Wall Street is experiencing anxiety as mom-and-pop shops reduce their software spending.

• Recently, small and medium-sized business software vendors have faced investor scrutiny due to their guidance.
• Local and regional businesses, including restaurants and retailers, are experiencing a decline in software spending due to weaker consumer trends, according to analysts.
• Nick Martin, co-founder and CEO of Joe Coffee, stated that every subscription they have is under scrutiny.

Nick Martin, CEO of Joe Coffee, is worried about the economy and is seeking ways to reduce expenses, particularly in the software department.

Martin and his brother, Brenden, founded a Seattle-based company to assist local coffee shops in competing with Starbucks by simplifying the process of fulfilling mobile orders, tracking analytics, and automating marketing efforts.

Despite their business remaining stable during the economic downturn that began in 2022, Martin has observed a decline in the number of lattes sold compared to the previous year. This trend is concerning for Joe Coffee's customers, prompting the company to take proactive measures to reduce expenses.

Joe Coffee, a marketing automation software vendor, has reduced its number of subscriptions, and is closely examining its spending with payment processor Stripe to determine whether to renew its agreement with the company.

Martin informed CNBC that every subscription is being closely scrutinized and that a strong business case is necessary before any new investments can be made.

Small and medium-sized businesses (SMBs) are not the only ones experiencing growth, as evidenced by the latest earnings reports from software businesses that serve them, including local shoe stores, small restaurant chains, and neighborhood spas.

HubSpot, , and all issued warnings to investors about potential issues ahead, mirroring broader economic indicators that reveal consumers are experiencing the ongoing consequences of inflation and high-interest rates.

The Bureau of Labor Statistics reported that retail sales for October decreased by 0.1%, indicating the impact of rising prices. The consumer price index for the previous month increased by 3.2% on an annual basis.

Despite a slight increase in broad market indexes since midyear, tech companies that focus on the SMB market are experiencing difficulties.

On Nov. 1, Paycom's stock price dropped 38% after the company announced that its revenue growth in 2024 would be between 10% and 12%, significantly lower than analysts predicted growth above 20%.

Bill's shares plummeted 25% two days after Paycom's drop, and the company reduced its profit and revenue guidance for 2024. John Rettig, Bill's finance chief, stated on the earnings call that the company is facing an environment of increasing economic choppiness and small businesses are under pressure to adjust to the current realities.

On the last day of October, ZoomInfo's stock price dropped 16% due to weaker-than-expected revenue forecasts for the fourth quarter. CFO Cameron Hyzer stated that the company is still facing challenges in retaining customers. ZoomInfo provides sales and marketing teams with tools to manage leads and customers.

Despite its earnings report last week causing a 6.1% drop in HubSpot shares, the stock has since recovered. The company's outlook was largely in line with estimates, but growth is slowing and CEO Yamini Rangan described the environment as "choppy and challenging" with clients "continuing to optimize spend."

Rangan stated on the earnings call that sales cycles are still irregular, budgets are still being closely examined, and buying urgency remains low,

No representatives from Paycom, ZoomInfo, HubSpot, or Bill responded to requests for comment. Since June 30, the stocks have fallen between 12% and 49%. The Nasdaq has risen more than 2% during that time period.

Fighting for the little guy

The domestic economy is significantly impacted by the sector of the market that small businesses serve. Over the past two decades, small businesses have contributed 40% to the U.S. gross domestic product and employed 46% of the American workforce, as stated by the Chamber of Commerce.

Longbow Asset Management CEO Jake Dollarhide stated that the results from Paycom and other SMB providers provide insight into the economy's condition.

According to Dollarhide, when individuals lack wealth, they typically become more reserved.

The Martins have experienced the difficulties of managing a small business, as their father's shed-making company in West Richland, Washington, was destroyed by larger corporations.

Why do small business owners, who are the backbone of America, never seem to get a break?" questioned Brenden Martin, Nick's younger brother. "Why isn't there anyone fighting for them? For us, that's our main motivation.

The Martin brothers have diverse backgrounds in technology. Nick worked at and then moved on to while Brenden had experience in product strategy and web development at different companies.

Both of them, having previously worked as baristas in coffee shops, shared a love for the role these establishments play in communities and aimed to assist small cafes in resisting Starbucks' influence.

In 2015, when Starbucks introduced mobile ordering, Joe Coffee had not yet emerged. However, the brothers recognized a promising market opportunity.

"At first, we thought we missed our chance, but then we realized that small businesses still require this," Brenden stated.

In August 2018, the Martins received $1 million in funding just before their big break at Coffee Fest, where they debuted their coffee brand.

In 2021, Joe Coffee, with 17 employees, developed a comprehensive software and payments system for coffee shops in response to the new demands created by the Covid pandemic.

To be successful, Joe Coffee's technology must generate immediate revenue and profit gains for its customers, who are already operating on tight budgets. The company does not offer a recurring subscription but instead takes a percentage of each transaction.

‘Nice to have’

According to Nick Martin, Joe Coffee has reduced the number of software products it buys due to higher borrowing costs. The company now has six software subscriptions, down from 12 to 15, which account for 3% to 5% of operating expenses, down from around 8%.

Essential products are prioritized over "nice to have" items in business operations.

"Is it possible to make this decision using only a spreadsheet?" he inquired. This is how the company determined which HubSpot services to eliminate. Joe Coffee remains a HubSpot subscriber but is now paying for fewer seats and tools, according to Martin.

Joe Coffee is considering other payment processors with lower fees, as Stripe, which is privately held, does not meet their needs.

Stripe said it doesn’t comment on specific customers.

The macroeconomic story will present differently for software companies based on their revenue models and their dependence on specific industries.

Unlike others, Bill could experience a more immediate impact since over three-quarters of its core revenue stems from transaction fees, while the remaining portion comes from subscription-based contracts.

According to Taylor McGinnis, an analyst at UBS who tracks Bill, ZoomInfo, and HubSpot, Bill's exposure would mainly come from the payment volume generated by SMBs.

SMB spending has bottomed, or businesses are still looking for opportunities to slim down their software portfolio if the economic picture dampens further, is the question investors across the sector are trying to determine.

According to Bryan Keane, an analyst at Deutsche Bank who specializes in software and payments companies, the lessons learned in B2B are more macro-driven than what is typically experienced. If there is another shoe to drop, there will still be some downside risk.

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