Consolidation is coming.

Thousands of well-funded SaaS companies that took fundraising rounds during the pandemic will run low on cash in the next 24 months.

Many will need to pursue fresh capital to continue forward.

Meanwhile, their customers’ CFOs are slashing tech stack budgets.

They are asking their line-of-business leaders to prune the proliferation of software tools acquired during the “good years” when the cost of capital to buy them was almost zero.

CFOs are asking two key questions for every product subscription:

  1. Is this mission-critical, i.e., do we need it, or can we live without it?
  2. If yes, could we get the same capability from another one of our existing vendors?

This will drive SaaS customers to consolidate spend to fewer vendors offering more comprehensive product suites. Will they be the best product for the job? Likely not, but for now, they might just be good enough.

Best-of-breed vendors who offer point solutions will experience pressure on two fronts. Gross retention will suffer as customers make consolidation decisions. And new logo sales growth will take a hit as customers delay purchase decisions.

A challenging set of realities for any subscription business, indeed.

These vendors will have a couple of paths to remain competitive.

First, they can join forces with complementary or competitive companies. Through M&A, the combined entities can capture cost efficiencies by reducing G&A expenses (e.g., one HR, finance, and legal team instead of two). More importantly, they can bundle their products into wider product suites that meet more customer needs.

I predict we’ll see a lot of M&A activity over the next 12-24 months, but mergers aren’t easy. They’re messy.

Their success depends largely on the skills and experience of the management teams, the quality of their execution, timing, and even a little luck.

The second path is leaning into the ecosystem, a.k.a. partnerships.

Instead of M&A, some companies will choose to partner. They will create “better together” solutions by integrating their products and go-to-market motions.

Partners will sell and service customers collaboratively by sharing contacts, information, and opportunities in a high-touch but structured manner.

This model has the potential to improve go-to-market efficiency and effectiveness.

While there are no immediate cost synergies, it’s a much less risky approach when compared to M&A.

Customers get their suite solutions, albeit from multiple vendors. They’ll also maintain freedom of choice, a hallmark of the best-of-breed approach.

Success in the ecosystem will depend on leadership’s willingness and ability to create and execute high-value partnerships.

  • Develop executive relationships with both complementary and rival companies.
  • Deliver thoughtful product integrations that multiply value.
  • Tell the story and create awareness through education.
  • Structure and incentivize collaboration with third-party Sales teams.
  • Ensure value delivery across the integrated product set.

In this world, experienced management teams will have the advantage. Leadership will be the key, both inside and outside the company.

Neither M&A nor partnerships are a sure bet, but both are better than going alone.

Because they interface with customers constantly, Sales and Success teams are in a perfect position to help shape the strategy. They must be alert to market feedback from prospects and customers and bring those insights back to the business.

Where is consolidation happening in the market you serve?