SaaS Inflation Index: 2022

A guide for finance leaders to navigate rising costs

SaaS pricing inflation is growing 4x faster than market inflation

Inflation has dominated the financial news landscape in 2022. In many markets, the consumer price index (CPI), a common method of measuring inflation, has reached its highest point in a generation. This concerning change in the price of goods has a meaningful impact on businesses. To keep pace with rapidly increasing overheads, most companies are deciding to pass costs on to customers — further contributing to inflation.

This growth in the cost of ‘things’ also applies to software. Almost every organization has come to rely on SaaS to conduct business, from communications tools like Slack and Zoom to productivity suites like Microsoft 365 and Google Workspace, as well as department-specific platforms like Atlassian, Workday, NetSuite or Salesforce.

Spending on SaaS products grew more than tenfold between 2010 and 2020, expanding from $13b to $157b annually. Investment accelerated even faster at the onset of the coronavirus pandemic, as companies raced to support remote working. SaaS spend increased by 26% in the months following the initial lockdown in 2020, and has only continued to grow in the years since.

As the adoption of SaaS gathers more momentum, how can companies manage increased costs against wider market concerns around rising inflation?

Between 2010 and 2020, global annual SaaS spend increased from $13b to $157b
The rising cost of SaaS

Unlike many other significant overheads, like payroll and rent, the selection, management and renewal of SaaS is decentralized in nearly every organization. This is for a variety of reasons, but buying power plays the most important role.

Buying power typically sits across several individuals and departments, with finance leaders managing budget requirements, IT teams assessing systems and compliance considerations, and department heads selecting based on functionality. It’s a complex web of decision making and, even with the best intentions, it can be a struggle to gain a single view of all of the SaaS products a company uses.

Compounding this issue is shadow IT, which is the widespread phenomenon of employees and departments self-provisioning tools that they might need without the implicit approval — or even knowledge — of other stakeholders. This usually results in product sprawl, frankenstacks, feature duplication and uncontrolled spending.

This ‘wild west’ of a cost center is a significant problem when the share of total cost is considered. A growing percentage of all expenditure for businesses goes to SaaS, with around 12.7% of total spend now used on software investments. That means $1 in every $8 that modern organizations spend is now dedicated to SaaS.

$1 in every $8 is spent on SaaS in the average organization

To translate that into dollars — as of 2022, companies spend around $3,112 per employee each year on SaaS. This figure rises to $4,552 for technology companies, who spend more than firms in any other category.


Increased adoption, increased spending

Charting the continued investment in SaaS can seem abstract when viewed in percentages, or market total value. A better way to understand the impact that SaaS is having on company budgets is to map it to currency.

A Microsoft 365 license is priced at $100 a year. Imagine $100 spent on SaaS in 2017. This would become $114 a year later, based on the average increase in SaaS spending, vendor upselling, surging prices, or general adoption of new tools.

By 2022, that $100 will have risen to $196. By contrast, if the cost of SaaS had risen only in line with inflation (US), it would only be $120.

It has taken only five years for average SaaS spending to double. Based on economic inflation alone, it would take 18 years for the cost of SaaS to double.

Research from Gartner indicates that the annual increase in SaaS spending has hovered around 11% to 16% over the past five years. This growth has far outpaced the rate of general economic inflation, even in recent periods of an uncharacteristically high CPI.

Clearly, the impact of SaaS in terms of productivity, collaboration and inclusion has been significant — but the accompanying cost has also been quietly spiraling upwards.

Global SaaS spend has increased by 11-16% per year over the last five years
SaaS pricing inflation vs. market inflation

It would be easy to attribute the explosion in SaaS spending to the adoption of new tools or the need for additional licenses and functionality.

While the average amount spent on SaaS has increased by 14.4% annually since 2018, only around 5% of this is due to these factors. The much bigger reason is the remaining 9%, which is due to vendors charging customers more — SaaS pricing inflation.

Analysis of more than 10,000 SaaS contracts shows that 74% of vendors have increased their list pricing since 2019.

Among the quarter of vendors that have not, almost all have reduced the size of the average discount afforded to customers — effectively raising the spend without touching the list price.

Following the same concept above for the overall cost of SaaS — $100 in 2017 would have grown to $153 by 2022 if average vendor pricing hikes were followed.

The rapid increase in SaaS prices has meant that customers are spending 53% more on licensing than they were five years prior. This ‘SaaS pricing inflation’ is responsible for the majority of the growth in business SaaS spending.

The SaaS inflation rate is around 4x greater than the market inflation rate

A comparison of regional inflation rates with the SaaS inflation rate by geography reveals that, over the past five years, the cost of SaaS for US organizations has grown 3.5x faster than the general inflation rate — even after accounting for an exceptionally high national inflation rate in 2022.

SaaS inflation has outpaced general inflation rates even more rapidly elsewhere. Spend among British and Australian firms has risen at a rate five times greater than regional economic inflation.

Vendor pricing tactics are driving SaaS inflation

It’s a difficult conversation when a supplier has to inform a customer that the cost of goods is going up. Perhaps that’s why vendors rely heavily on legal terms to do the leg work.

Analysis of 10,000 SaaS contracts over the past five years reveals that 88% of vendors have clauses that allow them to change their pricing at any time — in some cases without the need to notify customers.

Salesforce, for instance, included terms that allowed the company to increase pricing by up to 7% by default in its master service agreement (this particular term was removed in 2019). The vendor continues to include language that allows it to change its pricing at will.

