One of the topics we’ve discussed several times as of late is the declining renewal rates, and therefore growth rates, in cloud software. While a major driver of reduced renewal rates comes from layoffs, and the corresponding reduction in seats or user licenses due to fewer staff, a second major driver is the budget pressures and heightened expense scrutiny across companies.
As a software startup, it’s easy to say that a customer let go of 20% of their staff and their corresponding renewal value was roughly 20% lower (not counting escalations or price increases). This becomes more challenging when the renewal doesn’t happen (churn!) or the downgrade is more dramatic than the layoffs. In today’s climate, it likely means that the company chose not to renew because it wasn’t mission critical or the customer switched to a lower cost provider (another renewal blemish).
In software, we like to talk about must-have products vs nice-to-have products. Of course, it’s a continuum and not binary, but the most successful startups are in the must-have category and the vast majority of failed startups are in the nice-to-have category. Only, when times are good, it’s often hard to know just how much a must-have or nice-to-have a product is as budgets are loose and grow-at-all-costs is the mantra. The easy spending can make products look more must-have than they really are. Then, when budgets contract, the truth comes out.
This is especially challenging as many startups with nice-to-have products raised tremendous amounts of money over the last few years. After their own layoffs and efforts to conserve cash in order to push out raising another round, they’re getting hit even harder with renewal rates being lower than expected. Look for more investor scrutiny in future rounds to tease out what’s really a must-have vs a nice-to-have solution.
Entrepreneurs would do well to continually work towards making their products must-haves and staying as close to the customer as possible. Budget pressures are highlighting the true mission critical software apps, and many startups are finding out where they exist in the eyes of their customers.
Entrepreneur
via https://www.aiupnow.com
David Cummings, Khareem Sudlow
