Inflation dominated the financial news landscape in 2022. In many markets, the consumer price index (CPI) hit its highest level in a generation. This growth in the cost of “things” also applies to software.
Almost every organization has come to rely on SaaS to run their business, from communication tools like Slack and Zoom to productivity suites like Microsoft 365 and Google Workspace, as well as service-specific platforms like Atlassian, Workday , NetSuite or Salesforce.
That’s according to a report on SaaS inflation pricing from Vertice, a purchase and expense management SaaS platform.
Spending on SaaS products increased more than tenfold between 2010 and 2020, from $13 billion to $157 billion per year. Investment accelerated even faster at the start of the coronavirus pandemic, as companies rushed to support remote working. SaaS spending grew 26% in the months after the initial lockdown in 2020 and has grown steadily in the years since.
Unlike many other large overheads, like payroll and rent, SaaS selection, management, and renewal is decentralized in nearly every organization. This for various reasons, but purchasing power plays the most important role. Buying power typically rests across multiple people and departments, with finance managers managing budget requirements, IT teams evaluating systems and compliance considerations, and department heads selecting based on functionality. It’s a complex web of decision-making, and even with the best of intentions, it can be difficult to get a single view of all the SaaS products a company uses.
This “wild west” of a cost center is an important issue when the share of total cost is considered. A growing percentage of all business spending is on SaaS, with around 12.7% of total spending now dedicated to software investments. This means that $1 of every $8 modern organizations spend is now spent on SaaS. To translate that into dollars – as of 2022, companies are spending around $3,112 per employee every year on SaaS. That figure rises to $4,552 for technology companies, which spend more than companies in any other category.
It only took five years for the average SaaS spend to double. Based on the rate of economic inflation over the same period, it would take 18 years for the cost of SaaS to double. This growth has far exceeded the rate of general economic inflation, even after taking into account recent periods of unusually high CPI.
Clearly, the impact of SaaS in terms of productivity, collaboration, and inclusion has been significant, but the cost that comes with it has also risen smoothly.
Analysis of more than 10,000 SaaS contracts shows that 74% of vendors have raised their list prices since 2019. Of the quarter of vendors that haven’t, nearly all have reduced the size of the average discount given to customers , thereby increasing expenses without touching the list price.
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 increased 3.5 times faster than the general inflation rate – even after taking into account an exceptionally high national inflation rate in 2022 .
SaaS inflation has exceeded general inflation rates even faster elsewhere; British and Australian business spending grew at a rate five times faster than regional economic inflation.
Joel Windels, Vice President of Marketing at Vertice, said: “It has become clear that not only is SaaS essential for modern businesses, but also that it represents a growing cost center that can quickly spiral out of control without strategic management. Even without investing in new tools or additional licenses, data shows that SaaS spending is exploding. With an uncertain economic outlook for 2023, finance leaders absolutely need to start taking a more considered approach to SaaS spending if they want to sustain growth and streamline operations.
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