1. The gap between SaaS inflation and CPI inflation is at its widest yet and ‘shrinkflation’ continues to be practiced by vendors – creating a ‘pay more, get less’ scenario.
2. Business use of AI is proving to be more than just hype. The largest proportional increase of any category of tech spend was in AI - 64% YoY growth.
3. Business' average AWS spend has grown by 11% YoY. But not always efficiently.

Whether combatting soaring SaaS prices with better negotiated contracts, or opting to increase AWS Savings Plan commitment levels over Reserved Instances, there still remains plenty of scope for businesses to find savings and make budgets go further.

There has been a 26.9% increase in SaaS spend per employee over the last 12 months, with Q2 being the highest on record (avg. $8600).

With the trend for SaaS spend per employee moving up every quarter, it's unlikely we will see a meaningful drop in spend in Q3. Which means visibility and control of your SaaS stack has never been more urgent.

The average number of apps per business has grown by 10% since July 2023.

This could be due to the increase in adoption of ‘narrow’ or ‘point’ SaaS (tools that are dedicated to solving very specific problems), largely driven by how well these now tend to integrate with other solutions.

In our recent webinar on slimming down your organization's tech stack without limiting growth, Aarish Shah, Founder of EmergeOne, explains:

It could be easy to think that the reason for more SaaS spend per employee is simply that each employee is using more tools. But that’s not the whole story, as the graph below shows.

The SaaS spend per employee rises faster and steeper than the number of tools available to them, showing that there is more to this than the simple volume of apps.

The gap between CPI and SaaS inflation has steadily increased since February and, by the end of Q2 2024, had almost returned to October 2023’s all-time peak.

The gap is extraordinary. SaaS prices are increasing at a far faster rate than market forces ‘require’, and as we have covered in previous reports, buyers are not getting more for their money. In fact, typically they are getting less.

This is already being noticed by the market. 41% of those that contact Vertice for help optimizing their SaaS spend cite rising costs as their biggest concern - double the next largest issue of a lack of visibility into their SaaS costs and contracts.

Everything you need to understand SaaS Inflation:

The SaaS Inflation Index 2024

The SaaS Shrinkflation Report

When a company makes a headcount reduction, SaaS contracts can rarely be flexed in parallel. SaaS spend per employee therefore has only one way to go - steeply upwards.

Why is this?

1. SaaS contracts are rarely able to be right-sized outside renewal points. Most customers make multi-year commitments without the ability to remove licenses from agreements mid-way through.
2. But features and consumption are rarely impacted by there being fewer employees. Examples include Snowflake (queries), Twilio (SMS volumes) or Zapier (API requests). Marketo customers, for instance, are charged in part according to the number of contacts in their customer/prospect database - a factor totally distinct from the number of Marketo users.

2024 has seen significantly more investment in ‘Business Ops software’ than the previous year (24%). These are a mix of productivity tools like Google Workspace, plus finance software and other apps focused around business processes and resources.

This is likely to be a result of companies placing more focus on managing their back-offices and supply chains more cost-efficiently.

Meanwhile, investment in AI has increased by an extraordinary 65% YoY - the highest proportional increase of any category by far. Perhaps companies are expecting AI to pick up the slack from headcount cuts. Or larger companies with capital to experiment are onboarding these tools on a ‘proof of concept’ basis.

These projects’ success or failure may be evidenced by whether the growth in this area continues.

Tanja Fischer, CFO at Lindus Health who recently featured on our For The Love of Finance podcast series, noted that "startups are using tools like Microsoft, Slack and Monday to build communication structures that enable employee productivity".

She also noted the importance of business-critical tools like Okta and 1Password that can also unlock growth for startups:

"Investing in security can help pursue accreditations that are usually required to partner with larger customers."

Perhaps unsurprisingly, AI is dominating the top 10.

OpenAI takes the top spot as companies increasingly investigate both internal and external use cases, ranging from customer service chatbots to internal search engines and marketing copy generators.

Meanwhile the popularity of tools like Hex shows companies' eagerness to understand their data better, and the rise of Apollo.io seems to have been driven by their recent focus on new AI-driven capabilities.

Also, our data shows that AI software utilization is higher than the overall average (72% vs 65%) - suggesting teams are adopting these tools eagerly, potentially due to their effectiveness and impact.

This all costs money in a time of soaring costs. We’ve also noticed key players like Microsoft and Google giving big discounts for Copilot and Gemini, helping customers test them out for themselves and also helping the vendors fine-tune their products to establish strong product-market fit.

Monthly AWS spend per business has increased 11% YoY, with Q2 2024 showing the highest average monthly spend ($137,000 per business p/m). This indicates, whilst there are peaks and troughs month-by-month, costs are generally rising.

Q1 to Q2 2024 saw the biggest quarter-on-quarter spike, with average monthly spend per customer jumping by $9,000.

The starkest observation from this chart is arguably the most reassuring. While many categories saw a reduction in spend YoY, Cloud Financial Management saw a 49% surge in investment, probably driven by a heightened awareness over rising costs and a desire to control them.

Organizations are trying to spend smarter but missing some key opportunities.

Intel RDS instance types (such as R5, M5 and T3) are equally as popular as Graviton (such as M6g, R6g and T4g), but Graviton instances are 19% cheaper than Intel.

By replacing Intel with Graviton, companies could easily realize immediate savings without risking performance issues.

The M6 instance family is one of the most advanced, yet least used (8.4%). As AWS incentivizes using the most modern instances with attractive discounts, we predict that this percentage will rise next quarter. 

At the same time, AWS also encourages switching away from legacy instances by increasing their prices. And yet the older T3 instance type remains popular - a clear example of unoptimized spend as costs are higher, discount opportunities are lost, and more modern technologies would be more efficient.

This isn’t just confined to RDS instances. Usage of EC2 seems to follow the same pattern:

As with RDS, EC2 usage is still regularly focused on using legacy instance types (T3 for example has the second highest share of spend for EC2 spot instances), meaning opportunities for optimizing spend is going amiss.

However, we see a strong correlation between those who use Savings Plans and more modern instances.

We see a clear link between those using up to date instances (e.g m6a) and those using Savings Plans. The use of modern instances is a clear indicator of cost optimization maturity as they then attach Savings Plans to them, then use those plans well with high commitment levels.

And since there are multiple choices when it comes to discount commitment levels, there are also different ways to optimize - such as Reserved Instances.

Those on Savings Plans are clearly managing to achieve higher coverage levels than those using Reserved Instances.

This may be due to their higher flexibility, however Savings Plans are not a singular solution for efficient discounting.

Reserved Instances can suit more specific company savings needs, and can also be sold and traded if circumstances change. Working with relevant stakeholders to forecast these requirements accurately is critical for successful optimization.

We've focused on EC2 but it's worth investigating your entire architecture to identify any similar opportunities for upgrades and increased discount commitments to help tackle the rising YoY spend. 

Businesses can’t allow their SaaS and cloud spend to increase at this rate. They must quickly become more sophisticated in cost oversight and management.

We are seeing attempts to do so - trusting AI more, and the greater use of Savings Plans for example. But integrated efforts across SaaS and Cloud appear to be lacking.