With inflation rates remaining high, organizations across the globe remain focused on driving down costs. In fact, one such area of focus is the amount being spent on SaaS applications – 14.1% of total spend in the average company, up from 12.7% last year.
But while this offers a huge opportunity for businesses to streamline their SaaS stack and cut back on costs, it can’t be ignored that it is also this area of spending that is almost immediately impacted by the rise in inflation.
What do we mean by this?
Well, with as many as 89% of software vendors including clauses in their contracts that allow them to increase their pricing, they are effectively in a position to pass on their own rising costs to their customers at the point of renewal.
So, what’s the solution? How can you keep your spend to a minimum in the face of high inflation rates?
In short, by understanding the true impact of SaaS inflation and by arming yourself with leverage.
Here’s everything you need to know.
The true impact of SaaS inflation
According to Gartner’s VP Analyst, Robert Neagle, when it comes to preparing for the impact of inflation on IT spending, organizations have three choices:
- Spend the same and do less
- Spend more and do the same
- Optimize spending in order to spend the same and do the same
But what if you could spend the same and do more? Or spend less and do the same?
We believe you can. In fact, there are almost certainly opportunities for you to drive down the cost of your SaaS stack. For this to happen though, you firstly need to understand the actual impact that inflation is having on software pricing.
SaaS pricing inflation is continuing to outpace market inflation
Over the past 12 months, SaaS inflation – in other words, the average price increase of software – increased by 8.7%, meaning the same unchanged set of SaaS products are costing businesses substantially more than they did a year ago.
To put this into perspective, a software stack that previously cost $1 million, would now cost an additional $87,000. And that’s before the addition of any new licenses or functionality, or even new tools.
Perhaps the biggest reason for this is because the majority of vendors raised their prices during this time period. 73% to be precise. And by an average of 12% – well above market inflation, which has fallen from 7.5% to 5.2% globally over the past year.
SaaS inflation, on the other hand, is almost identical to the extremely high rates seen in 2022, falling by only 0.3%.
The bottom line is, SaaS inflation remains uncomfortably high – 68% higher than for other products.
Here’s the thing though, this disparity isn’t unique to certain markets. In fact, SaaS inflation is higher than market inflation in virtually every corner of the globe.
Which country is getting the worst deal when it comes to SaaS price hikes?
While no country has gone unscathed by soaring software prices, the impact is definitely more noticeable in certain countries – at least in relation to general market inflation.
In Spain, for example, SaaS inflation is three times the rate of market inflation (CPI), whereas in the US, Singapore and Canada it’s around double.
In regions where CPI is extremely high, including both the UK and Australia, SaaS inflation is slightly more aligned with consumer inflation.
Being aware of how SaaS pricing inflation differs from market inflation can ultimately give you greater leverage during your vendor negotiations.
How to use this insight to your advantage
Jo Ann Rosenberger recommends that you ask vendors to explain exactly why they’ve hiked up their prices and whether the extent of these annual software price increases are justified. “These vague and general answers can in no way serve as sufficient detail to explain or justify the fairness of these unexpected increases that result in hefty budget overruns”.
Ultimately, by arming yourself with this economic data, she claims that you will be in a much stronger position to make informed counteroffers. It is, however, important that you’re giving yourself ample time to use this leverage to negotiate new terms.
The bottom line is, many SaaS companies rely on their customers renewing their subscription — often at an increased rate — in order to boost their revenue, which is why as many as 89% of them have auto-renewal clauses in their contracts.
It’s therefore crucial that you know exactly which of your contracts include this clause and what the notice period is for terminating or amending the contract, should you wish to.
But although understanding this economic data can give you some much needed leverage to secure better contract terms, it isn’t the only way to cut your SaaS spend.
How to mitigate against inflation’s impact on your SaaS budget
While there’s no doubt that inflation will impact your IT budget, there are ways you can mitigate some of its effects.
Get a handle on your true SaaS spend and usage
Before anything else, you need to gain visibility of your entire SaaS stack. This involves identifying all of the SaaS applications that are being subscribed to by your business.
You should specifically seek to understand:
- The cost of each subscription
- The number of licenses — or seats — you’re paying for
- The cost per license
- The terms of your contracts
- The purpose of the SaaS tool
- Who manages the subscription
- How each tool is being utilized and subsequently how many licenses are actually required
Build a SaaS system of record
It’s not enough just to catalog your organization’s software applications though, you also need to maintain it going forward. By doing so, you can:
- Obtain real-time visibility of your software apps from a single location
- Keep track of impending SaaS renewals, ensuring you have more buying power to negotiate better terms and enough time to cancel or amend your subscriptions
- Track SaaS spending and user licenses
- Avoid SaaS overlap
Identify and eliminate unused, duplicate and redundant SaaS apps
Vertice’s data indicates that organizations with between 100 and 400 employees waste half a million dollars on SaaS each year. For those with 1,000 to 2,000 employees, the damage is closer to $3 million.
Having total oversight of your tech stack and a solid understanding of the software utilization rates across your company is ultimately crucial for driving down this unnecessary expense.
With this in mind, start by identifying whether there are software applications that are being subscribed to that are either no longer required, or that include more licenses than are needed.
On a similar note, there may also be instances where you are paying for multiple subscriptions of the same tool, something known as SaaS duplication. The software apps most at risk of this are those that are used across multiple departments, for example project collaboration software, or even a tool such as Adobe Acrobat Pro.
It’s not just duplicate apps you need to be aware of though, it’s also redundant software applications — those that effectively do the same thing, or that have overlapping functionality.
By pinpointing these tools, you can better manage your IT budget, ensuring that you’re only paying for what is needed.
Give yourself time to negotiate better renewal terms
When it comes to renewing your software, it’s important to be aware of any auto-renewal clauses in your contract. In fact, given that 89% of vendors include them, you could be caught off guard and end up committing to a subscription you no longer need, at a price that’s likely higher than it needs to be — data suggests that buyers are overpaying for SaaS by as much as 30%.
Which is exactly why you need to allow yourself enough time to evaluate usage and spend, identify duplicate and redundant applications, and ultimately determine whether or not you actually want to renew your subscription — and if so, on what terms.
Remove auto-renewal clauses
As part of your software negotiations, you should request that any auto-renewal clauses are removed from your contract. In almost all cases, the vendor will comply, however if they don’t then you should ask that they include a clause requiring them to contact you 90 days ahead of the renewal date, in writing, to remind you of your upcoming renewal.
It’s not just time you need though, it’s also leverage.
Arming yourself with economic data is one way to tackle negotiations, but there are certainly other levers you can use, such as committing to longer-term contracts for a better rate and finding out ‘real’ vendor pricing, in other words the prices that other companies are actually paying.
Secure the best possible deal on every contract
One of the biggest challenges for any SaaS buyer is the overwhelming lack of pricing transparency in the market. In fact, with as many as 55% of vendors obscuring their pricing, you are often left with no frame of reference, making it incredibly difficult to leverage the best possible cost.
But even for the 45% of vendors that do share their list prices, there’s no easy way of knowing just how willing they are to discount. In other words, there’s no easy way of knowing what other customers actually pay.
Sure, you may be able to scrape information from some feature comparison sites or find an outdated reference to a vendor’s pricing on a forum, but this data is often fragmented and unreliable.
Which is where Vertice comes in. We provide validated pricing insights and discounting data from thousands of SaaS transactions, giving you the leverage you need to negotiate the best possible deal.
But that’s not all we do.
At Vertice, we also recognize that effective SaaS management requires time, which is why we take the burden of managing, buying and renewing SaaS off your hands.