90% of SaaS Buyers Are Overpaying — Are You?

Negotiation, research into pricing models, and avoiding shelfware are key to maximizing value.
90% of SaaS Buyers Are Overpaying — Are You?
Photo: AmnajKhetsamtip

The process of buying, selling, and implementing software-as-a-service products is forcing companies to allocate excessive amounts of capital toward those types of services, according to new data. The research, from SaaS purchasing platform Vertice, found many companies are overpaying for products  from an industry that has seen drastic increases in costs.  

Eldar Tuvey, founder and CEO of Vertice, shared exclusive thoughts with CFO on not only his firm’s findings but how executives should gauge and value technology products. Although there is no formula to assessing software’s potential value to his business he said, it is a process that can pay major dividends if done correctly and efficiently. 

SaaS is a Fundamental of Modern Business

“SaaS has become a necessary cost of doing business, especially in the hybrid era of working,” said Tulvey. “Legacy tools are typically unable to support the agility required to get work done in a distributed workplace. Like many other areas of business, such as payroll or rent, placing a hard value on SaaS, in general, is a challenge and can depend on the specific software. In practice, however, avoiding it altogether is simply no longer an option.”

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A large majority (80%) of software providers surveyed by Vertice reported raising prices over the past two years. Annually, provider prices are increasing up to 10%. Given the increases, Tulvey explained the importance of setting a hard budget for SaaS allocations. “Organizations are spending somewhere between 5% to 15% of their net expenditure on SaaS. That is a huge share of wallet, and is rarely optimized effectively,” he said. 

72% of vendors report they have clauses in their contracts that allow them to change the prices of their services at any time.

“Decentralized buying, shadow IT, and a one-sided buying cycle mean the majority of businesses are spending much more than they should be on software,” Tulvey continued. “Getting better pricing insights and coordinating a more strategic approach to purchasing, renewing, and evaluating SaaS is critical to getting the best value on SaaS.”

According to the Vertice survey, 72% of vendors report they have clauses in their contracts that allow them to change the prices of their services at any time. For executives who wish to get the most out of their services, fluid dialogue with sales representatives about the business’s particular needs, along with a little give and take, can be a major money saver. 

Negotiating the Fairest Deal

There needs to be a lot of preparation before going to bat for the best price of a software product. “It comes down to the energy, effort, and research that a leader is willing to put into the process,” said Tulvey. By knowing things like a commitment to price equilibrium, differences between auto-renewals and price increases, and the demand for pricing transparency, executives can go to the negotiating table armed with everything they need.

Vertice’s dive into pricing models found that organizations can find savings by opting for longer-term contracts. Currently, for example, 89% of project collaboration software vendors offer discounts based on term length. Combine that with the findings that show only 14% of project collaboration software vendors reveal their full pricing list online, well below the SaaS industry average, executives must be sure they know exactly what they are buying.

The survey went on to share outside research that suggested only 45% of vendors list pricing online, while 55% of vendors “obscured” their prices from potential customers. Further analysis showed most price increases by SaaS providers over time were entirely automated. 

In Vertice’s analysis of pricing, it found 100% of SaaS providers reported settling for cheaper rates for those who chose to negotiate. Negotiation provided savings ranging from 15% to 34% per user. With rates in the $10 to $25 per user range, that is a significant amount of monthly savings for companies with lots of staff. 

“Hiring a job candidate at the best market rate requires a lengthy recruitment process and an investigation into industry salaries for the role,” Tulvey said. “Purchasing software is similar, meaning it takes a lot of hours and a lot of data to get the best possible deal.”

Only Buy What You Need 

“Shelfware is rampant,” said Tulvey, when asked about the rate at which companies are only using parts of technology they pay for. “So, too, is product duplication, where multiple tools are used to solve for the same use cases. These issues are both unintended consequences of SaaS sprawl, which has been [caused] by the ease of implementation and self-provisioned software within departments,” he said. “[This] creates a company-wide lack of visibility into the tech stack.”

Vertice’s top tip on how to get SaaS spending under control involves evaluating the tech stack. Companies must “determine how potential new products will fit in with [their] existing stack to uncover any tool overlap and minimize duplication,” according to Vertice.