IT Budgets Look Flat, Marketing Needs to Lead Through the Economic Challenges
B2B software providers are resetting strategies driven by several key factors: inflation is taking a bite out of IT buyer budgets, major suppliers have increased their prices, and start-up software company financial valuations have moved downward. In this environment, software CEOs and marketing leaders are pursuing digital transformation to make operations more effective, strengthening company and brand awareness, re-thinking channel partnerships, seeking new opportunities while cutting non-core costs, and revising value propositions.
Changes in IT Budgets Are Affecting Software Providers
According to the 2023 Info-Tech CIO Priorities Report, CIOs must account for the impact of inflation on their IT budgets and realize that what looks like an increase on paper is effectively a flat budget or worse. The trend our survey shows is that an IT budget had to increase by more than 6.5% to keep pace with inflation in 2023. However, only 40% of survey takers expect that increase to be approved. For the 27% expecting an increase of 1-5%, they are effectively facing a decrease in budget after the impact of inflation.
Looking Through 2023, How Do You Anticipate Your IT Spending Will Change Compared to Spending in 2022?
The software market is constantly evolving, and budgets are an essential part of that evolution. Software buyer budgets are shifting toward more strategic technological investments focusing on driving digital transformation and improving business operations. Simultaneous rising software suppliers and provider costs make cost optimization an important factor in shaping software purchase decisions. Companies are looking for ways to manage their budgets more effectively while investing in software delivering real business value. Several changes are occurring in the software affecting software purchasing. Here are the two most notable ones:
Changes in Supplier Costs Are Affecting Software Provider Margins
With the tremendous rise in costs and wage inflation over the past 12 months, many major software vendors and partners raised their rates, resulting in an increase of more than 10%. Suppose software solution providers don’t pass the costs along to their IT buyers/customers. In that case, it’s a direct hit to the EBITDA margin and, ultimately, to the overall value of the providers’ business. In general, SaaS is a model with the ability to respond to inflation because customers can't use the product without paying for it. If you have the ability, contractually, to raise prices. That's a good start, but it's more complicated. People are wrestling with what kinds of price elasticities to expect in the net impact of raising prices and the models to use.
Buyer Focus on Business Value Is Affecting Software Decisions
While companies would like more budget for software, they are more focused on cost optimization. Cost optimization is a business-focused, continuous discipline to drive spending and cost reduction while maximizing business value. It includes obtaining the best pricing and terms for all business purchases and standardizing, simplifying, and rationalizing platforms, applications, processes, and services. This trend leads to increased scrutiny of software spending and a greater emphasis on identifying areas where cost savings can be achieved.
How Should Software Marketers Respond?
For marketers, the focus from most customers will be on cost optimization. With the increasing pressure to do more with less, many companies are focusing on cost optimization and looking for ways to reduce their software spending. This has led to a growing demand for more affordable software that offers better value for money. Cost optimization leads to the importance of ROI as companies are increasingly focused on measuring the ROI of their software investments and making data-driven decisions about which software to purchase. This has led to greater scrutiny of software budgets and a focus on investing in software that delivers the greatest business value.
- Current customers may need additional rationale about why to stay with you if they are considering ending a contract and moving to your competition.
- Prospects and partners are conducting greater due diligence and looking for added value and better deals on longer-term contracts.
- Prospects may delay purchases or upgrades for up to 12+ months, possibly even into 2025.
- Companies will evaluate current SaaS contracts and eliminate redundant or non-cost-effective software.
- Competitors may use the marketing strategy of lowering prices to retain current customers or gain new ones to weather the economic storm.
During a market downturn, B2B businesses face challenges such as decreased demand, increased competition, and reduced profitability. To survive and thrive during such times, businesses need different strategies and to be agile and responsive. Companies can better position themselves during challenging times by adopting these key strategies.
Here Are Five Key Business Strategies to Implement as a Marketing Leader in 2023
1. Accelerate the digital transformation of your marketing department.
Action: Stop wasting money on ineffective advertising and ad-hoc media management.
Key recommendations – Stop spending money on ineffective advertising and ad-hoc social media placement and instead focus on pinpointing and fixing weaknesses in operations. Identifying liabilities and fixing your lead generation engine will save money and increase results. Evaluating social media channels and understanding how your audience responds will improve the company’s visibility and increase followers. Listening carefully to customers will provide valuable feedback for software improvement. Equally important: update your search engine optimization (SEO) keywords to keep your company website at the top of organic internet searches.
