Is SaaS price inflation a real thing?
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.
SaaS price inflation began to surface as a meme in late 2022. Early in 2023 it seems to be taking hold as many SaaS companies move to raise prices in response to inflation. Is SaaS price inflation a real thing? If so, what does this mean for pricing in 2023? How should SaaS vendors respond?
TL:DR: Five ways to counter accusations of SaaS price inflation
Be able to explain why prices have changed and what part of the price change is due to
Improved value
Higher costs
Changes in standard market benchmarks
Prepare for price negotiations
Know how and how much each set of functionality is being used
Be able to connect that use to value
Track price changes by your competitors and know what alternatives the buyer has
Be ready to call the buyer’s bluff, and when they say they don’t want to pay for certain functionality then don’t provide that functionality
Be ready to unbundle offers
Have a defensive bundle that includes only basic (and commoditized) functionality
Be able to turn off or charge separately for functionality that users claim they do not value
Be prepared to counter the positioning of SaaS subscription management platforms
Know if there are users that are getting value but are not being fully monetized (see Which users are you monetizing? Which should you monetize?)
Differentiate the bundles you make available directly versus the bundles available from Managed Service Providers and Software Asset Management providers - do not make it easy for MSPs to construct bundles that undercut your direct sales
Make sure you are documenting the value you deliver and tracking the value ration (V2C /LTV)
Have a value ratio target for each segment
Provide value enhances for customers with a low value ratio
If you can’t increase value or price, let your least attractive customers churn
Use a pricing and value management platform like Ibbaka Valio to do this
Is SaaS price inflation a real thing?
We first wrote about this back in November in Are B2B SaaS companies getting too aggressive with 2023 price increases?
Let’s see how things are playing out early in 2023.
The price increases are real and are going to be forced through. Based on our analysis of public reports we expect the below range of price increases in the US. Countries whose currencies are rising in value relative to the US$ may be slightly insulated, but countries whose currencies are declining relative to the US$ can expect even larger price increases. For example, for IBM, All Passport Advantage Eligible SaaS Products will see the following adjustments:
• 5% decrease: Swiss Franc
• 7% increase: Indian Rupee, and South Korean Won
• 10% increase: Canadian dollar
• 15% increase: British Pound, Euro, Danish Krone, Japanese Yen, Norwegian Krone, South African Rand, Swedish Krona
(from Your Guide To Software Price Inflation In 2023 by Anglepoint)
Typical range of Q1 price increases by SaaS category
The following ranges are based on publicly announced price increases for SaaS categories that Ibbaka tracks. This is of course just the tip of the iceberg. Many price changes are not announced publicly and there is likely to be set of vendors who respond to competitor price increases with price cuts or a reframing of their pricing.
Basic Infrastructure Services: 5-7% price increases - generally in line with 2022 inflation
Cybersecurity Applications: 10-12% price increases
Marketing Automation: 5-15% price increases (the range here reflects the wide variety of solutions; in general commoditized solutions will see lower price increases)
Financial Software: 7-9% price increases
Design Automation: 10-12% increases
IIoT Enablement: 10-15% increases
AI Applications: ??? there is too much rapid change happening to predict how prices will change in 2023
The question of price increases is complicated by the growing popularity of usage-based pricing. One can increase prices and see usage decline in response, thereby reducing overall revenue. These trends need to be carefully tracked in Q1.
When is a price increase ‘SaaS inflation’?
It is going to be important to distinguish price increases for current services from price increases that reflect increased value or new functionality.
A price increase that is justified by increased costs or by reference to inflation is an example of SaaS price inflation. There will be many examples of this in Q1, though we do not think the issue is as extreme as some are reporting.
It is not price inflation when a vendor is adding new functionality, or moving to a better pricing design that connects price to value .
This shows a path forward. If you are planning to make a major change to your pricing it is better to do it together with a new release and a change to your pricing model. Direct price increases, even if coached as a response to inflation, will in general face pushback.
How are buyers preparing to push back on SaaS price inflation?
The pushback can take several forms. One is more robust price negotiations. Buyers are being coached to prepare for SaaS price negotiations, vendors had better be prepared to do the same.
