SaaS price inflation is rising 4 times faster than market inflation, research
Both prices and SaaS consumption are rising
Software as a service (SaaS) pricing inflation has risen more than four times faster than economic inflation in the UK over the past 12 months, according to a new analysis by Vertice, a SaaS purchasing and spend management platform.
SaaS is a software distribution model in which software is hosted by a cloud provider, who then makes it accessible to end users through the internet. In this model, an independent software vendor (ISV) may choose to host the application by contracting the services of a third-party cloud provider. In case of bigger organisations like Microsoft, the software seller and the cloud service provider can be the same entity.
According to Vertice's analysis, spending on SaaS solutions increased from $13 billion to $157 billion yearly between 2010 and 2020, a more than tenfold increase.
Investment accelerated at an even faster pace during the pandemic, as businesses rushed to enable remote work. Following the first lockdown in 2020, SaaS expenditure rose by 26%, and this upward trend has only persisted in the years since then.
Currently, software investments account for around 12.7% of all corporate expenditure, which means that SaaS currently accounts for $1 out of every $8 spent by modern organisations.
As of 2022, SaaS costs businesses an average of $3,112 per employee annually; for technology companies, the spending jumps to $4,552.
In the UK and Australia, spending on SaaS has doubled on average in only five years, said Vertice, whereas if costs were rising with inflation this doubling would take 18 years.
More than 10,000 SaaS contracts were analysed in the study. The results revealed that 74% of providers have raised list prices since 2019. Almost all the remaining vendors have decreased the amount of the typical customer discount, hence increasing income without changing the list price.
The rapid increase in prices has meant that SaaS customers are on average spending 53% more on licensing than they were five years prior.
In the US, the cost of SaaS for organisations has grown 3.5 times faster than the general inflation rate. This finding holds true even after taking into account an exceptionally high national inflation rate in 2022.
"It's become clear that not only is SaaS critical to modern businesses, but also that it represents a growing cost centre that can rapidly spiral out of control without strategic management," said Joel Windels, VP of marketing at Vertice.
"Even without investing in new tools or added licences, the data shows that spending on SaaS is exploding. With an uncertain economic outlook for 2023, finance leaders absolutely have to start taking a more considered approach to SaaS spending if they are to maintain growth and streamline their operations."