Software Inflation Surpasses Consumer Price Index, Driving Concerns for Businesses

Software inflation has surged to 8.7%, more than double the consumer price index (CPI) in the U.S., according to Vertice, a SaaS and cloud spending management company. Despite a decline in the CPI this year, software prices have increased noticeably, with sales software seeing the most rapid inflation at 10.6%, followed by finance (10.2%) and productivity tools (10.1%). This upward trend in software prices is occurring despite global concerns about rising costs of living, creating a "cost of software crisis" for businesses.

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Vertice's annual "SaaS Inflation Index" report indicates that almost three-quarters of SaaS vendors have raised prices in 2023, leading to record-high levels of total software spending. The report, based on purchasing data from 16,000 vendors, highlights that software vendors are increasing prices more aggressively than other sectors. The industry's decision to raise prices is seen as a strategy to bolster revenue growth amid challenging economic conditions.

Major tech companies, including IBM and Salesforce, have implemented or announced price increases for their services. IBM is set to impose various price hikes for its cloud customers in January, affecting data storage rates. Salesforce has raised list prices by an average of 9% across several offerings, defending the move by emphasizing the absence of list price increases for seven years.

SAP has also announced an increase in annual on-premises support fees by up to 5%, citing current market conditions characterized by high inflation rates. As a result, businesses are facing higher software costs, with SaaS spending accounting for 14.1% of a typical company's expense line, surpassing contributions to healthcare coverage for the first time.

The software inflation trend is creating challenges for buyers, as more than half (57%) of SaaS vendors hide their pricing from public view, making it difficult for customers to assess and compare costs. Vertice notes that software spending growth is driven not only by price increases (8.7%) but also by "shrinkflation," where vendors charge the same price for reduced functionality to boost revenues during economic uncertainty.

Businesses are grappling with the impact of rising software costs, and the software spending landscape is evolving rapidly.