Dive Brief:
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Software-as-a-service prices are soaring as vendors grapple with challenges such as inflation, according to London-based Vertice, which provides a platform designed to help companies with saving money on software purchases.
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Almost three quarters (73%) of SaaS providers have increased their prices since August 2022, according to a report published by Vertice, which has purchasing data on 16,000 vendors. SaaS prices increased 12% on average over the past 12 months, the report said.
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“This spike is very significant compared to previous years,” Joel Windels, vice president of global marketing at Vertice, told CFO Dive, adding that SaaS prices rose 6% on average in 2019, for example. “SaaS companies have traditionally relied on higher usage to boost overall contract value, but in the last 12 months, we have seen price hikes become one of the main levers used by vendors to drive revenue.”
Dive Insight:
Like other sectors across the economy, the SaaS market is “feeling the pinch” when it comes to inflation, according to the Vertice report.
“SaaS vendors themselves are also looking for ways to maximize their own profit margins, driving many to up the price of their plans,” the report said.
Earlier this year, Microsoft announced price hikes ranging from 9% to 15% for cloud products offered to customers in the U.K. and EU, starting April 1. At the time, the software giant said the move was intended to ensure that its customers would “have consistent pricing reflecting the exchange rate of the local currency to the US dollar.”
Meanwhile, Salesforce said last month that it planned to increase list prices an average of 9% across several of its offerings, including Sales Cloud and Marketing Cloud, beginning in August.
“Salesforce’s last list price increase was seven years ago, and since then the company has delivered 22 new releases, thousands of new features — including recent generative AI [artificial intelligence] innovations — and invested more than $20 billion in research and development,” the company said in a press release at the time.
Not all SaaS price increases are publicly disclosed, according to Vertice’s report.
“We’ve seen that certain vendors are driving up their costs in more subtle ways, using tactics like bundling or unbundling features and shifting from drawdown pricing models towards monthly usage models,” the report said.
On top of inflation, the sector has also faced slower growth in recent months, Windels said. “One way to increase revenue is to gain more customers,” he said. “Another way is to say, ‘Well, our costs are going up. We’re struggling to grow in the traditional sense. Let’s turn up the dial on our existing customers.’”
Global spending on information technology and business services fell to $24.1 billion in the first quarter, down 8% from a market peak a year earlier amid weakening cloud demand, according to research firm Information Services Group. SaaS spending in particular declined to $3.9 billion, a 4% drop.
“[T]he cloud services market has seen its blistering growth slow considerably in recent quarters as enterprises slow the pace of migrations and look to optimize existing workloads in response to the uncertain economic environment,” ISG President Steve Hall said in an April press release.
Salesforce reported slower revenue growth for the first quarter of its fiscal year 2024, with company executives pointing to continued macroeconomic pressures, particularly in North America.
“We are seeing some good things, but North America has taken the brunt of the deceleration,” Salesforce CFO Amy Weaver said during a June earnings call.
The company saw “strong new business growth” in parts of Europe, the Middle East and Africa during the first quarter, even as it experienced continued pressure in the U.S., Weaver said. Its revenue growth rate in the Americas was 10% year over year, compared with 17% in the EMEA region, she said.
Brian Millham, Salesforce president and chief operating officer, said during the earnings call that cash-strapped customers continued to “scrutinize every deal” in an uncertain economic environment.
