Are B2B SaaS companies getting too aggressive with 2023 price increases?
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.
A new term is creeping into the business vocabulary. “SaaS Inflation.”
I first noticed this term two weeks ago in a very important report from Vertice, SaaS Inflation Index 2022.
Tech Central commented on this report in Opaque pricing hides actual value of SaaS.
It has since cropped up in several conversations with B2B SaaS buyers. The general tone of these conversations is that …
SaaS companies are trying to take advantage of general inflation to jack up prices.
Ouch. And there is some truth to this. I have also been having multiple conversations with both pricing experts and B2B SaaS leaders who plan to raise prices in 2023 and see Q1 and inflation as a good opportunity to do this.
We have commented on this earlier.
Let’s see what Vertice has to say and if B2B SaaS pricing decision makers need to be concerned.
Vertice on SaaS Pricing Inflation
Vertice is a sign of the growing maturity of B2B SaaS. It is a SaaS purchasing platform that promises to help you get your SaaS spending under control, providing cost control, efficiency and flexibility. The pricing page guarantees savings.
This will be a compelling proposition for many CFOs and SaaS buyers in 2023 and B2B SaaS companies should be prepared for this. Note that the value ratio, in this case saving over costs, grows from 2X, to 3X, to 4X across the packages.
So what does Vertice have to say about B2B SaaS pricing inflation?
SaaS pricing inflation is growing 4x faster than market inflation
Cost of SaaS doubles in only five years (see figure below)
SaaS pricing inflation rapidly outpacing market inflation (see figure below)
The SaaS inflation rate is around 4x greater than the market inflation rate
Vendor pricing tactics are driving SaaS inflation
These quotes should be red flags to SaaS pricing experts and we should be prepared to counter them.
Before we talk about that, let’s look at the Vertice data more closely.
From SaaS Inflation Index 2022
That is an aggressive growth curve. If you just look at these numbers you have to agree that B2B SaaS providers are getting greedy.
From SaaS Inflation Index 2022
The implication of this is that SaaS vendors are getting ahead of the market with price increases. As with all inflation metrics, it is important to dig in. Inflation is seldom even across the whole economy.
From SaaS Inflation Index 2022
The price increases in the design category stands out. Design has become a more and more important part of the economy (Ibbaka manages the Design Thinking group on LinkedIn which has grown to more than 200,000 members this year). As a result, demand for design software has taken off, and prices with demand.
The overall feeling one gets from this report is that SaaS pricing is getting out of control and that buyers need to take steps to get on top of this.
B2B SaaS is not pricing commodities
Is SaaS inflation a real issue?
Are SaaS companies getting ahead of themselves and raising prices too aggressively?
The answer to this turns on value, not price.
If B2B SaaS prices reflect increased value being provided then the price increases are justified.
A term like SaaS inflation obscures important differences between pricing solutions with highly differentiated functionality and commodities. An orange ten years ago is pretty much the same as an orange today. A barrel of oil has not changed in many decades. When the price goes up you get less value per dollar spent. This is not the case with B2B SaaS.
Let’s look at the SaaS design software category where prices are up a whopping 60%. As it happens, this is also a category that has seen a lot of innovation and these tools have become central to design work even as design has become a key to enterprise value creation. Take Figma as an example.
Figma is a collaboration platform for UI design. It has been widely adopted and makes UI design far more effective, at least that has been our experience at Ibbaka. The pricing model includes a free version and Figma is free to students and educators.
Adobe recently agreed to buy Figma for $20 billion. There has been tremendous value created for designers, the people who use their services, for Figma investors and I believe this will be a great deal for Adobe.
If this is SaaS pricing inflation it is the kind of inflation we need.
Pricing transparency, again
One of the main themes of the Vertice report is that B2B SaaS pricing is opaque.
Vendors also use pricing ambiguity to maximize the customer’s marginal willingness to pay. Only 45% of SaaS vendors publish their pricing, with the remainder obscuring the cost of at least some of their licensing — a technique that typically works to the advantage of the vendor rather than the customer.
There is a lot of truth to this. B2B SaaS pricing has a lot of challenges with pricing transparency and both buyers and sellers would make better decisions if there were more trust and transparency.
Back in March 2021, Ibbaka organized a round table on pricing transparency. Pricing Transparency - a conversation with Xiaohe Li, Stella Penso, Kyle Westra. One of the insights from this is that one needs to distinguish between price and pricing process and internal and external transparency.
In some companies, even people inside the company, sometimes even the sales team, do not really understand how prices are set. It is hard to be transparent with your customers when you do not have transparency yourself. Other companies, and this is what Vertice is criticising, hide their prices in various ways. They do not publish prices on their websites, they hide charges in their invoices, they have all sorts of additional service charges or transaction fees that do not show up in their pricing. Tricking people into paying extra is not a good business practice.
Generally, this is a bigger problem with sales led growth companies than product led growth companies. Product led growth companies are looking for frictionless transactions, which means that pricing has to be easy to understand and publicly available. For sales led growth companies, the website generally asks a prospective buyer to contact the company and to interact with a salesperson who may, or may not, understand how prices were set and who may, or may not, have a lot of discretion in negotiating the final price.
Pricing transparency does not have to mean published prices. Many solutions are complex, require configuration, and offer different levels of value to different customers. In this case, publishing prices can be meaningless. What is more important is to to be transparent on how prices are set.
The need to connect price and value
All of which brings us to value-based pricing. Value-based pricing provides an answer to the challenge of SaaS inflation.
If more value is being created for a customer it is fair to raise prices
Value-based pricing comes with a well understood process for segmenting markets, targeting customers, designing prices and setting price levels
Value-based pricing provides a way to tell value stories that justify price
At Ibbaka we connect value and price through our software platform Ibbaka Valio.
By connecting formal value models to pricing one can make sure that value delivered to your customers (V2C) is higher than the value you are capturing in price and show you if, when and how you should raise your prices.
If you are delivering more value, price increases should not be seen as inflationary.