2023: The year of the price hike?

Software startups — prepare for a mixed bag of good and bad news in 2023. On the positive side, software budgets are expected to increase by 11.3 percent, according to Gartner. However, just because the budget grows doesn’t mean you’ll have access to it.

In 2023, it’s possible that the largest software companies will consume budget growth, with little leftover for startups. To understand this, we must first understand the pecking order of software.

The software budget pecking order

In software, a few large companies always eat first — think AWS, Google, LinkedIn, etc. These are the mission-critical providers that tend to be sticky. They are hard to churn away from and tend to have few viable alternatives. How will the top software companies react to a hardening economic climate? While they can’t control the economy, they can control their price.

If Google raised its price, would you churn and go somewhere else? Or would you bite the bullet, pay the bill and cut something else? Bingo. The top software companies know they’re sticky.

So, if the economy gets worse, we expect 2023 to become the year of the price hike for the top software companies. This means less budget for you. Let’s dig in.

Declining share of wallet for top software companies

To predict the recipients of the software budget, we first need to understand where the money has historically flowed. To do so, we look at the share of wallet across Vendr’s database of $2B+ software purchases.

In 2021, the top 10 sellers earned a 29.46 percent share of wallet. This means that for every $1 spent on Vendr’s platform, $0.30 went to a top ten software company.

Here are the top 10 software companies, in 2021, by share of wallet:

But in 2022, we noticed a shift in the share of wallet – outside of the top ten companies.

Year-over-year, share of wallet for the top ten software companies declined by 9.23 percent to 26.74 percent. This means the biggest players received less budget allocation, allowing more dollars to flow to startups.

Here are the top 10 software companies, in 2022, by share of wallet:

On Vendr’s platform, companies like Datadog and Salesforce increased share of wallet YoY, by 1.22 percent and 1.58 percent, respectively. Meanwhile, Google and LinkedIn lost share of wallet YoY by -3.98 percent and -1.77 percent, respectively. AWS, perhaps the most resiliently, remained steady at the top with a ~6 percent share of wallet.

Prediction: 2023 becomes the year of the price hike

We predict that 2023 will become the year of the price hike, most notably within the top sellers with a declining share of wallet. Why? Someone has to foot the bill of higher costs incurred by inflation plus a declining share of wallet.

And the top companies can get away with it. They have the stickiest products, the most market share, and the least viable competition.

Perhaps oversimplified, but one way to predict the severity of the price hike is to monitor the impact of inflation coupled with the loss of market share.

For example, 6.5 percent inflation + 2 percent loss of market share = 8.5 percent price hike.

What does this mean for you? Even though software budgets may go up, they may not reach your pockets. If the top software companies begin raising prices, get ready to fight for every dollar.

There’s a pecking order in software, and those at the top eat first.

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