Introduction
A well-designed tech stack and cloud architecture enables business performance and growth.
However, rising costs are eating away at the bottom line.
But what’s causing these rising costs? And can you mitigate them, or are they inevitable and simply ‘the cost of doing business’?
In this new quarterly SaaS and Cloud Spending Unwrapped report, we will show:
The big picture
- 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.
- 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.
- 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.
SaaS spend in Q2 2024
Quarterly SaaS spend by employee has never been higher
SaaS Spend per Employee (Q2'23 to Q2'24)
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.
SaaS apps per business hits a new peak
Average Number of SaaS Apps per Business (Q2'23 to Q2'24)
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.
SaaS Spend Per Employee Vs. Avg. No. of SaaS Apps Per Business (Q2'23 to Q2'24)
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 reasons behind q2 increases
1. SaaS Inflation
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.
SaaS Inflation vs. Market Inflation (Q2'23 to Q2'24)
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.
“Average SaaS inflation in Q2 2024 was 11.8% – 3.5x higher than May’s US CPI inflation (3.3%). Showing how this gap has grown, the average difference in Q4 2023 was ‘only’ 2.5x.
And the gap is even wider in the UK, with SaaS prices rising 5.5x faster than consumer goods inflation. And globally, this SaaS inflation surge shows no signs of slowing down.”
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:
SaaS product spending patterns
Category-level spending
Proportion of Spend Per Category
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.
“Within Business Ops we have seen particular strength in the Office Of The CFO software subcategory, with demand accelerating following Silicon Valley Bank's March 2023 failure and now a disproportionate lift from interest in AI.
When Matt Slotnick, Founder and CEO of Poggio, recently joined CloudRatings' Cloud Radio podcast, he highlighted who is driving AI adoption right now.
'It's not small sales teams with credit cards that can go swipe. It's actually the market-leading companies that like winning because they see AI and think, 'We won the last game, and now AI helps us win the future. How do we get AI to as many people in our organization as possible?'"
Application-level spending
Most Popular SaaS Apps by Spend
App | Change vs July ‘23 |
---|---|
Slack 1st | +2 |
Google 2nd | -1 |
1Password 3rd | +4 |
Hubspot 4th | 0 |
Intercom 5th | +7 |
Miro 6th | +10 |
Linkedin 7th | -3 |
Atlassian 8th | -6 |
Salesforce 9th | +2 |
Figma 10th | -2 |
Kandji 11th | -2 |
GitHub 12th | -3 |
OpenAI 13th | +12 |
Monday 14th | 0 |
NetSuite 15th | +5 |
App | Change vs July ‘23 |
---|---|
Slack 1st | +1 |
Salesforce 2nd | -1 |
Microsoft 3rd | 0 |
HubSpot 4th | +2 |
LinkedIn 5th | -1 |
Atlassian 6th | -1 |
Google 7th | 0 |
Monday 8th | +4 |
Miro 9th | +6 |
1Password 10th | +1 |
DocuSign 11th | +5 |
Okta 12th | +1 |
Intercom 13th | +5 |
NetSuite 14th | 0 |
Adobe 15th | +5 |
App | Change vs July ‘23 |
---|---|
Slack 1st | +2 |
LinkedIn 2nd | 0 |
Microsoft 3rd | -2 |
Salesforce 4th | 0 |
NetSuite 5th | +1 |
Adobe 6th | +2 |
HubSpot 7th | +3 |
Atlassian 8th | -3 |
Jamf 9th | -2 |
Snowflake 10th | +2 |
Okta 11th | -2 |
GitLab 12th | +5 |
Intercom 13th | +3 |
DocuSign 14th | +1 |
Google 15th | -4 |
“Enterprise SaaS is consolidating fast. Businesses want all-in-one solutions and robust integrations, pushing contract values up for heavyweights like Salesforce, Microsoft and HubSpot.
These suppliers offer extensive functionality and seamless ecosystems, reducing implementation risk and making them safer bets for enterprises seeking long-term value.”
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."
YoY Growth by Volume / $ Spend
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.
“We use AI in our customer support and success areas to service our customers far more quickly and easily.”
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.
Fastest Growing Apps by Region ($ Spent)
Cloud Spend in Q2 2024
Cloud spending patterns
YoY AWS Spend per Business
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.
Share of Spend per Category
Category | Spend Q2 '24 | Spend Q1 '24 | Spend Q2 '23 |
---|---|---|---|
Compute | 27.33% | 25.70% | 27.15% |
Databases | 18.46% | 20.86% | 20.73% |
Networking & Content Delivery | 10.70% | 10.27% | 12.55% |
Cloud Financial Management | 12.33% | 12.04% | 8.27% |
Management & Governance | 5.62% | 5.33% | 5.83% |
Storage | 5.52% | 5.44% | 6.76% |
Analytics | 4.75% | 5.19% | 4.76% |
Support | 4.75% | 5.19% | 5.54% |
Containers | 3.95% | 3.41% | 2.33% |
Security, Identity & Compliance | 3.13% | 2.77% | 2.66% |
Application Integration | 1.31% | 1.19% | 0.99% |
Others | 2.15% | 2.60% | 2.43% |
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.
Cloud application trends
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.
RDS Instances by Share of Spend
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.
“There are many reasons why mis-sized, sub-optimal or legacy resources are still used. Upgrading them takes time, teams prefer to use what they know works, and a lack of visibility leads to over-provisioning of resources.
But the fact remains this is cost-inefficient and companies will benefit in the long run by switching across to alternative, more modern resources.”
This isn’t just confined to RDS instances. Usage of EC2 seems to follow the same pattern:
EC2 Spot Instances by Share of Spend
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.
EC2 Share of Spend Utilizing Savings Plans
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.
RI and SP Average Commitment Levels by Percentage
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.
“Compute and EC2 are one of the biggest expenditures for organizations. But planning and managing EC2 commitments can be a significant task - sometimes doubling or tripling workloads.
However non-EC2 usage is remarkably stable and consistent over long periods, lending itself to reliable commitment-based discounting. It’s therefore worth looking beyond EC2 at other services to help discount further (ElastiCache and Redshift).”
In Summary
It’s time to spend smarter
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.
"SaaS and cloud spend are often the silent killers in a company's budgets - too often left unmonitored, or assumed to be an unalterable business cost.
This simply isn't the case. And we are yet to meet a finance or procurement leader who hasn't been astonished by the value of the savings tactics available to them they aren't capitalizing on.
We can't realistically predict a substantial drop in SaaS pricing. Nor can we expect growing companies to focus less on cloud. Which means it’s up to finance and procurement leaders to find new ways to reduce spend while increasing efficiency."
Report Methodology
To create our software spending reports, we use aggregated, anonymized data to provide an in-depth view of global SaaS and cloud spending.
This data is based on a network of thousands of companies, vendors, and millions of cloud metrics across a varied portfolio of businesses worldwide. These companies span every major industry and vary in size, from small businesses to some of the world’s largest organizations, with hundreds of thousands of employees and millions of customers.
When referring to company size, Vertice uses the term "startups" to refer to companies with 100 or fewer employees.