes on what’s thwarting sales and marketing in the tech sector

In the years following the dot-com bubble, I had the good fortune of representing a $180 million venture capital (VC) fund (they are much bigger now). It was a long-time client of my employer, a PR agency, and as such, I also represented one of their startup portfolio companies.

We did well from a PR perspective for both companies. Yet the challenges with the startup were insurmountable in that sector. It eventually closed, and we lost them as a client, even as we hung onto the VC firm.

And the VC firm was fun to work with. The team was so insanely smart; it was working with those people that motivated me, despite having a Master’s degree, to go back to school at night and on weekends to earn an MBA.

They also understood PR. I could always get 20 minutes to brainstorm or work out a pitch. That translated into a ton of coverage for the firm, even as other firms were buttoning down the hatches to weather the downturn.

It was great for media pitching, and we landed lots of interviews. I’ll never forget one interview we landed about the state of VC investing. At the time, deals across the sector had dried up. For context, recall that “irrational exuberance” was a term coined by the then Chair of the Federal Reserve Alan Greenspan.

Reporter to VC: “How about you? Anything look interesting? Are you getting any deals done?”

VC to reporter: “Lot of things look interesting, but not too interesting.”

Of course, that comment made the story. And as I look back on those times, I think the economy in B2B SaaS feels reminiscent of the dot-com bubble (failed unicorns are arguably a product of irrational exuberance).

Business has slowed, and while everyone puts on a brave face, when you talk to folks one-on-one, many will admit that, yeah, things are not great right now.

I’ve been doing a ton of sales work lately – and have even poked around at a few in-house jobs (I’ve always said I’d go back in-house for the right job). I’m effectively a business development representative (BDR) for myself. It’s thankless work but I’ve had some amazing conversations and it’s led me to several conclusions about the state of the market.

>>> Need an extra pair of hands? Sword and the Script Media can help with B2B marketing, PR and social media.

1. Growth-at-all-costs led many to close “bad fit” customers

The growth-at-all-costs mandate caused too many companies to pursue customers outside their ideal customer profile (ICP). As one technology CMO recently said to me in a private conversation (used the quote with permission, but said person wants to stay anonymous):

“I think the company had a ‘get huge quickly’ mandate and fulfilled it, at the cost of bringing on a bunch of customers (smaller, midsize) who don’t have the sophistication to use it well and who will churn. I have no idea of their capital structure, but – with changes to expectations – it may be hard to find the right exit. Two years ago. I didn’t think so. I thought they would become the new Salesforce over time. I don’t think they’ll crater, but I think they may be in for some very tough quarters to get that customer portfolio where it needs to be in terms of retention, churn, etc.”

That person and I were talking about a specific example, but as I thought about the comment, I think this is probably true for a lot of companies in SaaS. I’ve worked recently with a (separate) company that, in part, analyzes churn in SaaS, and they were calling this out in early 2023.

Think about a hypothetical software company that designed a product for the SMB space. If they sold that product to an enterprise, chances are they will be dissatisfied. That’s an overly simplistic example to make a point, which is, that process takes time to resolve. SaaS companies that recognized this and started cleaning it up last year (or earlier) have a leg up right now.

2. Companies are still digesting a tech spending binge

When the pandemic was recognized, the NASDAQ plummeted. Everyone braced for the worst, but then something wild happened: business wanted to stay open and needed communication and collaboration tools. And business spent lavishly on technology.

Now we are through the pandemic, and businesses are still digesting all the tech they purchased. At the same time, many are struggling with corporate real estate leases, even as their offices remain largely vacant. This is putting a lot of pressure on the operating budget.

Work has changed forever. There will be a need for some office space, but getting that right is going to take some trial and error. Since corporate leases tend to run over a time – five or 10 years is not unheard of – it’ll take some time to right-size.

3. Many of the companies founded were really just features

An experienced sales executive gave me this idea. As I understand it, he realized this when being recruited to join other startups and build a sales organization:

Many of the “businesses” founded over, say the last 10 years, or the longest period of economic growth in recent American history, aren’t really businesses; they are merely features. Many are good features and useful in their own right but not enough to stand on their own and incapable of independent scale.

