Dive Brief:
- The combined effect of inflation, competitive labor markets and environmental sustainability requirements will lead to 15% to 20% higher SaaS costs by 2025, according to Gartner projections.
- “Although there may be some justification for pricing uplifts due to increased expenses or currency fluctuations, some IT vendors may be opportunistically looking to grow profitability,” Hannah Decker, principal analyst and one of the authors of the report, said in an email to CIO Dive.
- The projected increase in SaaS costs comes as global economies are reeling from record-setting inflation. Software providers, including Slack and Microsoft, have already increased product pricing in 2022.
Dive Insight:
While vendors might claim inflation, competitive labor markets and environmental sustainability requirements are driving price increases, customers don’t have to take these claims at face value.
“CIOs must request a detailed explanation of the uplift to understand how the vendor's business is being impacted by the current economic climate to ensure they are not presenting ‘exaggerated truths,’” Decker said.
With proper documentation, CIOs can have the advantage during pricing negotiations. Decker suggests CIOs push back with data from economic indexes or statements from earnings calls if the vendor is a publicly traded company.
“For larger contracts where the CIO has a peer-to-peer relationship with the vendor, this may be more impactful,” Decker said. “For smaller vendors, the CIO may not have such a direct relationship.”
If negotiations don’t go in the customer’s favor, CIOs might need to pivot by stepping down to a lower level of support or reducing licensing, according to the Gartner report.
As software tools have matured, companies rely more and more on them to enhance business operations. Software spend will rise at a compounded annual growth rate of 10.3% through this year, according to a Forrester report. That's more than twice the growth rate of all other tech spending.
“The nature of SaaS is consumption- and subscription-oriented so it can’t be a one-way street for the vendor,” Stephen White, senior director analyst at Gartner and one of the authors of the report, said in an email. “It should be a bilateral agreement benefitting all parties.”
