With the impending recession, the tech industry must navigate a challenging landscape. Simon Kucher have developed nine proven actions that will help B2B tech companies build a strong future while managing the current crisis.
The economic downturn is reflecting sharply in the technology industry. While the market thrived during the pandemic years, the situation reversed in 2022 caused by inflation, higher interest rates, and uncertain economic conditions, among other factors.
Now as client procurement teams tighten the wallet and become increasingly cautious, tech companies must prepare themselves to navigate the looming recession.
Recent macro trends in the technology industry
The economic slowdown, workforce reductions and fundraising challenges are the three biggest headlines we have been observing in the tech industry recently.
The NASDAQ Tech 100 Total Shareholder Return (TSR) was down 40 percent in 2022, compared with an average annualized TSR of 30 percent between 2017 and 2021.
Source: Simon-Kucher analysis; Investing.com; Financial Times; NASDAQ
Additionally, the slowdown is affecting the private markets, with private equity (PE) and venture capital (VC) firms hesitating with investment. The amount of money flowing into startups globally declined by a third in 2022, from 775 billion US dollars to 478 billion dollars.
As a result of the economic uncertainty – staff layoffs have been a common theme over the last year as companies look to extend their financial runways.
Current B2B tech market challenges
Cost/margin pressures
Sustained high inflation is leading to increased expenditure and margin pressures. Coupled with high interest rates and lower PE/VC valuations, companies do not have the capital available to invest in new products or drive inorganic growth.
Reduced number of customers
Since the pandemic fuelled demand spikes for technology and e-commerce companies, there has been a significant market correction. This alongside budgeting pressures has led to the lengthening of sales cycles as customers delay decision making.
Decrease in price realization
As enterprise customer procurement teams are under increasing pressure to reduce spend on the vendor base, there is growing scrutiny to defend price. Furthermore, there is also a rising churn risk from smaller customers with lower budgets who could be looking to cancel subscriptions or downgrade to save cash.
Nine proven actions for navigating an economic recession
Trying to look ahead during challenging times can be difficult, but it’s imperative to re-think strategy at this time, and adapt accordingly.
We have developed a pricing and sales framework at Simon-Kucher, specifically for B2B technology companies to help you think through this:
Offering strategy
- Adjust value proposition messaging
Since customer needs can change quickly, companies must adapt their value proposition to align with their customers’ new purchasing criteria. Some steps that can be taken include gathering customer feedback to adjust offerings to ensure they are still focusing on the most relevant needs.
- Offer less expensive alternatives
During a recession, price trumps quality. However, reducing prices indiscriminately and without reason can hamper price integrity. Instead, a less expensive alternative that is justified by some reduced quality can be offered to customers.
- Rationalize the product portfolio
When looking to reduce the cost base, it important to understand on a product/module level the relationship between ARR generated and cost to serve. This may lead to some potential actions on the long tail such as price increases or even sunsetting.
Monetization strategy
- Pinpoint churn risk and implement surgical pricing
Companies must segment their customer base and identify customers who are at high-risk of churn. Using this segmentation, they can then develop a targeted pricing and concession approach to better retain and grow MRR
- Increase concession discipline
Offer new policies as negotiation strategies instead of reducing prices. They could include free cancellations, loyalty credits, order efficiency discounts, etc. While it’s critical to develop concessions that benefit company and customers, emphasize that these are limited to a certain period.
- Adapt pricing model
Getting the right pricing model is always crucial, but more so during a recession when there is a heightened focus on balancing price with value. In certain scenarios, consider developing a carefully ringfenced transactional model for low-volume users while keeping high-volume customers on a subscription model at price points attractive to each group.
Sales operations
- Drive sales operating model efficiencies
During a recession, it’s critical to adjust sales model to focus on customer retention and expansion rather than pursuing new clients. Companies can also re-align their processes and improve their data and sales tools to support this new focus, whilst also driving through sales efficiencies.
- Refine sales targets and incentives
Cultivate a different sales incentive scheme to reward and motivate the team by shifting the focus to expansion and retention ARR. It’s important to think about setting short-term goals and regularly changing targets.
- Utilize behavorial psychology
Behavioural economics can be leveraged to increase conversion rates as customers advance through the sales funnel. Direct the suitable activity toward the relevant target for optimal results.
Be part of a competitive B2B tech market
Attuned to changing markets and customer needs but don’t know where to start? Recession-proof your company with some help from our experts.
Navigating an economic recession is never easy, having an actionable strategy in place will prepare you for challenges.
Our experts are equipped to help you take immediate action to adjust your B2B offerings today and fuel growth in the long term.
Reach out to us today!
