‘Companies are in freeze mode’: Coronavirus crisis strains ad tech licensing model

Like so many other industries, the coronavirus crisis is rapidly separating the distance between the haves and the have nots in the software-as-a-service sector.

In ad tech in particular, there was a rush in the middle of the last decade for companies to switch their models from charging clients a percentage of the media they were spending to instead adopting a flat monthly fee for the use of their platforms. The latter model usually generates more predictable monthly recurring revenue — versus the ebbs and flows of advertiser spend — and SaaS businesses tend to fetch higher valuations than those relying on media-based income.

But predictability isn’t a trait of this current crisis. As the pandemic escalated in March this year, CFOs started forensically scrutinizing their companies’ monthly outgoings and began trimming discretionary spending in a bid to preserve as much cash as possible. Nonessential software fees are a logical first cut as a downturn looms. Take WPP, which said in a statement last month it had “identified savings in excess of £100 million ($124 million) in property and IT capital expenditure against an initial 2020 budget of around £400 million ($495 million).”

A whole host of companies in the SaaS space are now seeing their new business pipelines evaporate, experts told Digiday. Plus, there aren’t any in-person trade shows taking place for sales teams to chase new leads. Aside from the collaboration and video conferencing tools that are experiencing a boom right now as teams are forced to work remotely, large established players with multiyear contracts are best positioned to escape the chop, according to executives. But even those companies aren’t immune in an environment where businesses are seeking payment holidays and testing force majeure clauses.

“It’s forcing major brands to just go back to basics,” said Ryan Kangisser, managing partner for strategy at advisory firm MediaSense, added that it’s not just the fixed cost of contracts companies are considering, but the internal resources required to run the software.

“One CPG we work with is considering whether to retain their DMP contract [with a large software provider] because of all the time and effort they put into it verus the output. There are other ways of driving growth beyond that platform,” Kangisser said.

The majority (70%) of SaaS billings take place in the first 15 days of the month, according to Cledara, a purchasing and analytics platform that helps companies manage their software subscriptions. That means the next two weeks will be crucial for the SaaS sector. Spend on lead generation tools already declined 8% between February and March this year, according to Cledara.

“My hypothesis is that companies are in freeze mode at the moment,” said Brad van Leeuwen, Cledara co-founder and COO.

SaaS companies will need to adapt their sales approaches accordingly.

“If you’re selling a solution that requires people to have a PhD in nuclear physics to figure out how to work it, or a three-month ramp up period,” those onboarding processes will need to be overhauled, said Eamonn Carey, managing director for London at Techstars, a startup accelerator. 

“For a lot of businesses, the buyer persona has changed from the VP of engineering or an individual product lead to the CFO-type level. They will go, ‘I don’t understand what this tool even does — I don’t even understand what the description on their website says’,” Carey added. 

To counter the potential for confusion — and instant dismissal from CFOs — smaller companies, who provide niche point-solutions could look to create a bundle of services with other companies in adjacent spaces to create a bundled subscription that is competitively priced to better-known full-stack services, Carey said.

Still,  with new business under substantial strain, retaining customers is key — which may require wiggle room and forgiveness with clients.

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“If you say to someone, we have a 12 month contract but I need to massively reduce, cancel or postpone my payment, if that person refuses, you say: ‘At the end of 12 months you’re gone,’” said David Jones, CEO of brand tech group You & Mr Jones. 

SaaS companies that accept a haircut on price now, may be rewarded with longer contracts later.

“I’d expect to see some opportunity for sellers to lock in longer agreements with existing customers in exchange for price breaks,” said Eric Franchi, operating partner at Math Capital.

Ultimately, as with every other sector, the SaaS companies that were already executing responsible financial management and had strong cash positions going into the crisis will be better positioned to weather the storm and come out of it. 

“SaaS can actually be a real minefield unless you have scale,” said Iain Jacob, who chairs on several company boards in the media, advertising and technology space and the former CEO of Publicis Media EMEA. “Many smaller companies and startups totally underestimate the cost of sales and marketing and overestimate how fast they can grow a license base that pays the bills.”

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