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Cost of software crisis: SaaS inflation running at more than double US consumer inflation

Almost three-quarters (73%) of SaaS vendors hiked prices in 2023, pushing software spending to all-time high according to Vertice’s annual SaaS Inflation Index.

Software inflation has remained stubbornly high in 2023 at 8.7% – more than double the rate of US CPI inflation according to Vertice, the SaaS and cloud spend optimization platform.

Whilst CPI inflation has fallen compared with 2022, Vertice’s “SaaS Inflation Index” shows that software prices are surging. In fact, a SaaS stack that cost $1,000,000 a year ago will today cost businesses an additional $87,000.

The Index, which analyzes data from 16,000 software vendors, identified a “SaaS inflation gap” – the difference between software inflation and market inflation – which has widened since last year. It shows the rate of inflation in software is over two times (136%) the annual CPI rate of inflation, and is showing no sign of slowing down. In contrast, this inflation difference was a much lower 38% in 2022.

Spiraling software price hikes

Almost three-quarters (73%) of software vendors increased their prices in 2023, including HubSpot (+12%), Microsoft (+15%), and Webflow (+23%).

More than half (57%) of SaaS vendors hide their pricing from public view, making it easier to mask price hikes.

Record high in SaaS business expenditure

For the first time ever, software spending has surpassed the contribution employers pay for healthcare coverage. SaaS spending now accounts for 14.1% of a typical company’s expense line – up from 12.7% last year – which means more than $1 of every $8 spent is on SaaS. This equates to an average of $7,900 per employee spent on software, compared to $5,760 in 2022.

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Rampant “SaaS shrinkflation”

Alarmingly, the research highlights that while overall SaaS spending is growing by 17.9%, only 8.7% comes from growth in prices. The remainder is driven by adding more users; introducing new software tools; and – most worryingly – the rise of “SaaS shrinkflation”.

Among Vertice’s customers, more than a quarter (28%) of contracts have been impacted by shrinkflation, where vendors charge the same price for reduced functionality as they look to increase revenues in tough economic conditions. Vertice has seen a rise in the use of opaque techniques to hide decreases in real value – including “bundling”, “unbundling”, and “currency harmonization”.

Eldar Tuvey, CEO and founder of Vertice, said:

While consumers across the world face a cost of living crisis, businesses are facing their own cost of software crisis, with costs rising much faster than last year, as vendors look to grow their top lines in a challenging macroeconomic environment. The growing prevalence of SaaS shrinkflation makes software pricing more difficult to navigate than ever.

“For businesses across the world, there is a pressing need to manage their cost base in order to allocate their resources to more productive areas and ride out the global downturn in better shape. Getting value for money starts with gathering accurate information and asking vendors lots of probing questions, for example: ‘What are other companies like us paying for their licenses?’

“Efficient businesses are not only more likely to turn a profit or avoid cashflow problems, but they are also less vulnerable to being forced into making redundancies that reduce productivity. Leaders should look to technologies that can control and centralize the software stack, provide visibility into software pricing, and support them with contract negotiations.”

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