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What is SaaS Inflation? How To Counter It?

Ajay Jay
March 28, 2024
5 min read

Imagine you're at a buffet. An all-you-can-eat dining experience with a plethora of dishes at your disposal. Now, visualize transferring that to the digital business space - lots of software the company can take advantage of. We call this the Software-as-a-Service (SaaS) industry. Yet, as tempting as the buffet style of software accessibility may seem, it comes with a cost often referred to as SaaS inflation. So, what is it exactly? How can your company prevent it? Let's delve into this modern digital phenomenon.

"SaaS inflation can be likened to a buffet where you consume too much, leading to a bloated software subscription budget."

  • Understanding SaaS Inflation: An exploration of what SaaS inflation really means.
  • Countering SaaS Inflation: Practical strategies to keep your company's software budget in check.

TL:DR: Five ways to counter accusations of SaaS price inflation

Accusations of SaaS price inflation can be unsettling and can create a negative perception among customers and potential users. However, there are several ways to address these claims effectively.

1. Provide a Clear Explanation for Price Changes

One of the most empowering responses to accusations of price inflation is transparency. SaaS vendors should proactively communicate the reasons behind any changes in their prices. For instance, if price increase is due to higher operating costs, more comprehensive features, or improved security measures, those facts should be shared openly. Providing a clear, detailed context helps to maintain trust and mitigate customers' backlash.

2. Highlight the Increased Value

Rather than focusing solely on price, provide a clear account of the increased value that your SaaS offering brings. Positively spin the price increase by emphasizing how the enhanced features, better user experience, or additional support justify the new pricing. This approach can help convince customers that they are receiving more bang for their buck, which can soften the blow of a price increase.

3. Staying Updated with Market Benchmarks

It's always critical to stay in touch with the market pulse when it comes to pricing metrics. If your SaaS product price changes are in line with what's happening across the marketplace, share this through an informative approach. Use industry statistics and market benchmarks to show your customers that your pricing is standard, reasonable, and fair.

4. Develop a Coherent SaaS Management Strategy

To mitigate the impact of rising prices, startups should consider establishing a comprehensive SaaS management strategy. By doing so, companies can rationalize their software investments, eliminate duplicate tools, negotiate better contracts, and more effectively manage SaaS spending. It, in turn, lessens the pressure of increased SaaS costs on businesses, reducing the risk of overpayment.

5. Encourage Negotiation and Consider Unbundling

Lastly, make room for negotiation considering the increasing trend of pushing back on SaaS price inflation. By opening doors to discussion, you paint a picture of flexibility and concern for customer satisfaction. Alternatively, consider unbundling your services, allowing customers to choose, pay for only what they need and perceive the value individually, thereby reducing resentment towards a blanket price increase.

By adopting these strategies, SaaS vendors can effectively navigate accusations of price inflation, keeping their customers satisfied and their business reputation intact.

Is SaaS price inflation a real thing?

Yes, SaaS price inflation is a real phenomenon and not just a product of imagination or memes that emerged in late 2022. Without a doubt, the effects are sweeping across the industry, and this is more than just conjecture. At the beginning of 2023, SaaS companies are witnessing a hike in pricing inflation. When stacked against global inflation, which has dropped to 5.3%, SaaS prices have climbed by 8.7%. This imposes a question mark in the minds of customers and the market at large: Is this justifiable?

The term 'SaaS shrinkflation' has also come into existence, pointing towards the shift in perception and implying that less is being offered for more. However, it's crucial to bridge the gap between perception and reality. The reality is, pricing adjustments are part of a broader economic picture. The Vertices annual SaaS Inflation Index report, for instance, shows software prices have skyrocketed even when the Consumer Price Index (CPI) indicates a decrease compared to 2022. Software inflation stands at a whopping 136% over the annual CPI rate.

To prepare for pricing in 2024, anticipations have been made surrounding substantial inflation across various SaaS categories. Therefore, for businesses relying on price-sensitive customers for revenue, having a solid strategy to counter these accusations is now more crucial than ever.

Combatting SaaS price inflation doesn't mean dropping your prices. It's about demonstrating the reasons behind these changes, showing improved value, explaining higher costs and changes in market benchmarks. In essence, it's about framing an understandable narrative that aligns your pricing strategy with customer expectations.

When is a price increase ‘SaaS inflation'?

Firstly, it's crucial to clarify that a price increase is not automatically equivalent to 'SaaS inflation'. Just as in the physical world, prices for various goods and services, including SaaS offerings, will rise over time due to normal economic inflation. This is a natural progression in any capitalist economy and a reality that businesses must grapple with. SaaS contracts often account for this with an automatic 3% price increase clause. But when does this become 'SaaS inflation’?

