What you can do about rising SaaS prices
Aimee Manning | JAN 26, 2023
Microsoft may well have hit the headlines following its recent announcement that it will begin aligning its pricing globally from April 2023, but the company is by no means the only SaaS vendor to increase its costs.
The reality is that we have seen — and will continue to see — the price of SaaS rise exponentially. According to our own data, vendors across the software industry have been raising their unit prices by an average of 9% each year, contributing to an industry that is now worth $186.6 billion.
But despite SaaS price increases being somewhat inevitable, there’s a real question of just how sustainable they are, given that the average business now subscribes to as many as 110 tools.
In fact, with SaaS sprawl having taken hold of the majority of organizations, not to mention the challenging economic pressures being faced across the globe, many companies now have no choice but to rein in their SaaS spending. The question is, how? What can be done both in the short term and long term to mitigate against rising SaaS costs?
Why are Microsoft, IBM and other SaaS companies raising their prices?
Before we jump into the steps that can be taken to control software spend, it’s important to acknowledge why prices are rising at such an alarming rate.
Microsoft’s reasoning behind its imminent price changes is to “harmonize” pricing worldwide, ensuring that the prices being charged across all markets are closely aligned to the US dollar.
Looking at the company’s existing pricing parity — a metric we use at Vertice to determine the consistency of a vendor’s pricing across similar customer profiles — Microsoft appears to have a relatively average score of 45, which suggests that while there is a certain level of pricing variability, the difference in what its customers are paying is not quite as inconsistent as it is in other SaaS businesses.
That said, the announcement does indicate that its customers outside of the US can expect to see significant price rises, ranging from 9% in the UK to 15% in Japan for its cloud-based services.
It’s not just Microsoft though. IBM has announced that it too will be harmonizing its pricing, with customers in all territories outside of the US, other than Switzerland and Liechtenstein, due to see SaaS price increases of up to 15%.
But is this concept of “price harmonization” really just an excuse to justify substantial price rises?
Perhaps. Although some might argue that it’s refreshing not to see a company hide behind rising inflation rates. Especially given that SaaS prices are increasing at a rate that is four times higher than market inflation alone can account for.
Then, there’s the fact that these announcements encourage existing customers to not only renew their contracts early ahead of April 2023, but to also commit for the long term as part of a multi-year agreement.
Regardless of the reason, the reality is that we can expect to see almost all vendors continue to raise their prices. What we don’t yet know is whether more vendors will follow in Microsoft and IBM’s footsteps and make more drastic changes to their global pricing models, leaving certain customers paying substantially more for their subscriptions.
How to protect your business from spiraling SaaS spend
So, what’s the solution? How can you start future-proofing your business and keep your SaaS costs to a minimum?
Right-size your SaaS licenses
Whether you’re using Microsoft, IBM or any other SaaS tool, the first thing you should do is review each of your subscriptions and understand whether you:
- Need the number of licenses being paid for
- Need the tier of license being subscribed to
While this should be part of a wider application rationalization process, you ultimately need to determine whether the company is making full use of the tool, or whether there are opportunities to downgrade to a cheaper plan, remove licenses or even terminate the subscription altogether.
Of course, you won’t necessarily be able to make immediate changes to your subscription if you’re tied into a contract, but it will ensure you’re prepared ahead of your next renewal.
Take control of your entire SaaS stack
It’s not just individual licenses you should be optimizing. It’s also your SaaS stack as a whole.
In fact, as your business scales, you will almost certainly see cases of redundant and duplicate applications — those being SaaS tools that have overlapping features, or instances where multiple teams or employees are subscribed to the exact same software, independently of one another.
Unless you have both visibility and control of your software, that is.
Remove or amend contractual clauses
When it comes to negotiating software contracts, many buyers only focus on the price, not realizing that there are certain contractual clauses that can be negotiated as well. One such clause being auto renewals.
While 89% of vendors include these auto renewal clauses in their contracts, according to Vertice’s Head of Buying, Nick Riley, almost all of them will remove these clauses when asked to do so.
They aren’t the only clause to be wary of though. You should also be aware of price uplifts.
This is because 88% of SaaS vendors include clauses in their contracts that allow them to increase their pricing at any given time, in many cases without having to notify the customer. In fact, Microsoft itself has announced that it will be reviewing its pricing every six months, which will likely mean further increases down the line.
By negotiating a maximum price cap, you can more effectively manage and prepare for any future price rises. You should also consider working with an intermediary to negotiate on your behalf, as they will understand the intricacies of SaaS purchasing and therefore be able to advise you on the specific details related to any agreement.
Use pricing intelligence to secure the best possible deal
In order to survive any period of economic uncertainty, businesses must do all they can to reduce their spending. As one of the largest outgoings in any modern organization, this increasingly includes SaaS.
The fact that the cost of software is rising isn’t the only challenge you face as a business though. There’s also the fact that in most instances, the vendors hold all the cards in negotiations. Or at least they have the upper hand. Just take the fact that as many as 90% of buyers are overpaying for SaaS by as much as 20-30%.
But with the right leverage, this doesn’t have to be the case.
Which is where we come in.
At Vertice, we have access to the pricing and discounting data of more than 13,000 SaaS vendors worldwide. This not only provides us with the insights into what other companies are paying for software, but it allows us to leverage this pricing intelligence on your behalf, negotiating the best possible deal on any SaaS contract.