A good negotiation comes from a strong and informed position when it comes to what you own and what you need. What are you paying for that isn’t being used? What might you need for future employees as you grow? How are your software publisher’s sales team being incentivised and on which products? Is there a more cost effective way to purchase what you need? from “Your Guide to Software Price Inflation 2023”
Another tactic that we are seeing is unbundling. Over the past decade, SaaS companies have gotten very good at building and selling software bundles. Microsoft is a great example of this. It has constructed many bundles and incented sales to sell these. According to The Information, there is growing resistance to this among buyers.
As companies scrutinize their software spending amid the slowing economy, they’re pushing back on software bundles, looking to pay only for what they use. Microsoft customers, for example, are increasingly telling the tech giant they only want certain security and compliance parts of the all-in-one bundle, known as E5, without other business apps. As a result, customers are often striking narrower deals that typically cost about 5% less. from “Microsoft squeezed by growing resistance to software bundles”
This does not mean that you should abandon the bundling tactic. Rather, you need to create some defensive bundles that you can offer as alternatives during an inflationary or recessionary period.
Another interesting tactic that some are advocating is to buy through a managed service provider rather than buying directly.
Using a managed service provider to support your internal resources combines an extra layer of expertise and a series of lifecycle change management and optimization activities, transforming existing practices to deliver transparency and optimization that makes yearly negotiations an integrated part of the process. They will establish a platform of more trustworthy data and leverage and augment your SAM (Software Asset Management) tools. from “Your Guide to Software Price Inflation 2023”
There is a growing set of companies that help buyers manage SaaS spend. SaaS vendors need to be aware of these companies, track their offers, and work out how to make them allies. Some examples of such companies are …
Vertice - SaaS purchasing platform
Productiv - SaaS management built on SaaS intelligence
Zylo - one source of truth for all your SaaS
Find out if your customers are talking to companies that are promising to reduce their SaaS spend. Understand the promises these companies are making and be prepared to counter them.
How to respond to accusations of SaaS price inflation
Be clear on what is a straight price increase and what is a price increase based on improved functionality and greater value creation. Be ready to communicate the reasons for price increases.
Separate commoditized functionality from highly differentiated functionality and don’t let the buyer use commoditization as a way to pull down overall prices.
Prepare for price negotiations
Know how and how much each set of functionality is being used
Be able to connect that use to value
Track price changes by your competitors and know what alternatives the buyer has
Be ready to call the buyer’s bluff, and when they say they don’t want to pay for certain functionality then don’t provide that functionality
Base your price on the value you are delivering to customers (value to customer or V2C). Track the value ratio and make sure that value and price are aligned (the value ration is Value to Customer / Lifetime Customer Value). Hopefully you have segmented your customer base using the following model before you implemented your price increases.
A price and value management platform like Ibbaka Valio can help you gather the data you need to justify price changes.
SaaS inflation and usage based pricing
An effective way to address charges of SaaS price inflation is to layer in usage-based pricing. Design your usage based pricing to track the completion of value paths (a series of actions taken by a user that results in something they value). About 60-70% of your revenue should come from a subscription, 30-40% from usage. Be willing to reduce your subscription price in return for adding in a usage fee.
This can be a very effective way of pushing back on charges of SaaS price inflation. You are showing flexibility while better connecting price to value. And as inflation is tamed and the economy emerges from recession you will be well positioned to grow.
Five ways to get ready to defend your prices
Be able to explain why prices have changed and what part of the price change is due to
Improved value
Higher costs
Changes in standard market benchmarks
Prepare for price negotiations (see above)
Know how and how much each set of functionality is being used
Be able to connect that use to value
Track price changes by your competitors and know what alternatives the buyer has
Be ready to call the buyer’s bluff, and when they say they don’t want to pay for certain functionality then don’t provide that functionality
Be ready to unbundle offers
Have a defensive bundle that includes only basic (and commoditized) functionality
Be able to turn off or charge separately for functionality that users claim they do not value
Be prepared to counter the positioning of SaaS subscription management platforms
Know if there are users that are getting value but are not being fully monetized (see Which users are you monetizing? Which should you monetize?)
Differentiate the bundles you make available directly versus the bundles available from Managed Service Providers and Software Asset Management providers - do not make it easy for MSPs to construct bundles that undercut your direct sales
Make sure you are documenting the value you deliver and tracking the value ration (V2C /LTV)
Have a value ratio target for each segment
Provide value enhances for customers with a low value ratio
If you can’t increase value or price, let your least attractive customers churn
Let’s not accept the SaaS price inflation narrative. We can counter it by making sure our prices reflect the value we are delivering.