Examples of contractual pricing increases

Datadog Master Subscription Agreement
“Datadog may increase the current pricing for the Services by up to the greater of 5% or a percentage equal to the increase for the prior 12-month period (or the prior period of the same duration as the Renewal Order Term, if longer)”

Zoom Terms of Service
“Zoom may change prices at any time, including changing from a free service to a paid service and charging for Services that were previously offered free of charge; provided, however, that Zoom will provide you with prior notice and an opportunity to terminate Your Account if Zoom changes the price of a Service to which you are subscribed and will not charge you for a previously free Service unless you have been notified of the applicable fees and agreed to pay such fees.”

Weaving price increases into contracts is not the only tactic used by vendors. Ensuring customers renew, often at increased rates, is key to growing revenue for SaaS businesses.

Auto-renewal is another tool employed by more than three quarters of SaaS vendors, with 81% including auto-renewal clauses stipulated in their contracts with customers.

Vendors in creative segments, such as design, marketing and productivity are much more likely to feature baked-in pricing increases in customer contracts. This is in contrast to more analytical and technical product categories, which are less than half as likely to include this kind of term — under a third of operations, ecommerce, devops and analytics vendors do so.

Many, if not most, companies struggle to manage the wide variety of SaaS products used across their organization. Visibility is a major challenge for finance teams, and responsibility for renewal often awkwardly straddles multiple departments and personnel.

Jody Shapiro, writing in Forbes, outlines the situation elegantly:

“Today’s SaaS renewal process is, frankly, all over the place. The renewal process usually begins with the original license owner, the procurement team and the IT team. These groups work together to try to make decisions under a tight deadline. This process is almost always manual (via spreadsheets), and it rarely goes beyond a list of users, their department and the date they last used the app. It also must be repeated for every application purchased by an enterprise, so large companies are always preparing for a renewal discussion involving one vendor or another.”

Vendors in creative segments, such as design, marketing and productivity are much more likely to feature baked-in pricing increases in customer contracts. This is in contrast to more analytical and technical product categories, which are less than

This scattered approach is exactly what vendors prey upon, resulting in large annual increases in spending and a 2022 SaaS inflation rate of 9%. Notably, these auto-renewal clauses rely on the customer to opt out if they do not wish to renew.

The time constraints for this can be tight — frequently something the customer will not notice until beyond the deadline, forcing them into a renewal. Among the 81% of vendors that include auto-renewal in their contracts, the most common notice period to avoid it is 30 days, although 45, 60 and even 90 days are all also common.

Every category of SaaS relies heavily on auto-renewal contracts. More than half of all vendors in each segment include this clause, with the exception of finance products — perhaps a reflection of a more informed buying persona for that kind of software. HR products are the most likely to feature auto-renewal terms in their contracts.

Billing and payment terms

It’s well documented that vendors retain customers better when on longer term contracts, which is why discounting is more likely to occur for deals signed over two, three or four years (and sometimes beyond that).

Around 68% of vendors offer the option of monthly billing for some of their tiers, though this falls to only 22% for enterprise pricing.

Billing terms can also be a factor — the most common payment term is net 30.

Pricing transparency is cloudy

It is now well established that SaaS pricing inflation is responsible for a spiraling and difficult-to-manage cost center for many businesses. Vendors have a long and sophisticated set of levers that they use to sustain their own revenue growth, usually at the expense of the customer.

As well as auto-renew and contractual mechanisms, vendors also use pricing ambiguity to maximize the customer’s marginal willingness to pay. Only 45% of SaaS vendors publish their pricing, with the remainder obscuring the cost of at least some of their licensing — a technique that typically works to the advantage of the vendor rather than the customer.

”If the negotiation happens in a silo entirely controlled by the vendor, then that framing could be vastly different from what everyone else is paying. This makes a huge difference. Sales teams know that people love to feel like they got a great deal, but they are happy to admit that this can be accomplished regardless of the starting point.”

– Austin Petersmith, Founder & CEO at Racket

This sentiment is supported by the evidence. The most open pricing models would be variable, balancing cost with utility perfectly. Research shows that less than 5% of SaaS vendors offer pricing on a sliding scale, while only 6% offer a guaranteed ROI.

This is most apparent at the enterprise level, where buyers are less likely to be sensitive to pricing — which is why consistent and clear enterprise pricing is usually the most difficult to find.

Only around one in six software vendors provide pricing for solutions that cost more than $25,000 a year, making it almost impossible for businesses to compare options in the purchasing cycle for the software that matters.

Only 45% of SaaS vendors publish their pricing
How to overcome SaaS pricing inflation

It’s inevitable that spending on SaaS will continue to grow as a whole. Organizations will march onwards towards the cloud, enabling employees with a wider and deeper range of tools to remain productive in the modern work-from-anywhere era. New innovations, expanded licensing and richer functionality will all drive that growth in the years to come.

What does need to change, however, is the balance between vendors and their customers. With SaaS pricing inflation growing at four times the pace of market inflation, it’s important for organizations to better manage their SaaS purchasing strategies. Gaining a single view of significant SaaS product investments is paramount — visibility alone can help identify instances of platform duplication or license under-utilization.

Most crucially, businesses need more insights into the real cost of SaaS. What are other companies paying for their licenses? What is the price of enterprise products and what is the average discount rate for similar customers? Answering these questions is a challenge, often involving informal peer networks or arcane online research methods in lieu of a trustable benchmarking solution.

Vertice has gathered a database of over 13,000 SaaS vendors across more than 100 countries, with detailed product information and analysis on the most popular applications. This dataset also includes 10,000s of price points and negotiated contracts with a total value exceeding $300 million.

  • Vertice negotiates with vendors on your behalf, leveraging this extensive data on real, up-to-date SaaS transactions to get you the best deal on any contract.
  • The entire SaaS purchasing process is streamlined and simplified, freeing your finance and procurement teams to focus on your core business.
  • Get full visibility into your SaaS stack, all in one place, enabling you to make informed decisions.

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