In today’s rapidly evolving business landscape, Software-as-a-Service (SaaS) solutions have become indispensable tools for organizations across industries. However, as SaaS adoption soars, many businesses find themselves grappling with an unexpected challenge: rising SaaS costs.
SaaS vendors are increasing pricing across the board in 2023 to keep up with rising costs, inflation, and top-line pressures. In nearly every renewal we’ve seen this year, vendors are either increasing prices or restructuring their packaging and pricing to increase revenue.
And costs are only going to keep going up. Gartner shows that SaaS spend continues to grow by 15-20% annually. Likewise, if you’re not centralizing visibility and coordinating SaaS life cycles, you’re likely to overspend by at least 25% over the next few years.
Suffice it to say: getting the best price for your SaaS is critical to your company’s bottom line. You must ensure that the price of your SaaS aligns with the perceived and actual value of the application.
In this blog, we’ll delve into the intricate world of SaaS pricing and shed light on why prices increase, the different pricing structures employed by SaaS companies, and most importantly, how you can negotiate favorable deals to optimize your SaaS expenses.
Understanding SaaS Pricing Structures
Before diving into the art of negotiation, it’s essential to grasp the diverse pricing structures employed by SaaS companies. A firm understanding of these structures empowers you to negotiate with your vendors.
- User-Based Pricing: This is the most prevalent pricing model. With user-based pricing, each individual who uses the software gets their own license. Typically, you pay for a predetermined number of licenses at a price per headcount. As the headcount grows, the cost per license tends to decrease.
- Consumption Pricing: In this model, your company pays for the actual consumption of the product. You are charged based on your usage, whether it’s the number of transactions, hours of usage, or another relevant metric. It’s important to be mindful of contractual usage limits, as exceeding these limits often results in additional overage fees. Consider DocuSign Envelopes, where you pay for a specific number of envelopes. If you surpass this limit, additional charges apply. It’s important to set the right level of consumption through understanding internal needs. Always underestimate. It’s easier and better to add more licenses later than overestimate and not used everything you paid for.
- Platform Fees: Some SaaS providers charge a flat dollar amount for the entire platform. This fee may encompass various services such as customer success, development environments (sandbox), and more. During negotiations, it’s possible to discuss and negotiate percentages for these individual components, which helps with cost optimization.
- Tiered Pricing: Tiered pricing structures involve increasing the price of the application as you add more features or licenses. This often results in different tiers with varying license quantities, features, contract terms, and more. A classic example of this pricing model is Zoom.
- Freemium Model: Certain SaaS products offer a freemium model, allowing users to access the software for free but with limited features and user allowances. Users have the option to upgrade to a paid version with enhanced features. Canva is a prime example of this model.
Do Higher SaaS Prices Reflect Higher Quality?
One common misconception is that higher prices equate to better quality in the realm of SaaS products. However, it’s important to debunk this notion. Price isn’t necessarily an indicator of quality but rather a reflection of a product’s maturity and complexity.
Higher prices often indicate a more mature or complex product. Established players in the industry, such as Salesforce, SAP, or NetSuite, tend to offer a wide range of product offerings with intricate implementations. While they may come at a premium, they provide a robust ecosystem of features and capabilities.
On the other hand, lower prices may signify newer entrants in the market. These companies might be seeking to gain a competitive edge by offering cost-effective solutions. However, it’s essential to evaluate whether their offerings meet your specific requirements and expectations.
What is the Standard for SaaS Price Increases?
It’s become a common trend for SaaS vendors to implement price increases during renewals. These increases are often in the range of 10%, but we’ve seen them as high as 30%. Unless already written into your contract, price increases are frequently introduced with minimal explanation. But, what drives these price hikes?
- Inflation: Vendors occasionally attribute price increases to general inflation. As operational costs rise, they may pass some of these costs onto customers.
- Cost of Business: Vendors may justify price increases by citing escalating business costs, including those associated with customer support, research and development, and infrastructure maintenance.
- Product Enhancements: SaaS companies invest in product development to enhance features, security, and performance. They may use this as a rationale for price adjustments.
- Optimization Paradox: An interesting phenomenon occurs when customers reduce licenses, consumption, or remove certain products to save money. In response, vendors may raise the unit or per-user cost, causing the overall contract value to increase.
- Maturity of SaaS Company: Early adopters of a SaaS tool may experience more frequent price increases year over year, especially as the SaaS company matures and refines its pricing strategy. You can, however, negotiate price caps to avoid this.
Negotiating Favorable Pricing: Tips and Strategies
In an economy where most SaaS vendors are raising prices, negotiating favorable contracts requires a strategic approach. Here are some tips to help you navigate the negotiation process:
- Start Conversations Early: Plan ahead by initiating discussions with your vendor 90-120 days before your contract renewal. This timeline not only allows you to proceed at your own pace but also puts pressure on the vendor to reach a mutually beneficial agreement.
- Benchmarking: Leverage benchmarking data to gain insights into what similar companies are paying for similar services. This knowledge serves as a powerful bargaining chip during negotiations, helping you secure more favorable terms.
- Ask for a Flat Renewal: There are a couple scenarios in which you may want to ask for a flat renewal. First, you’ve reduced licenses or made other adjustments that may result in increased costs. Explain to the vendor that this change was unforeseen or unplanned, and you didn’t budget for the new price. While it may not always work, some vendors are open to this negotiation. Second, you don’t have plans for growth and your license count will remain flat. Consider a flat renewal as a baseline cost avoidance win.
- Early Renewal: In some cases, renewing your contract before its expiration date can lock in better or flat pricing. Vendors may be more willing to accommodate your request if you commit to an early renewal. This is especially incentivizing if it’s the end of their fiscal quarter or year.
- Leverage Negotiation Levers: Explore various negotiation levers, such as the inclusion of additional services or features, extended contract terms, or volume commitments. Some of these levers may not necessarily lower contract prices but can add value to your agreement.
Renewing with Optimization in Mind
Navigating the complex terrain of SaaS pricing and negotiation is a vital skill for SaaS buyers. By understanding the different pricing structures and implementing effective negotiation strategies, you can optimize your SaaS expenses and secure favorable contracts.
Renewals are one of the best points to optimize. At Zylo, we understand the challenges of SaaS management and offer valuable resources to help you make informed decisions. Explore our Guide to SaaS Renewals for more insights on managing your SaaS contracts efficiently.
Remember, getting the best price for your SaaS isn’t just a smart business move—it’s an essential component of your company’s bottom line.