When I look at the thousands of companies on the 2024 Martech Landscape, this definitely seems true. It’s probably true in other sectors as well.

Find a trend, pump a lot of money into it, make a lot of noise in the market and hope to get acquired. I When it works, it’s great, but when it doesn’t the industry has to go through some painful moments to get it out of our collective system.

4. B2B marketing in SaaS has over-promised for years

I thank Jon Miller for putting this idea in my head. He’s been writing a lot about how B2B marketing needs a makeover.

One of his observations is that marketing is harder – and while the economy is a factor – he wrote recently:

“But I think it’s deeper than that. I think that years of too many emails, overly promotional content, aggressive meeting requests, gated pricing, etc. — all driven by overly ambitious targets and relentless pressure to squeeze more leads out of ever-smaller budgets — have poisoned the buyer experience and damaged the traditional playbook beyond repair.”

I think he’s right. As a marketing community, we’ve cried wolf too often and the market has become desensitized to it.  An audacious email subject line that had an open rate of 60% in 2019, has an open rate of “marked as spam” today.

I believe the answer is to be steady, pragmatic and educational. Say it like it is without the hype and you’ll stand out – because so few tech companies do that today.

If you aren’t following Jon, I recommend it: LinkedIn or Twitter.

5. Interest rates and government debt

Interest rates are a complicated topic. It’s wrapped up in inflation and a whole bunch of other factors. While most people focus on the Fed’s overnight lending rate, and it is a widely watched benchmark, another interest rate to watch is 10-year Treasury bills. As of Friday, it was sitting around 4.2%

The idea is the United States Treasury is the most secure financial instrument in the world, so lending money to the government is free of risk.  That number is used in financial markets to determine the “risk-free” rate.

In other words, you can earn 4.2% interest on a loan with virtually no risk. If you are willing to take on a little more risk, you can easily earn a higher rate (the bond market is an order of magnitude larger than the stock market).

That’s the calculus that investors have to make. Should you plow a bunch of money into a private investment for equity on which you could lose everything – or make a loan and be first in line for repayment in bankruptcy court?

The other factor that people don’t realize is that the government competes for loans too. Interest on the U.S. debate alone is about a trillion dollars a year, so the government needs to borrow more and more. That sucks capital out of the market and keeps rates higher.

6. Presidential and political uncertainty

One thing businesses don’t like is uncertainty – and the current Presidential election in the U.S. is very uncertain. Neither candidate seems to have a majority which may signal that many Americans, again, are voting against the lesser of two undesirable choices. Each choice will have a very different impact on business. Nobody wants to invest in strategic projects until they know which direction the Administration is headed.

7. Marketing budgets are over-indexed on performance

Measurement has long been the Achilles Heel of marketing. This has caused a misguided backlash against spending marketing budgets on anything brand-related and marketing communications, in favor of “performance marketing.”  Performance marketing usually means spending a ton of money on tactics with a trackable CTR like email, social ads and PPC.

This is misguided in B2B because most buyers are making decisions long before they ever talk to sales. In other words, you miss the opportunity to shape perceptions and ideas if you invest nothing in marketing communications. So even if you do get lucky with the spending on performance, and find a ready buyer, their perspective has likely been shaped by your competitors.

Glimmers of hope for B2B SaaS

There are some glimmers of hope.

First, in my experience, and I’ve lived through a few of these downturns, B2B tech is the first sector to take a beating, but also the first one out. SaaS companies that addressed their pain points in 2023, are starting to look at growth again. Those that didn’t are going to have some hard decisions to make in the second half of this year.

Second, the European Central Bank has already cut rates and the Fed seems to be hinting at one projected cut this year – provided inflation continues to slow.

Third, businesses are finding a budget for marketing. The idea of “profitable growth” has been floated as counter-culture to “growth at all costs” but the problem is, it just doesn’t scale like investors want. Growth requires marketing investment and companies are starting to poke around again – I see it in the volume of inquiries I’m starting that are beginning to pick up.

There’s a huge opportunity for those SaaS companies that come out with savvy, adequately funded and well-planned marketing effort this fall.

>>> Need an extra pair of hands? Sword and the Script Media can help with B2B marketing, PR and social media.

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Image credit: my own

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