Why SMB Customers Are The Collateral Damage Of Tech Industry Layoffs
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Technology is no stranger to changing the world. Whether creating or responding to change, we thrive in fluctuating circumstances. But what’s happened—from the pandemic success of the industry to the mass layoffs of 2022—is giving even the most seasoned technologists whiplash.
In the second quarter of 2020, Google, Apple, Amazon and Facebook generated revenue Profits are $38 billion. After two years, according to Crunchbase, approx 41,000 employees US-based companies in the technology sector have laid off as early as September 2022. Why? A number of factors—including inflation, rising interest rates and post-pandemic growth slowdown—are leading investors to base valuations on profits and cash flows from companies that value growth potential.
This has forced tech companies, mostly in a growth mindset from the pandemic, to rebuild on a dime. The list of companies laying off workers shows the level of economic anxiety running through the industry. It has heavy hitters like Netflix, Robinhood and Better, the latter two of which are amazing 30% and 50% of their workforcerespectively, as reported in the Crunchbase article cited above.
Much of the conversation surrounding these layoffs has so far been oriented, as in this article, to focus on markets, investors, companies, and affected employees. No one, it seems, recognizes the impact these layoffs will have on customers, especially small to medium-sized businesses (SMBs) who are SaaS customers.
While enterprise SaaS customers should experience little or no change as a result of these layoffs, SMBs will likely suffer. I’ll go into more detail below, but the quick explanation is this: most SaaS companies aren’t easily built to serve SMBs, and the harder it is, the harder it is to accept the marginal ROI of these accounts as a purse strap.
So while companies are pouring over their unit economies, customer-facing teams are serving SMBs that brick-and-mortar customers will be left in the dust. So it’s up to SMBs to be more aware of who they’re buying their SaaS products from.
The Unit Economics of It All
SaaS companies aren’t trying to set their SMB customers up for failure. But when they create complex products and/or processes that require constant hand-holding to move their customers forward, they don’t ensure customer (or their own) success. It all comes down to unit economics.
Let’s say an SMB customer buys a year-long SaaS subscription for $5K while an enterprise customer buys one for $100K. If the SaaS company costs around $5K to close a deal, they are recouping their costs and making significant profits from their enterprise customers while simultaneously losing money to their SMB customers. Considering the cost of configuring, deploying and enabling customers to use a complex product, a process that involves an ecosystem of employees – they’re burning a lot of cash on their small customers.
As SMBs expand, these companies expect to recoup that money and buy more from them But when the valuation is on your profits, it’s a gamble few companies are willing to make.
This is what leads companies to focus on higher annual contract values (ACV) at these times, even if they are much lower. Because SaaS companies are making money from them immediately—and by giving up services to all their $5K customers and reducing the staff responsible for those services—they’re saving money immediately.
Brex, which was announced in June That they are ditching their small-business customers is a great example of a company making this exact calculation in an effort to increase profits.
Unlike Brax, companies that rein in custom development and support aren’t completely abandoning their SMB customers. But, with the new drive toward profitability, these customers are more likely to figure out the product themselves.
What SMBs Should Look For With SaaS Products
The economic pressures of the moment are unlikely to change the approach of most SaaS companies towards serving SMBs. It is therefore wise for SMBs to adjust their buying criteria accordingly. Here are a few things they should look for:
1. Products and services that operate on a self-service basis If a company offers self-service products, it has traditionally been able to offer small-sales customers a great experience without one-on-one help. It is employing cheap and powerful configuration and deployment options to get its small customers up and running. Self-service allows the company to support a large number of SMB customers, meaning it has honed the services it offers.
2. Ability to ensure proper fit of tool before purchase. If an SMB customer can test the product with a free trial or a freemium subscription before committing, that’s a good sign. On the one hand, the company says it is confident enough in its product that it believes customers who use it will agree to buy. On the other hand, the customer can experience the product and feel confident in their decision to buy or leave.
3. A frictionless buying experience and strong customer support reputation. An SMB should be found A simple, convenient and fast purchase experience is a possible indicator that the company is used to efficiently serve its customers, especially the younger ones. A company’s customer support reputation is perhaps more important. If a company’s support is praised for being responsive and offering useful, timely help, it means the company has built a support infrastructure for less sensitive customers like them, who will solve their own problems.
There are many lessons to be learned from the massive layoffs of the last few months, especially for SMBs. While SaaS companies are unlikely to change their approach to serving SMBs, what SMBs should look for in SaaS providers should change. By finding companies that provide a great self-service experience that still makes the company profitable, SMBs put themselves at less risk for layoffs when the next period of economic uncertainty inevitably comes.
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