2023 has brought numerous changes to the SaaS industry…and not necessarily for the better. After the boom period of 2020 and 2021, where SaaS companies were soaring in valuation and startups could secure funding easily, 2022 and 2023 have seen a massive drop in performance.
On average, tech stocks dropped 30% in 2022, and according to our Pulse of SaaS III report, YoY growth for SaaS companies has declined by approximately 15%-16%. Additionally, VC funding has fallen dramatically, with seed-stage funding falling 44% YoY as of 2023 Q1, and early-stage funding falling 54% within the same timeframe.
Among all this chaos, it’s no surprise that sales cycles have been trending in a negative direction as well. If you’ve noticed that closing sales has become a longer, more difficult process, you’re not alone—the entire SaaS industry is feeling the strain, and it’s going to take some strategic moves to survive.
This article will go over how SaaS sales cycles have changed since the downturn, what factors have played into this change, and what SaaS companies can do to lessen the impact of the downturn on their sales cycles as much as possible.
The state of SaaS sales cycles in 2023
As we move into 2023, it's becoming increasingly clear that, on average, SaaS sales cycles have become longer, more expensive, and more challenging. This trend will most likely continue as long as the economy continues to trend downward. Here’s a quick snapshot of what the sales landscape looks like for SaaS companies today.
What’s changed with SaaS sales cycles
Many reports have noted a trend toward longer sales cycles across the SaaS industry.
According to a report from venture capitalist Tomasz Tunguz, between early 2022 and 2023, the average startup saw a 24% jump in their sales cycle length, with the average sales cycle increasing from 65 to 75 days. For B2B startups focused on enterprise customers, the jump was even larger at 36%. Out of that 36% of startups, one-third saw a 50%+ increase in sales cycle length.
Startups aren’t the only ones feeling the heat: A survey from RevOps reports that 49% of SaaS businesses have seen an increase in their sales cycle length this year. Out of those businesses, 52% saw their sales cycles increase by 10% or more, with 6.3% seeing an increase of 30% or more. This trend is alarming for many SaaS CEOs and finance leaders, as sales cycles can greatly impact the overall health of a business.
How longer sales cycles impact your bottom line
Long sales cycles can be frustrating to sales teams who need to hit their targets, but more importantly, they have a significant impact on your company’s overall performance and bottom line. By substantially delaying the time it takes to generate revenue, long sales cycles can diminish cash flow and runway, increase the cost of customer acquisition, and ultimately limit your company's ability to grow.
This is especially true for startups and emerging SaaS companies that need to demonstrate growth to potential investors to secure funding. With longer sales cycles, not only do these companies need to rely on investors more for cash flow, but they also have a harder time securing funding from investors. This means that these companies may struggle to meet their financial obligations, which can lead to a cash flow crunch and a limited ability to reinvest in key growth initiatives.
For example, Bartosz Majewski, founder of Casbeg, highlights exactly how long sales cycles can create long-term damage to your company’s success in this article. Majewski compares two hypothetical competing companies, both of which have an identical product valued at $300,000 per deal. But, one company has a short 90-day cycle, instant invoice generation, and a 7-day payment time. The second company has a long 180-day sales cycle, 7-day invoice generation, and a 45-day payment time.
After 3 years, the faster company will generate $3.5 million in revenue, while the slower company will generate $1.5 million. This opens up endless possibilities to reinvest in growth, secure more funding, and dominate the competition for the fast company, while the slow company gets left in the dust.
Longer sales cycles may also indicate weaknesses in your product, sales process, marketing, or many other factors of your business. If it takes too long to close a deal, that could mean your product isn’t very strongly positioned, or that your sales team isn’t doing a good job at selling it. It could also mean your pricing is over- or under-valued, or that you’re going after the wrong ICP.
What’s contributing to your long sales cycle?
However, a weakness in your product or business operations doesn’t explain an industry-wide trend toward longer sales cycles that are affecting both small and large businesses. So, what’s causing this trend? Why have SaaS sales cycles become longer, especially in the B2B space?
There are a few key factors at play, most of which are due to an intertwining of long-term industry trends and the effects of the recent economic downturn. Here are three of the biggest culprits.
The downturn has restricted everyone’s access to cash
The impact of the recent economic downturn has caused everyone's budgets to tighten, including your B2B customers.
Data from our Pulse of SaaS III report shows that, on average, SaaS companies have seen their runways reduced by 17% or 1.5 months between 2021 and 2022.
