Why prices are still going up when companies are spending less

SaaS Buying

Discover why software prices surge despite reduced spending. Explore the 2023 landscape of hikes, inflation, and AI investments.

Vendr | SaaS prices on the rise
Written by
Vendr Team
Published on
September 6, 2023
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Inflation rates are finally trending downwards — at least for U.S. consumer prices. The worst of software inflation, though, may be yet to come.

2023 has been the year of software price hikes. Microsoft, Google, Salesforce, and Zendesk, have all implemented price increases so far this year.

Shrinking workforces, higher inflation-driven costs, investments into AI, a strong US dollar, and a more challenging fundraising landscape have combined to make software price hikes the new norm. It’s a trend that started with the software companies at the top.


A perfect software pricing storm

The software at the top of the budget pecking order has, over the past few years, captured a decreasing share of wallet. The top 10 software vendors in 2021 accounted for 29% of software spend. In 2022, they captured only 27%. While top software companies can’t control the economy, they can control their prices. This led to our prediction earlier this year that top companies would raise their prices to make up for a decreasing share of wallet, and 2023 would be the year of the price hike.

That hunch came true. Half of the software vendors with the top share of wallet raised their prices in 2023, despite positive signals in the broader economy.

Google started the trend by hiking Google Workspace’s price by 20% in February. It also added an annual plan “to lock in the lowest prices” and deter churn — priced, for now, at the pre-price-hike rate to dampen the blow. Google Cloud storage prices also went up an average of 44% in April.

Microsoft, after a late-2021 Office 365 price increase, added global currency-based price adjustments this year. That addition translates into a 9% price hike in the United Kingdom and an 11% hike in the EU. That, along with a new $30/month Copilot AI add-on for Office 365, rather than AI being bundled with existing plans, could represent a large increase in average spend.

Salesforce is raising core prices by 9% in August. Zendesk pricing went up 12 to 20% in July and Enterprise plans now require a sales call (see our guide to Zendesk pricing and plans for more detailed info). Snowflake switched to US Dollar-only billing in November 2022, resulting in a net price increase for most global companies amid a strong US Dollar environment.

Other public SaaS vendors, including Zoom, Shopify, Atlassian, and Monday.com also raised prices. Where Gartner predicted software budgets would increase 11.3% in 2023, and TechCrunch recently reported that IT spend has continued to grow at a steady 4%, the price hikes mean that any budget increase will go to pay for already-deployed software.

Costs are driving price hikes

Software price hikes are driven in part by inflation. The cost of living has surged post-pandemic in most economies. Higher electricity costs, chip shortages, and rising wages all increase the cost of doing business.

If you have to choose between a marketing campaign or renewing a non-critical software subscription, you’ll likely opt for the former. No surprise that software churn is at a 4 year high, as Paddle reported in June.

That, in turn, hits software vendors’ bottom lines, driving them to cut spend as well. Even giants like Meta have aggressively cut costs for a “year of efficiency.”

Cut software budgets translate into tech jobs disappearing as funds dry up. Companies are forced to do more with fewer people.

“In 2018 the typical firm that raised a round of $10m-25m had some 50 employees,” reported the Economist in July. “In 2023 a similar one employs 41.” That downsizing has seen 220,000 tech jobs disappear so far in 2023—and each employee represents lost software licenses as they log out of their former employee’s tools.

So even if a software vendor doesn’t get cut from a company’s budget, it’s likely now being used by fewer people inside that company. Teams are scrutinizing every line item, buying software only for critical users, and choosing lower-tier software plans. As more companies cut seats and plans, the total software spend gets hit even harder.

That translates into a massive 45% decrease in average contract value between Q1 and Q2 2023, as teams purchase fewer seats and select lower-priced tiers.

Charging more for software is the only way to maintain revenue when vendors can no longer make it up in volume.


Why raise prices when budgets are tight?

Mission-critical software is sticky. There are certain tools you can't scale back on, even if the price goes up.

Price and stickiness correlate. If company processes are already embedded in a product, buyers are more willing to pay more instead of switching to a different solution.

Less crucial tools are easier to drop. As Paddle’s churn report found, when budgets get cut, “products with few stakeholder champions will be the first to go.”

That hurts startups, but helps software giants with larger software suites. Your company might try to wring more value out of existing Google Workspace or Office 365 subscriptions while churning out of a newer startup’s offering that performs a single task.

Stickiness has given larger software companies the headroom to raise prices, and a chance to earn back their historic share of wallet even in a difficult environment.

That has already translated into a drop in discounting. Across Vendr’s software negotiations, we’ve seen a gradual decline in average discounts. The discount rate decreased from 11% in 2022 to 9% in Q1 2023 then dropped to only 7% in Q2 2023.

List prices are the new normal in software. The larger software vendors have little reason to discount when their products are a standard you have to buy. Smaller software vendors know they’ll struggle to retain customers, and need to earn the lifetime value of a contract far quicker than before.

Going forward, it could mean that smaller, pre-IPO software startups will be less likely to raise prices and more willing to compete on cost to gain a share of spend. That is, if they’re able to continue to raise funding, something that’s increasingly difficult in a high-interest-rate environment.

It could also mean that the most sticky, difficult-to-replace software in your stack may keep going up in price.

Investments into future tech aren’t paying off – yet

At the same time, software companies are spending massively on AI and other future tech:

  • Meta lost over $3.7 billion on Reality Labs research and development, far more than their spending reductions could offset, reports the WSJ.
  • Microsoft CFO Amy Hood announced “accelerate[d] investment in our cloud infrastructure” to meet Microsoft Cloud growth and AI platform demand.
  • Snap’s cost of revenue increased 11% percent, rising costs Ben Thompson of Stratechery suspects are fueled by investments in Snap’s “My AI.”

“Generative models can add huge compute costs,” cautions SaaS Capital’s Rob Blecher, indicating that these costs must be made up in new revenue or lower margins.

Despite those expenditures, new AI-driven revenue isn’t doing much for the bottom line.

“Growth from our AI services will be gradual,” said Microsoft’s Hood. Bloomberg found that investors are not giving a premium to AI stocks.

This aligns with what we’ve seen so far. Vendr’s data shows that AI integration doesn't strongly influence SaaS purchasing.

That leaves the new investments to be recouped with higher pricing on traditional software suites where customers have lower price sensitivity.

Going forward, new features—especially those powered by AI—will most likely only be added to higher-tier plans to drive increased subscription revenue. We’re already seeing with Google Workspace’s latest features coming only to mid and top-tier plans. AI add-ons might be pulled into the core subscription plans as well, if opt-in adoption doesn’t drive the returns needed to pay back the investment. We’ll also likely see annual plans be increasingly required or heavily incentivized in pricing, to bring churn rates down.

The year of price hikes is far from over.


Vendr Team
Vendr Team
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Vendr's team of SaaS and negotiation experts provide their curated insights into the latest trends in software, tool capabilities, and modern procurement strategies.

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