The rise of 'SaaS shrinkflation' and how you can avoid it

With price hikes from the likes of Salesforce, Microsoft and Hubspot making headlines in 2023, it’s hardly surprising that the amount that businesses are spending on SaaS is increasing rapidly. Over three-quarters of vendors hiked prices in 2023, driving SaaS inflation to more than double the rate of US CPI inflation.

Above-inflation price increases are undoubtedly a thorn in the side for businesses trying to control costs, but they are (for the most part) clearly articulated by vendors.

In a frustrating development for CFOs and finance teams, vendors are resorting to more insidious tactics in a bid to pump revenues.

Research by Vertice has revealed that over one-quarter of businesses have been impacted by “SaaS shrinkflation” in the last 12 months, where vendors charge the same price for reduced functionality.

Software pricing is notoriously difficult to understand because the majority of contracts are made up of a complex constellation of packages, bundles and license agreements. SaaS shrinkflation takes advantage of this confusion, with vendors employing a handful of novel tactics to achieve the same benefits of inflating prices – without touching the list price itself.

How to spot SaaS shrinkflation in your tech stack

Understanding the ways vendors are raising their prices and using this knowledge to your advantage is the first step to reducing the impact of shrinkflation.

Common examples of SaaS shrinkflation

Non-cumulative pricing

Some vendors with usage-based pricing are gradually moving towards a use-it-or-lose-it model. Non-cumulative pricing limits the amount of value a customer can accrue over time. Some vendors do not allow customers to collect cumulative credits on usage or other criteria, instead making customers use their paid-for allowance or accept losing it for subsequent pay periods.

Reduced discounting

The willingness to offer discounts has reduced markedly among software vendors. Salespeople have far less flexibility to reduce the price than they once did, which means it’s harder to get generous discounts tools in your SaaS stack. This is an often ‘invisible’ element of shrinkflation but one that can have a huge impact on your overall annual spend.

Bundling

The concept of bundling features into a single offering is a tactic that more vendors are adopting to hide decreases in real value. While it can be easy to presume that more features mean greater value, this isn’t always the case. This is because buyers are left with no choice but to subscribe to a plan that consists of functionality they have no use for – at a higher cost than they would otherwise need to pay if they were only charged for the features they actually needed.

Unbundling

Where a company may have previously had ten features as part of their plan, some vendors are effectively unbundling these features at the point of renewal and include each one as an individual line item at a fixed cost. This is happening frequently with enterprise-level renewals, as these plan types are often obscured on the pricing page and customized to the individual company.

How to combat shrinkflation

The moment most companies notice the impact of shrinkflation is at the point of renewal, when they will be facing a larger bill without a clear explanation as to why. Get very familiar with the contract you originally signed and how the price or service has changed since this point.

To be in a strong negotiating position, you should start your due diligence way before a renewal date. While there’s no one-size-fits-all, I recommend starting this process 6-8 months before a renewal to give you enough time to gather the facts and start asking probing questions. If you fail to take this time, your supplier could realize that you need a quick turnaround and respond with inflexible terms.

To ultimately secure the best possible price, you need leverage. More specifically, you need intel into what other companies like yours are realistically paying for their subscriptions. Technology can help with this process by providing visibility into software pricing and supporting you with contract negotiations.

Eldar Tuvey is the CEO of Vertice. 

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