6 Ways You Are Overspending on SaaS in 2023

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SaaS applications have become the norm for coordination, communication, and making informed decisions in organizations. They are flexible, cost-effective, and robust, but most importantly, they are easier to purchase.

Yes, anyone within the company with access to their organization’s credit card can purchase a SaaS application.  This pushed the employees and internal departments to purchase SaaS apps uncontrollably.

Initially, it appeared to be effective, but eventually, their SaaS spending spiraled out of control because they lacked a strategic plan to manage their SaaS applications.

What exactly caused this hike in their SaaS spending? What were they doing wrong?

Let us show you how businesses are overspending on SaaS and why they need an effective SaaS spend management solution to overcome SaaS spending hassles.

Read on.

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What is SaaS spending?

SaaS spending is essentially the cost of managing SaaS applications and solutions. With SaaS solutions becoming an integral part of the business, it’s no surprise that 51% of the IT budget will be allocated to SaaS applications by 2025, as reported by Gartner.

Most excess costs of SaaS solutions arise due to poor negotiation processes, missed renewals, shadow IT, and more. When left unchecked, these expenses could spiral out of control and cause the company to lose more than it gains.

Why is your SaaS spending so high?

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Several factors cause companies to spend so much money running their SaaS solutions. These include:

1. Rise of shadow IT

Shadow IT refers to the proliferation of SaaS applications that are used without the knowledge of IT or the security team. This happens when users decide to purchase software not part of the official IT purchasing process, often leading to departments solving the same problem with different tools.

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Not only did the users abandon the tool prescribed by the IT department, but they also signed up for different tools that perform the same functions. This results in the company paying a lot more than it should.

Since this is an expense hidden from IT, it can be challenging for the financial team to locate and track where it comes from.

2. Lack of usage analytics

Usage analytics allow companies to track user data and make smarter decisions. With accurately measured data, operations can be kept as lean as possible. Companies need to know what works and what doesn’t to prevent them from wasting time and resources on the wrong decisions.

When companies lack proper usage analytics, they cannot make informed decisions that benefit them. It will also be hard to track any issues that users encounter as they happen, making it hard for the companies to engage and resolve them in real time, which leads to higher costs.

3. Lack of a SaaS spend management system

A SaaS spend management system will provide application and spend visibility, app usage data, optimization insights, and assisted buying features to help manage your SaaS spending.

A lack of such sophisticated systems can lead to a cluttered SaaS landscape and excess spending. The first step toward reducing SaaS spending is to use a spend management platform.

You can leverage its comprehensive app usage data and cost optimization insights to optimize your SaaS stack and renegotiate with the vendors to reduce your SaaS spending.

4. Poor vendor negotiations

Research has shown that about 80% of SaaS vendors have raised their prices over the last few years. While these vendors might justify the costs with inflation claims, environmental sustainability requirements, and competitive labor markets that drive price increases, companies don’t have to take them at face value.

If a business lacks the bandwidth to properly negotiate the contract's price, they might end up agreeing to whatever price the vendor sets, even if it is expensive. This could lead to higher SaaS costs when it could have been avoided with proper vendor negotiations.

5. Missing out on contract renewals

Contract renewals are a perfect time to renegotiate terms with the vendor. With most vendors having auto-renewal clauses in their contracts, it’s essential to allow enough time to evaluate usage and spending and identify any redundant applications to help decide whether renewing is wiser.

Missing out on contract renewals prevents the company from negotiating terms that fit them better. Instead, they’ll end up potentially overpaying due to auto-renewals, which will further increase the costs.

Businesses should adhere to SaaS renewal best practices to avoid contracts automatically renewing and costing them more money.

6. Purchasing the wrong product

Sometimes, mistakes happen during the SaaS buying process, and companies purchase the wrong product. When you end up with a SaaS product that isn’t suitable for your company, you also end up with one that isn’t suitable for your consumers.

This could lead to mistakes and failures that are costly to resolve. And if a product like this is purchased through shadow IT, it will also pose a greater risk to your data security.

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How to stop overspending on SaaS

Fortunately, your company doesn’t have to keep overspending on SaaS. You could save up to millions of dollars by establishing efficient cost-control measures. Here are a few tips to optimize SaaS spending.

Centralizing SaaS spend management

The procurement of SaaS products tends to happen within departments. Each team will have different needs and will sign up for the software that can best cater to those needs. Of course, these teams that use specific software products must be involved in the decision-making.

However, this process must be centralized so costs can be managed appropriately. A centralized SaaS spend management platform can help companies identify and avoid the risks of redundant applications in shadow IT while maximizing their savings.

Monitor SaaS license usage

Paying for unused licenses is the most common SaaS mistake that companies make. You could be paying for 100 licenses but only have 70 members on your team, which leaves 30 unused licenses. The number of members fluctuating could also be the issue, but it can be quickly resolved by carefully monitoring the usage of SaaS licenses.

You want to make sure to avoid leaving any technology unused. A Gartner research study reported that over 30% of the increasing SaaS costs go unused in any given month.

So it is essential to perform an audit, leverage app usage data, and negotiate usage-based pricing plans with the vendors to right-size your SaaS stack.

Cancel or archive unused licenses

If you've noticed that some licenses have gone unused, it’s better to cancel or archive them. This explains why centralizing SaaS spend management is so vital.

Without it, administrators would be reluctant to cancel unused licenses because they are uncertain whether someone from a different department might need them.

With centralized management, one team within the company has full access to every information related to SaaS usage, such as who uses the tools, the cost of that usage, and whether a user holding a license no longer needs it.

All the tactics for controlling SaaS spending boil down to using the right one-stop-shop solution: using a SaaS management platform. CloudEagle is one solution that can help you control your unnecessary SaaS spending.

CloudEagle

The CloudEagle platform can identify overspending by detecting low usage, duplicate, and free trial apps that employees are exploring, as well as billing overages. This information allows users to be deprovisioned accordingly, resulting in immediate cost savings.

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Our renewal workflows that start 90 days in advance can stay ahead of all the renewals, resulting in 60–70% savings.

We can leverage your app usage insights, negotiate with the vendor on your behalf, and get them to lower their pricing by citing the price benchmarks of their competitors.

We’ve helped various customers right-size their licenses and lower the cost per license during vendor renegotiations.

CloudEagle is more than just a platform that offers insight into your SaaS spending and app usage. Our services also include negotiation expertise, a team of skilled SaaS buyers who can negotiate on your behalf to optimize SaaS spending, and automated workflows to increase your team's productivity and save time.

Do you want to stop overspending on SaaS applications?

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Conclusion

With how much businesses today rely on SaaS applications, setting aside a budget to ensure they run smoothly and efficiently has become essential. However, businesses can still make mistakes and spend more than they should.

Understanding what drives cost increases is essential before figuring out how to stop overspending. We believe this article clarified why your SaaS spending is high and how to stop it.

The proper cost-control measures and the right platform, such as CloudEagle, are what you need to manage SaaS spend and reduce expenses.

Good luck!