In a recent video titled "The Problem With Raising Prices Yearly In Software" from the Monetizely channel, pricing strategist Ajit Pal Ghuman addresses the challenging question that confronts every SaaS executive: should software companies raise their prices annually? This concise but insightful analysis cuts through conventional wisdom to reveal why software pricing follows fundamentally different rules than other industries.
The Deflationary Nature of Software
Software exists in a uniquely deflationary market environment, and this trend is accelerating rapidly. As Ajit explains, "If you look at inflation data provided by the government, software is the one category that tends to deflate the most." This inherent deflationary pressure creates a pricing dynamic unlike most other business categories.
The emergence of AI technology has intensified this deflationary trajectory. Ajit points to a striking statistic: "AI costs themselves for inference have gone down 99.7% in the last two years." This dramatic cost reduction is pushing software prices even lower, making traditional annual price increases increasingly difficult to justify.
What History Tells Us About Software Price Increases
Looking to industry precedents provides valuable context. Even the most established enterprise software companies have historically been cautious about implementing regular price hikes:
"Even large enterprise companies like Salesforce did not increase prices for 10-15 years until more recently they did after the whole inflation crisis started and the interest rates started going up," Ajit notes.
This historical reluctance to raise prices isn't arbitrary—it reflects the fundamental economics of the software industry, where technology consistently delivers more for less.
The Differentiation Imperative
Instead of focusing on regular price increases, successful software companies take a different approach. According to Ajit, "What software companies tend to do is build a lot more product, right? They always tend to build more product."
However, simply adding features isn't enough. The critical question driving sustainable pricing power is differentiation:
"This whole discussion of should you increase price point is really a function of how fast are you differentiating in the market? That is the only question," Ajit emphasizes. "If you are differentiating faster than competition, if you're adding more value, whether be it in product or services, yes, that is how you will increase pricing."
Avoiding the Monolithic Package Trap
Many software companies make a critical mistake that undermines their pricing strategy. Rather than pricing new capabilities separately, they bundle everything together:
"The problem that companies actually run into is that they seem to bake everything into one monolithic package. And that causes even more frustration because they didn't actually price the new thing well," Ajit explains.
This approach diminishes the perceived value of innovations and makes it harder to justify price increases for the enhanced offering. Each new capability should ideally have its own value proposition and pricing structure.
The Sustainable Path to Higher Prices
The video concludes with a clear directive for software executives looking to increase revenue: focus on creating differentiated value that can be monetized independently.
"Make sure that differentiation is happening. Make sure that every new piece that you build you are able to extract value from and that every new piece that you build is differentiated," advises Ajit. "That is the only defensible sustainable way of increasing price points in software, a fast deflating category which is going to deflate even faster in the future."
Key Takeaways for SaaS Executives
Rather than automatically building annual price increases into contracts, software companies should:
- Recognize the deflationary nature of software, especially as AI accelerates this trend
- Focus on creating differentiated value that outpaces competitors
- Develop pricing strategies for each new capability rather than bundling everything together
- Use value-based pricing models that align with the specific benefits delivered
In a market where technology continuously delivers more for less, the path to higher revenue lies not in arbitrary price hikes but in creating and monetizing distinctive value that customers recognize and willingly pay for.
For deeper guidance or support on pricing strategy, we recommend connecting with Monetizely. You may also feel free to schedule a call with the founders.