2. Keep the company messaging strong
Action: Create a more effective PR plan to keep your company’s share of voice strong.
Key recommendations – PR must keep your company brand in mind during a recession or downturn. It is critical that you have a consistent, planned approach. Leverage your “experts” through thought leadership activities (blogs, white papers, presentations, webinars, etc.). Use more social media for messaging about software enhancements, expansions into new geographies and market segments, upcoming events, etc. Explore paid opportunities that offer visibility to key thought leaders to present in customer councils or networking sessions. Ensure your PR team keeps your company’s messaging resonating strongly with customers, partners, current/potential investors, and potential hires.
3. Re-assess and re-prioritize your channel.
Action: Prioritize your company’s use of channel partners with an additional eye on stability and viability and the “right” fit to your company’s changing requirements.
Key recommendations: Assess channel partner needs and select partners with complementary capabilities. Establishing a close relationship with the right channel partner for new product sales and needed technologies and business processes can also drive scale. Partner stability, however, becomes of greater importance within an environment of economic headwinds, and selecting a poor channel partner can spell disaster. Use SoftwareReviews’ Choose the Right Channel Sales Partner blueprint to assess the viability of your vendors as potential partners.
4. Cut non-core marketing.
Action: Negotiate with all your vendors for a reduced price based on usage or seasonality, including marketing and PR agencies.
Key recommendations: Negotiation is critical for marketing professionals, especially when under pressure to control expenses. Given the current economic turmoil, cost-cutting, specifically quick and straightforward cost-cutting while minimizing the impact on service levels, has risen to the top of many marketing leaders’ agendas. Cost reduction isn’t new, it is required to conduct efficient business. We can help you learn the tactics and strategies to get you reduced prices during software and service contract negotiation. Refer to our article Marketing Strategies in a Potential Recession for specific guidance about re-organizing the marketing budget.
5. Refresh your product pricing and packaging.
Action: Be willing and able to make price, contract, or packaging adjustments as needed based on a competitor or buyer’s feedback.
Key recommendation: Evaluate and optimize your pricing strategy to establish the “best” price for your product or service that maximizes profits and shareholder value yet reflects buyer value and ROI requirements. For specific guidance, reference our Optimize Software Pricing in a Volatile Competitive Market blueprint. During economic headwinds, your customer’s budget spend is scrutinized by CFOs who want an ROI. Product leaders must price products based on a deep understanding of the buyer price/value equation and alignment with financial and competitive pricing strategies. Help your sellers articulate ROI to satisfy the customer CFO. Rethink your portfolio and look to put poor-performing and redundant products on the path to retirement while migrating clients to new products to reduce costs and re-invigorate the buyer’s value proposition. Remember that you can charge more for products of greater value!
Many B2B software companies partner with large software suppliers and embed their software with their services. With the change in the economy, many of these partners raised their rates resulting in a 10% higher cost in 2022. And the “strong” US dollar has also forced a “price” increase for other major currencies, which causes significant price issues for global companies selling into Europe and Asia. But while software buyers need quality software to operate their business, the bar for value is higher than ever as deals get greater scrutiny. Software marketers should work closely with Product and Sales to ensure strong product market fit and value articulation. A stronger marketing focus on digital transformation means shifting investment into areas that keep brand messaging strong, keep the voice of the customer present in all key decisions, and rationalize budgets to do away with low-return products and programs.
Other Related Publications and Deliverables:
Improve External PR Communications for Greater Product Launch Success – Build a strong campaign to increase your team’s efficiency and execute a finely tuned campaign.
Optimize Software Pricing in a Volatile Competitive Market – Price products based on a deep understanding of the buyer price/value equation and alignment with financial and competitive pricing strategies.
Choose the Right Channel Sales Partner – Research your partners and prioritize which partnerships are right for your company’s goals and capabilities.
Improve Your Social Media Impact – Ad hoc social media management causes wasted resources on ineffective social media channels, missed opportunities to capture customer insights, and inconsistent communication with prospects and customers.
Marketing Strategies in a Potential Recession – Businesses still need quality software to operate. However, during a recession, the buyer journey will change, and messaging will need to be adapted.
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