This is because of two primary reasons. One is that getting funding from VC investors has become more difficult, with total VC funding declining by 35% from $681 billion in 2021 to $445 billion in 2022. Another is that it’s become a lot more difficult to generate sales and revenue—as everyone’s budgets shrink, a feedback loop occurs that makes everyone’s budget shrink even more.
All of this makes it much more challenging for potential buyers to invest in new software, which makes sales difficult for software vendors. Sales teams need to spend more time nurturing leads, and even if a customer is a perfect fit in terms of need, they may simply not have the budget to afford the price you’re quoting.
Competition is increasing as more companies use SaaS tools
Aside from the state of the economy, sales cycles may also be getting longer simply because competition in the world of SaaS is on the rise.
According to our SaaS Benchmark Report, 99% of businesses worldwide use at least one SaaS solution, and total SaaS spend grew by around 16% from 2021 to 2022. Additionally, the State of SaaS Buying Report by Spendflo indicates that SaaS is one of the top five expenses in nearly every organization, while a survey by DevSquad reports that 38% of companies run entirely off of subscription-based SaaS services, while 80% of companies would like to achieve the same by 2025.
This means that closing deals may simply be harder because buyers have more options to choose from, and can be easily persuaded to opt for a competitor due to small differences like a slight discount, a better user experience, or the option to pay in flexible payments.
When combined with the downturn’s negative effect on everyone’s budget, buyers become even pickier, and this competition gets even more pronounced. Our data shows that CAC has risen by a factor of 2 within the past year and that CAC payback time has risen by a factor of 1.5. This indicates that customers simply need more convincing to buy than they used to, and therefore, more time and energy needs to be spent on converting them.
Long-term annual contracts are becoming less desirable
Long-term annual or multi-year contracts have always been preferred by SaaS vendors because they offer stable ARR, a high ACV, and more upfront access to cash. On the other hand, shorter contracts are usually preferred by SaaS buyers because of their flexibility and affordability.
In the past, buyers would opt for annual contracts because they had enough cash flow to pay the price upfront, and there weren’t many other options. However, this norm is shifting.
Since the downturn, people are finding it harder to pay upfront for expensive annual contracts, resulting in payment delays and increased collection times. Our data shows that 40% of companies have seen an increase in their collection times within the past year, while 50% of companies have experienced an increase in payment delays.
And, of course, that’s for the buyers that end up converting at all. Many SaaS companies are seeing an overall drop in conversions and sales because many buyers simply can’t afford the costly upfront payment the same way they could in 2020 or 2021.
However, that doesn’t mean all opportunity is lost. Vendors who have adapted to this trend and offered flexible payment options have been rewarded with 4.5X better churn rates than companies who insist on rigid annual payments. If this trend continues, companies that fail to adapt may see even longer sales cycles and will lose potential buyers to competitors that offer flexible payments.
How to improve your B2B SaaS sales cycle
In today’s uncertain economic environment, B2B SaaS businesses need innovative solutions to shorten their sales cycles, increase their cash flow, and generate the revenue needed to grow if they don’t want to fall behind. One promising method for solving many of the issues with today’s longer sales cycles is the integration of a B2B BNPL (Buy now, pay later) solution.
With B2B BNPL, SaaS vendors can receive the full value of a long-term or annual contract upfront, while offering buyers the option to pay over time in flexible, more affordable payments. This can help businesses close deals faster, increase annual contracts, and boost their runway, even in the face of an uncertain economy and tightening budgets. Customers, in turn, benefit from greater financial flexibility, which can make it easier to justify their investment in your product.
Plus, all billing, collections, and payment processing is taken care of by the B2B BNPL solution, which means SaaS finance teams don’t have to worry about spending time chasing down buyers with reminders and collections.
- Halve its time to close from 4 weeks to 2 weeks.
- Reduce time to cash from 15 days to same day.
- Triple its pipeline, with $3.7 million in revenue generated exclusively through Pay.
In the competitive and cash-limited SaaS environment of today, many other SaaS vendors could expect similar results by offering their buyers a way to pay that works with their budget—without vendors having to sacrifice the stability and instant revenue of a typical annual contract.
Shorten your sales cycle by taking action now
If you’re looking to shorten your SaaS sales cycle, boost your ARR, and increase your cash flow, consider offering flexible payment terms through a B2B BNPL solution like Capchase Pay. By providing customers with greater financial flexibility, you can close deals faster, increase your customer LTV, and provide an edge over your competitors.
To get started, click here for more information, or schedule a call with us to learn how you can integrate Capchase Pay into your sales process.