Inflation and pressure to recoup costs and fuel revenue is driving Salesforce’s first price increase in seven years. Here’s why, and how it will impact customers.
Salesforce’s decision to raise the price of its software products starting in August can be attributed to a combination of factors, including inflation and pressure to fuel revenue after a pause in price hikes during the pandemic period — issues that are affecting other major technology suppliers, analysts said.
“We have seen a general rise in software prices coming out of the pandemic as inflation has put pressure on operating costs of technology vendors, and these costs still remain high,” said Liz Herbert, principal analyst at Forrester.
Software vendors generally put a halt on price hikes when Covid hit, but started increasing prices as the pandemic subsided, Herbert noted.
For example, Microsoft announced a price increase for its 365 suite in the range of 8%-20%, depending on the edition, in late 2021; SAP increased its maintenance pricing by up to 3.3% in late 2022; and Slack increased prices by 8%-9% around the same time. Meanwhile, other vendors increased prices without making public announcements. Oracle, for example, raised maintenance pricing by 8%, though it did not announce the increase publicly, Herbert noted.
“We are also seeing some pricing changes anecdotally, for example, one client told us they were facing more than a 25% increase in their Citrix renewal, and another cited approximately a 10% increase in their Adobe deal related to a consumer price index (CPI) clause,” Herbert said.
Salesforce, according to a company blog post published on Tuesday, said that it would be increasing prices across Sales Cloud, Service Cloud, Marketing Cloud, Industries, and Tableau by an average of 9% from August, after seven years of no price hikes.
“The new list prices will be Professional Edition $80 (up $5), Enterprise Edition $165 (up $15) and Unlimited Edition $330 (up $30). These editions will be priced comparably in other currencies,” the company wrote in the post, adding that similar price increases will go into effect for Tableau, CRM Analytics, Marketing Cloud Engagement and Account Engagement offerings.
Revenue pressure drives price hikes
Investor pressure to drive more revenue from products is a major reason for the price hikes, according to Herbert.
“When considering the general market conditions and the specific profit pressure that Salesforce is under, this price increase should not be too much of a surprise,” Herbert said.
Although strong user uptake of Tableau business intelligence and MuleSoft data automation and integration software fueled a surprising 14% year-over-year jump in revenue for Salesforce’s fourth quarter, the company underwent several tumultuous months starting late last year, as the company cut around 10% of its workforce, shut numerous offices, and saw co-CEO Bret Taylor and Slack CEO Stuart Butterfield step away from the company.
During the earnings call for the recent quarter, CEO Marc Benioff said that Salesforce needed to “radically accelerate the transformation plan timeframe” as the company entered the fourth quarter.
“We needed to press the hyperspace button and bring the two-year goals forward quickly and exceed them,” Benioff said during the call, according to a transcript from Seeking Alpha. Further, Benioff added that the company had put mechanisms in place to talk to investors and listen to their concerns before making changes in the company’s go-to-market strategy.
The move to hike prices, according to Omdia’s chief analyst Bradley Shimmin, will help the company maintain profit levels amid a maturing marketplace where the move to the cloud has already happened for most enterprises.
At the moment, though, cloud revenue for most cloud services providers, including Salesforce, is continuing to grow at a compound annual growth rate (CAGR) of 17%, according to IDC research vice president Alan Webber .
Meanwhile, new generative AI capabilities, such as Einstein GPT, likely played a very small to a negligible role in determining the change in pricing, several experts agreed.
Forrester’s Herbert pointed out that in its latest AI Day event, Salesforce said that pricing for its generative AI services was still being worked out.
“GenAI pricing is likely to evolve over time as there are still many unknowns about costs, usage, competitive pricing pressure, and more,” Herbert added.
How will customers deal with the Salesforce price hikes?
The change in pricing strategy will impact Salesforce’s many enterprise customers almost immediately, and may force relatively smaller enterprises to look at other options, such as Zoho or Oracle, according to Shimmin.
The increase in prices comes at a time when companies are trying to manage costs in an uncertain macroeconomic environment.
“As a result, customers will continue to evaluate the number of licenses that they hold for Salesforce applications to ensure they are getting optimal value from the number of licenses they have,” Webber said.
The price increases may have less of an effect on larger customers. Futurum Group’s research director Keith Kirkpatrick said that customers will “not blink” at the price hikes as “large customers are unlikely to see actual net price increases of 9%, given their scale”.
Additionally, the change in pricing is not going to affect enterprise customers who are locked in three-to-five-year deals with Salesforce.
“Real pricing changes for these enterprises won’t hit them until renewal time or unless they are adding a new cloud,” Herbert said, adding that it was difficult to quote a final impact of the price change as Salesforce discounting has historically ranged very dramatically.
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