A price hike transforms into what has been termed 'SaaS inflation' when the rise in the cost of SaaS tools significantly outpaces the rate of general economic inflation. This distinction was heavily underlined in 2023 when SaaS prices rose by a whopping 8.7%, even while global inflation dropped to 5.3%. This soaring ascent in software costs, 136% higher than the annual Consumer Price Index (CPI) rate according to the SaaS Inflation Index, is what sets 'SaaS inflation' apart.

You must also consider the concept of 'SaaS shrinkflation'. This occurs when SaaS vendors reduce the functionality or features of a SaaS product without lowering the price, effectively raising the per-unit cost and contributing to the perceived inflation. This sideways move often goes unnoticed but has the same result as a direct price increase.

In conclusion, 'SaaS inflation' is a term specific to the SaaS industry, referring to price increases that significantly outstrip the rate of general economic inflation, coupled potentially with 'SaaS shrinkflation'. However, remember that just as in any other industry, there is a valid and reasonable ground for price shifts in the SaaS landscape. Yet, when these changes become disproportionate or not justifiable by value addition, they come under the umbrella of 'SaaS inflation'.

How are buyers preparing to push back on SaaS price inflation?

As SaaS inflation becomes a growing concern within the industry, customers are becoming more vigilant and proactive. They're preparing several strategies to push back against these increasing prices, amongst these include some tried-and-true tactics as well as unique approaches specific to the digital SaaS market.

Negotiating Better Deals

One of the most popular strategies that buyers employ is negotiation. The conversations involving negotiations often extend beyond the price. It elaborates into such areas as service level agreements (SLAs), additional features, or longer contract durations. By understanding their business needs intricately and aligning these with the SaaS offerings, customers can gain a stronger bargaining position.

Unbundling SaaS Services

Another efficient method employed is the tactic of unbundling. Instead of procuring all-encompassing packages that might include unwanted features, customers are choosing to prioritize their needs. By opting to unbundle SaaS offerings, they not only tailor the product more precisely to their requirements but also avoid paying for unnecessary additions.

Switching Vendors

The current SaaS environment is dynamic and competitive. If a customer feels they aren't receiving the value they're paying for, or the price increases are unjustified, they may opt to transition to another SaaS provider. Comparing different vendors, their prices and the value they provide can often result in identifying better alternatives. This competition drives the market towards affordable and value-driven solutions.

Anticipatory Budgeting

Savvy businesses are also focusing on building anticipatory budgets. They are monitoring the SaaS market diligently to observe the pricing benchmarks and accordingly allocating funds which accommodate potential price increments. This farsighted budgeting aids them to stay ahead of the inflationary curve. While each of these strategies comes with its unique benefits and challenges, they all share a common goal- to ensure an optimized balance between the value provided by SaaS services and their associated costs.

How to respond to accusations of SaaS price inflation

In light of recent trends, accusations of SaaS price inflation might crop up more frequently. However, when these challenges appear, they should be met with grace and transparency. Anticipating concerns and having well-thought-out responses can help assuage customers’ fears, making sure these accusations don't escalate to full-blown complaints or lead to a loss in trust. Below we discuss some ways that companies can effectively respond.

Stand Firm on the Value Proposition

One of the most effective ways to respond to such accusations is to articulate the amplified value proposition. Show users just how much they're getting in return for the prices they're paying. This may take the form of new features, improved services, or sometimes, survival. After all, in a competitive economy, businesses must increase prices to maintain the quality of their products and services. How you communicate this, however, is key. It's essential to keep your message unambiguous and to frame it in a manner that highlights the customer's best interests.

Transparent Communication

Transparency and honesty can go a long way in dismantling any accusation, including those of SaaS price inflation. Make sure you're clear and upfront about why prices are going up. If it's due to increased costs in production, higher salaries, or expanded feature sets, let the users know. Communication is a crucial tool in bridging information gaps and can help eliminate misunderstandings that can lead to such accusations.

Maintain an Open Door Policy

Another strategy is to ensure you maintain an open door policy. This means directly addressing customers' concerns and providing them with a platform to express their doubts. Whether it's through email, live chat, or social media, being accessible can help put consumers' minds at ease and build confidence in your response.

Review Your Pricing Strategy

This might also be a good time to review your pricing strategy. Are your prices aligned with the value users are getting? Are there alternate models you can consider to ease the pressure on your users while ensuring your business thrives? These are questions worth pondering. In the end, striking a balance between affordable rates and maintaining a profitable business might be the best defense against accusations of SaaS price inflation.

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SaaS inflation and usage based pricing

Alongside SaaS inflation, there is a rising trend known as usage-based pricing. Simply, it's a pricing model where the cost is directly tied to the customer's usage of the software. This has gained popularity as a fairer method of pricing, given that it aligns directly with the value the customer gets from the service. Let's delve into how this model factors into the SaaS inflation discussion.

