6 minute read
You have probably heard the term “shrinkflation”, which describes the situation where an item gets smaller while its price stays the same or even goes up. For most of us the type of thing that comes to mind with shrinkflation is chocolate bars or other consumer goods. Indeed, a recent survey by Compare The Market identified that since 2014 the average chocolate bar had decreased in size by 11% while increasing in price by 10% . Shockingly, packets of digestive biscuits have shrunk by 28% while their price has increased by 65%. Why isn’t this headline news? Scandalous!
Shrinkflation isn’t confined to confectionery and biscuits, it’s also a thing with software. Specifically, cloud software. Back in the days when software came on CDs or floppy disks (!) then the general model for software pricing was you bought it under a “perpetual” licence. As the name suggests, you’ve paid for it, you’ve got it forever.
Now, if a new version of the software came out, then you might have to pay an upgrade fee to get the improved functionality, but software releases were relatively infrequent, and generally price increases were incremental and gave access to improved or additional functionality.
With the advent of Cloud, and particularly Software as a Service, that changed. Subscriptions became the new norm, typically annual, and new or improved features could be accessed more frequently. This model has some great advantages, avoiding the need to pay for all the software upfront, moving software from capex to opex, and being able to take advantage of the latest capabilities in software quickly, to name but a few.
That’s the silver lining, but there is a cloud, and that’s the ability of vendors to be more creative with their pricing.
Sometimes this creativity takes the form of annual price rises, linked to inflation, or maybe a little more “ambitious”. How about a 160% increase? We’ve covered the general trend of rising software prices in a recent blog post. In this article we’re going to focus on how shrinkflation is being creatively applied to software pricing.
First off, what do we mean by shrinkflation when it comes to software, given that software doesn’t have any physical dimensions or weight? Simplistically, it means less functionality at a given price point.
Many SaaS applications are sold in different tiers or plans. Each tier will have a defined list of functions, with more functions being provided with more expensive tiers. One of the most common ways that shrinkflation manifests itself is by reducing the amount of functionality provided in a given tier.
Some high profile examples of this would be Dropbox reducing the amount of storage on its free plan from 5Gb to 2Gb, or Adobe reducing the number of features on its free tier of Creative Cloud. An extreme example would be Oracle’s decision to effectively completely remove the free tier for Java for commercial use. This is proving expensive for organisations that developed applications when Java was free.
In the case of Dropbox and Creative Cloud, these are applications it’s likely organisations could find alternatives for without major disruption, annoying though it might be. For more specialised applications that may not be the case. For example, accounting is a key business function, and while there are a number of accounting packages that are available, moving to a new application is an onerous chore that most organisations would prefer to avoid. Users of Wave, a popular finance package, were faced with exactly that dilemma recently, when a range of key function were moved up into higher, significantly more expensive, tiers.
Sometimes tiers don’t get rejigged, they get removed completely. Customers can be forced to move to a new pricing plan, and it won’t be a cheaper one. This is what happened with Dashlane, a password and security application.
A more subtle form of cost increase is where the functionality that organisations typically want to use is in a tier that also includes a lot of functionality that is not widely used. This isn’t so much shrinkflation as adulteration, where the stuff you want to buy is padded out with filler that doesn’t provide any value.
Another more subtle way of increasing prices is to change the pricing metrics, e.g., from users to seats, as Hubspot did recently. Hubspot also made it cheaper to have a couple of licences, but to increase beyond that now costs significantly more than previously. Hubspot no doubt modelled the effect this would have on its revenues, and while to be fair it did commit that existing customers would have no more than a 5% increase, I’d be amazed if Hubspot’s revenues declined following this change.
There’s a couple of “known unknowns” that are worth mentioning as well, shadow IT being the first one. We did a deeper dive on this recently, but essentially shadow IT is technology that’s being used for business purposes by employees without the knowledge of the IT function. If you take a look at our recent article, you’ll see it’s pretty prevalent, and the emergence of AI tools like ChatGPT means it’s currently expanding rapidly. The issue here is that organisations can be suffering from shrinkflation, or simple inflation, without even understanding what’s driving the cost increases that they are experiencing.
The other unknown is what are the cost decreases that organisations should be enjoying but aren’t. The cost of the hardware that provides storage, memory, and compute power continues to fall. A report from analysts RedMonk in 2023 suggested that the pricing of providers of cloud services like Amazon Web Services and Azure were increasing rather than falling. Of the Infrastructure as a Service (IaaS) vendors they looked at, only Oracle had reduced their pricing. RedMonk’s report had some caveats, as cloud services vendors make it very hard to make price comparisons (interesting in itself), and the technology packages they offer have changed over time, but it’s clear that their pricing is not trending downwards in line with hardware costs.
So, what can you do about shrinkflation?
A good first step is to audit and review what software is in use in the organisation, be it “official” or “shadow”. In the case of SaaS, work then has to be carried out to analyse where software is over-specified, over-licensed, or is simply redundant. With cloud services like Azure and Amazon Web Services, a more technical review is required to ensure that these are being used in the most efficient and cost-effective manner.
It takes time and specialised knowledge to carry out this kind of exercise, but it can have a compelling ROI. Here at Costimised we can help you reduce your SaaS and Cloud services costs in a fast and cost-effective way. Please contact us at enquiries@costimised.com to set up a no-obligation discovery call.
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