23.05.2023

Price increases for software

How companies should react to the current pricing policy of software manufacturers

It is clear that the coronavirus pandemic and the war in Ukraine have caused massive price increases. This affects and burdens many companies in particular. Here you can read the results of our survey on inflation in the IT sector. This poses major challenges for companies, especially when it comes to software costs. In many companies, software costs now represent one of the largest cost blocks within IT costs. This means that cost increases in this area have a significant impact on the overall cost trend, which needs to be managed effectively.

What triggered the tipping point in the pricing policy of software manufacturers?

Before 2020, the situation was different: While the annual price increase for software averaged less than one per cent per year and was therefore below the general inflation rate, the coronavirus pandemic was the first turning point in the pricing policy of software companies. The cost policy for standard software changed again, fuelled by the war-related explosion in inflation. The major manufacturers in particular have announced or already implemented massive price increases. Significant examples of this are:

 

  • Microsoft Office 365 has seen increases of more than 38 per cent. And the software giant is even announcing price adjustments every six months with immediate effect.
  • IBM has increased its list prices by more than 20 per cent since October 2022. If the comparison point is taken from 2020, this adds up to over 70 per cent (!) list price increases for many standard software products.
  • Broadcom is seeing increases of over 30 per cent - but in some cases significantly higher prices are being asked for its acquisitions such as CA Software.

     

In addition to classic price adjustments, software manufacturers are finding more hidden ways to increase their turnover. For example, other manufacturers such as VMWare force their customers to switch to a new licence model and thus cleverly "package" significant cost increases.

Such increases are correspondingly painful, as experience has shown that the software from major manufacturers, which is often difficult to dispense with, accounts for a particularly high proportion of total software costs.

How can we skilfully and effectively deal with massive price increases for software in the future?

When confronted with such price increases, they should not be accepted lightly.

The first step is to critically scrutinise the sometimes flimsy justifications for the drastic price increases and refute them on the basis of existing experience. The following arguments are often used by software manufacturers to justify price increases:

  • Inflation

    This is mainly driven by energy and other commodity prices, of which software is partially independent. It can be clearly seen that software price increases in the past have been significantly lower than general inflation.

  • Exchange rate to the dollar

    This has reversed in recent months, but contrary to the development of the exchange rate, none of the providers have lowered their prices again. It is also important to scrutinise what proportion of the service is actually provided abroad.

  • Innovation, new features and shorter release times

    Despite grandiose announcements, these are not always verifiable and are often not even required or requested by customers.

  • Other frequently cited arguments are: Supply chain problems, raw material shortages, labour shortages, future crises

    Manufacturers are obviously using the current price trend to optimise their own sales on the backs of their customers. Here it is important to demand open book approaches or precise derivations. A balance sheet analysis of the supplier can also be very helpful in this context.

  • Extension options

    Such options should be firmly anchored in the contract in order to bridge a potential migration period to an alternative software product. In the event of an upcoming contract renewal, existing options in the expiring contract should perhaps be examined in detail.

  • CAPs/upper limits

    Maximum price increases can be contractually agreed if necessary.

  • Contract terms

    Longer terms - if plannable - with fixed prices keep costs under control in the long term.

  • Legal support

    Under certain circumstances, it can be useful to consult legal experts in order to fix terms, secure existing claims or check whether and to what extent price increases violate competition law, for example.

  • Decoupling of conditions from the official list price

    Agreeing fixed future unit prices instead of discounts on future list prices can help to make price increases predictable and cushion excessive increases in list prices.

  • Utilise resellers

    An indirect purchase via intermediaries can possibly increase the pressure on suppliers and software manufacturers and create a certain amount of competition.

  • Software Asset Management

    The importance of licence management / software asset management in the company needs to be strengthened in order to license software in line with requirements and in an optimised manner and to use it efficiently.

  • Inform management

    It goes without saying that decision-makers should be aware of current developments in the software market and ensure forward-looking budgeting.

In addition to the measures mentioned above, there are other cross-vendor approaches that can support companies in coping with price increases for software products and in optimising software costs and software support. These are discussed in detail in a separate article.

Also and especially because the balance of power is often very unevenly distributed and the dependency on software products is immensely high, it is more than advisable to have a competent and reliable partner at your side. With extensive experience in software licensing and IT services, Intero Consulting can help companies to optimise the costs of their software usage, negotiate contracts and take appropriate cost-saving measures.

 

We would be happy to discuss possible approaches with you in a non-binding initial consultation. You can also find more information on our website or get in touch with us today.

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Dominik Sachse

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