SaaS Market Braces for Looming US Recession

Credit: Foto-Rabe

The United States is bracing itself for a shallow recession as its economic growth, as of June 17, sank to 0% from 0.9% on June 8. In response, the US Federal Reserve increased its benchmark interest rate by 0.75%, its highest since 1994. By the end of the year, the benchmark rate is expected to reach 3.4%, potentially spiking to 3.8% in 2023. With this, Fed officials see a grim GDP gain of 1.7% for the year, lower than the 2.8% outlook in March. This will likely affect every industry, including the inflation-resistant SaaS market.

Speaking of inflation, the US Bureau of Labor Statistics saw an 8.6% annual increase in the consumer price index in May, the highest since 1981. Energy prices increased by 34.6%; food costs by 10.5%; and all the other major categories by an average of 6%.  This has largely contributed to the imminent recession since price hikes affect sales. After all, the National Bureau of Economic Research defines recessions as two consecutive quarters of negative economic growth, accompanied by a decline in income and retail sales, high unemployment, and low GDP.

Following the 0.75% increase in benchmark interest rate, another increase is expected in July, which could see the rate reach 2.25% to 2.50%. The move will slow down the economy even further but will keep Americans from spending, affording the Federal Reserve the space to stabilize price hikes. It addresses the main concern of the global supply chain crisis that led to the country’s current inflation woes—too much demand and not enough supply.

A resilient industry like the SaaS market could weather the storm better than others, given how most companies didn’t raise prices in the midst of inflation. However, the protracted economic downturn of a recession is bound to cause a lot of problems.

Consequences of Recession for the SaaS Market

Even though the rates of SaaS companies have been stable, the spending capacity of their clientele is affected by external forces. With this, recent SaaS trends convey that a contraction is possible due to the increase in churn rate or if the market growth becomes flat. A 2022 study found that subscription box models have the biggest churn rate, at 22%, followed by subscribe and save models (16%), and consumer SaaS (11%).

Although sales have been stable, the problem here is that lost customers aren’t being quickly replaced. If the recession persists, along with the Federal Reserve’s increased benchmark interest, the occurrence of new sales will eventually slow down until the economy stabilizes.

Another concern is the rising rate of downgrades. Many SaaS customers downgraded their subscription plans, especially in May, causing many companies to have fewer monthly returns. A worsening economy can fast-track this trend in the following months as customers tighten their budgets. After all, they have to spend on other necessities, most of which are saddled by perpetually increasing prices.

History provides a basis for how the SaaS industry performs under recession, and the aforementioned market contraction did take place. In the 2008 recession, the growth rate of the top SaaS brands tumbled from 40% to a mere 10%, and the brands beneath this tier fared even worse.

However, the SaaS industry is resilient enough to keep many players from being insolvent or bankrupt. At the end of the day, a 10% growth rate or a bit less is sufficient for companies to stay afloat until the recession has been resolved. In fact, 80% of SaaS companies in the 2008 recession still managed to grow, albeit slightly.