2023 was another year of relentless price hikes across the software industry. 73% of SaaS vendors - including Zoom, Shopify, Atlassian, and Monday.com - raised list prices in the past 12 months, driving software inflation to 8.7%. That’s more than double the rate of headline inflation in the US.
Whilst general price increases are natural over time, opportunistic vendors have used inflation to hide much bigger hikes, raising prices to uncomfortably high levels in a bid to boost revenues.
Google Workspace kicked off the year with a 20% price rise, with other software giants following suit including Salesforce with a 9% hike and HubSpot with a 12% increase. Microsoft recently announced its second price uplift of the year and pronounced that it will "continue to assess pricing in local currency as part of a regular twice-a-year cadence."
Among the quarter of vendors that have not raised prices, almost all have reduced the size of the average discount afforded to customers — effectively raising the spend without touching the list price.
These would be worrying figures in any economy, but for businesses attempting to drive growth during an economic downturn, soaring software costs should be ringing alarm bells. The cost of software, which is now the second largest expense for many companies after payroll, has grown by 17.9% over the past 12 months alone.
Opaque pricing tactics are driving software inflation
One of the reasons that SaaS vendors are able to increase their prices year after year is that so many obscure their pricing information. More than half (57%) of SaaS vendors hide their pricing from public view and the majority of contracts are made up of a complex constellation of packages and bundles, which makes it easier for vendors to mask price increases from customers.
As SaaS prices continue to inflate, many vendors reserve the right to charge their buyers more at each renewal. This is because of price uplift clauses built into their contracts. Research by my company has found that as many as 88% of suppliers include these terms, which allow them to increase their pricing at any given time — in some cases without the need to notify customers.
What can you do?
With the price of SaaS growing so much faster than consumer inflation, it’s important for organizations to take action to mitigate the impact of price hikes. As many as 90% of companies are overpaying for their SaaS products by 20%-30, but with the right strategy in place they are able to achieve savings relatively quickly.
The first step is getting clear visibility of your SaaS spending, usage and software renewals. Gaining a single view of significant SaaS product investments will help you make informed decisions about cost optimization - for example if certain contracts are under-utilized or if you have duplicated tools across departments.
Don’t simply accept price increases or unfavorable contract terms as a matter of course. Armed with insights, you can choose the right course of action - whether that’s consolidating applications, cutting licenses, or negotiating a better annual fee. In the case of auto-renewal clauses, most vendors will remove these clauses when asked to do so during a negotiation.
I also recommend getting access to benchmarking data, so you can understand what other companies are paying for their licenses. If you can seek out several different price points or quoted figures from a vendor’s competitors, they will be more likely to provide a counter-offer to ensure your business.
Ultimately, the best long-term approach is combining purchasing technology with a culture of cost-awareness in your business. Whenever someone decides to buy a new piece of software, you want them to consider the cost implications and work with other teams to avoid duplication of tools across your tech stack.
Final words
With the slowing of headline inflation set to continue into 2024, I expect to see more modest increases as SaaS vendors find it harder to hide behind general consumer inflation as a reason for hiking prices.
Despite price increases being less extreme, vendors will increasingly look to make gains through less obvious methods - for example by cutting the discounts they offer or restructuring pricing models to give customers less value for money. Businesses must continue to keep a close eye on vendors and shouldn’t rest on their laurels when it comes to the cost of software.
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