How Usage-Based Pricing Functions

Usage-based pricing operates on the principle of “pay as you go.” Customers are only billed for the services they utilize, thus creating a linear correlation between use and expenditure. This ensures that customers feel they’re getting their money’s worth and reduces the chances of accusations of unnecessary price inflation.

The Impact on SaaS Inflation

Adopting a usage-based pricing model can serve as an effective counter to claims of SaaS inflation. As the charges are dependent on usage, it eliminates the concern of paying for unused services or features, a contributing factor often tied to SaaS inflation. Moreover, it places the power in the hands of the customers, allowing them to control their expenses based on their usage.

Balancing Usage-Based Pricing and Value

While usage-based pricing seems an ideal solution, it's crucial for SaaS companies to strike a balance. The pricing should still reflect the value of the software, and companies must ensure they're not underpricing their products. A key to this is effective communication about the value provided and the corresponding cost, which can help to justify the pricing to the customer.

The Rise of Saas Shrinkflation

Moving on to another interesting concept in the SaaS industry is 'shrinkflation'. This occurs when the price remains the same, but the value or the number of features decreases. 'Shrinkflation' can fuel dissatisfaction among customers and lead to accusations of SaaS inflation, as users feel they're paying more for less. It requires careful attention along with a good user communication strategy and possibly introducing unbundling of services to pre-empt issues and maintain customer satisfaction.

Five ways to get ready to defend your prices

As a SaaS vendor, it is essential that you prepare to defend your prices in the face of accusations of inflation. This involves understanding your pricing strategy, providing clear explanations for price changes, and highlighting the increased value that customers receive. Here are five strategies you can adopt to prepare for such situations.

1. Understanding Your Pricing Strategy

Your pricing strategy is a reflection of your value proposition. Make sure it aligns with the market trends and your operational costs. Often, knowing why and how prices are set can give you a significant advantage when it comes to justifying them to your customers. Technology can be your ally here, with pricing and value management platforms like Ibbaka Valio proving to be exceedingly helpful.

2. Clear Communication about Price Changes

When prices change, ensuring clear communication with your customers can prevent misunderstandings. Be transparent about the reasons for the price hike, including increasing supplier costs or additional value added to the product or service. This openness builds trust and assures your customers that the price change isn't arbitrary.

3. Highlighting Increased Value

Increased prices should correspond with increased value. If you've invested in improving your product or service, this should reflect in your pricing. The upgrades might be in the form of extra features, enhanced customer service, or improved functionality. Make sure your customer base understand the rationale behind the price hike.

4. Be Prepared for Negotiations and Unbundling

Customers may push back against price increases by asking for negotiations or even unbundling of services. Be ready to navigate these discussions by understanding your pricing flexibility and knowing which services can and cannot be unbundled. Remember, you can always turn these conversations into opportunities to display the inherent value of your bundled services.

5. Monitoring the Market

Keeping an eye on market trends is fundamental. Regularly track price changes by competitors and understand alternatives available to buyers. Monitor any shifts in the benchmark prices in the industry, so you can better explain your prices relative to the market. Remember, staying competitive doesn't just mean matching lower prices, but also justifying higher ones.

Frequently Asked Questions

When it comes to the concept of SaaS inflation, it’s normal to have questions. We’ve compiled a list of common inquiries to present answers in the most clear and detailed manner possible. Let's take a closer look.

What is SaaS inflation?

SaaS inflation is simply an increase in the prices of SaaS services that exceeds the general inflation rate in the economy. This phenomenon has gained attention as customers note the upward pricing trend in the SaaS industry.

How can SaaS vendors justify price increases?

Price hikes in SaaS can be attributed to several factors. This includes advancing technology, the introduction of new features, heightened competition, increased cost of operations, and a response to market benchmarks. A deep understanding of these factors can help SaaS vendors effectively communicate price changes to their clients.

What are the common mistakes in SaaS contracts?

Common mistakes in SaaS contracts may include overlooking auto-renewal clauses, not understanding the usage terms, or being unaware of data privacy provisions. Customers often overpay for SaaS by as much as 30% due to these oversights. It's essential to review and understand the agreement before committing to a subscription.

What is usage-based pricing?

Usage-based pricing is a pricing model where the cost of the software is directly proportional to the customer's usage of the service. This model has gained popularity for its fair approach, directly aligning the cost with the value derived from the service.

How can price increases impact businesses?

Price increases wage uncertainty, chaos, and financial strain on businesses. As costs rise, businesses grapple with maintaining their operations without compromising their profit margins. This is why understanding SaaS inflation and deploying optimal pricing strategies become crucial.

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