As the business world grapples with the financial challenges of the current economic environment, the annual SaaS Inflation Index from Vertice, a spend optimization platform, provides enlightening insights into global software spending. The index analyzes data from 16,000 software suppliers and has revealed an alarming trend – a ‘Cost of Software Crisis’.
This cost crisis is materializing as Software as a Service (SaaS) inflation has overtaken consumer inflation in the UK for the first time, with high supplier prices further exacerbating the problem. Notable examples of vendors raising prices are HubSpot (+12%), Microsoft (+15%) and Webflow (+23%). The index shows that over a quarter of companies are affected by ‘Software Shrinkflation’. This phenomenon occurs when software vendors charge the same price while offering less. Vertice’s research also reveals that over half (57%) of SaaS vendors are actively hiding prices, and a striking one in eight business spends are now directed towards software.
By 2023, SaaS inflation reached an unprecedented 8.7%, with 73% of software vendors raising their prices. This inflation rate significantly outpaces UK CPI inflation, which stands at 6.7% for this year. Thus, if a SaaS stack cost a business £1,000,000 a year ago, they would be expected to pay an additional £87,000 today.
An observation of price changes across different product categories reveals that sales software has been most affected by price increases with an inflation rate of 10.6%. This is closely followed by finance (10.2%) and productivity tools (10.1%). Conversely, HR and marketing software have experienced more modest price increases.
Over half (57%) of SaaS vendors have obscured their pricing from the public, making it easier to mask price increases. This lack of transparency also enables sudden price increases. Vertice’s research has found that the less transparent a software company is about its pricing, the greater the likelihood of sudden price increases.
Reflecting the trend of skyrocketing software prices, enterprise spending on SaaS has hit an all-time high with over one in eight enterprise spend spent on software, equivalent to an average of £6,500 per employee spent on software, compared to £4,740 in 2022.
While total SaaS spending in the enterprise has seen a growth of 17.9%, only 8.7% has been contributed by growth in prices. The rest comes from introducing new software tools and adding more users. Most worrisome is the growing trend of SaaS shrinkflation, a phenomenon where vendors charge the same price for reduced functionality, thereby escalating their revenues in a challenging economic climate.
Commenting on the findings, Eldar Tuvey, CEO and founder of Vertice, explains the urgent need for companies to manage their cost base effectively in order to navigate the global downturn in better shape. He said: “Efficient companies are not only more likely to avoid cash flow problems and generate profits, but they are also less vulnerable to layoffs that reduce productivity.” Managers are encouraged to consider technologies that provide visibility into software pricing, control and centralize the software stack, and assist them in contract negotiations.