This week, software giant Salesforce released better-than-expected third-quarter earnings, leading to a significant increase in stock prices. However, much of this growth can be attributed to the company's decision to raise the prices of its products.
Salesforce is not alone in this trend. Last year, four out of the top 10 global cloud software companies increased the prices of some of their products by 10-30%, and among the top 20 cloud software companies, 16 plan to raise their prices by more than 25% in the coming years.
According to IT research and consulting firm Gartner, which conducted this analysis, the reasons for these price increases include macroeconomic factors such as inflation, exchange rate fluctuations, market competition, rising costs, and sustainability goals. Companies that have raised prices include German software giant SAP, enterprise software manufacturer ServiceNow, and Shopify.
Gartner analyst Hannah Decker pointed out that customers who have been using and renewing these products for a long time find it difficult to refuse these price hikes:
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If a customer is negotiating a brand-new deal, they have the option to walk away or use a competitor's proposal to negotiate a lower price. However, when it comes to renewals, customers usually don't have the leverage to create a competitive threat.
These significant price increases above the inflation rate are being passed on to renewing customers.
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With the rise of cloud computing, business software has largely shifted to the cloud and is sold to enterprise customers on a subscription basis rather than as a one-time purchase, further limiting customer choices.
Brian Clarke, Vice President of Pricing Assessment and Procurement Advisory Services at International Data Corporation, stated that this puts pressure on customers to make decisions quickly:
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The power has shifted to the suppliers, and they are very adept at adjusting their pricing extraction methods.
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<h2>Increased AI Spending</h2>
Some software vendors also claim that the price hikes are due to the addition of the most popular AI features, such as Salesforce charging extra for its AI suite and Microsoft charging extra for its Microsoft Copilot.
During this week's conference call, Salesforce CEO Marc Benioff shared his ambitions for AI:
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We are very eager to ensure that Salesforce becomes the number one AI CRM. In the past six months, we have done a lot of work in this area.
We are leading our customers into a new era of artificial intelligence.
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As the world's largest customer software service provider, Salesforce's growth has been somewhat stagnant over the past year. Subsequently, activist investors entered the company and demanded changes to improve profit targets. Salesforce has laid off nearly 9,000 employees and restructured its sales team in the past two quarters.
Considering the pressure faced by Salesforce, it is difficult not to see the company's AI efforts as a desire for growth.
However, after the hype of &#34;AI fever&#34; for half a year, investors are gradually becoming more rational and no longer buying into any mention of &#34;AI&#34; without seeing more.
Chris Versace, Chief Investment Officer of Tematica Research, said:
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What people are expecting is a transformation, and the key here is: is it the &#34;new new thing&#34; or the &#34;real real thing&#34;? That's what investors really want to know.
To some extent, we are confused by some promises that have not really been fulfilled compared to hopes or hype.
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In a report, Bernstein analyst Mark Moerdler bluntly stated that Salesforce's direct competitor Dynamics is backed by Microsoft and OpenAI's AI and cloud technologies, which puts Salesforce in a more unfavorable position:
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We are concerned that Salesforce will have difficulty monetizing artificial intelligence.
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<h2>Customer Churn</h2>
But before Salesforce achieves its AI goals, the imminent issue is customer churn.
According to Business Insider, Salesforce's price increase has left customers &#34;stunned&#34; and even &#34;angry&#34;:
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Some people said that in the months leading up to the price increase, Salesforce took a tougher stance in negotiations. A Salesforce customer, who is a contract negotiator for a small publicly traded company, agreed to discuss their recent contract renewal anonymously with Insider because they are not authorized to speak to the media. Insider knows their identity. The contract negotiations took place earlier this year.
When customers discovered that Salesforce planned to increase the total cost of their $1 million contract by 5%, renew it for three years, and make no changes to the product, they were surprised.
Unable to secure the budget to deal with the price hike, customers felt frustrated and ultimately renegotiated an 18-month contract, cutting some services.
&#34;It's insane,&#34; the customer said. &#34;I understand costs go up over time, but my company doesn't welcome a 5% increase at this price.&#34;
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Although switching vendors is a difficult and costly issue for long-term contract customers, it is not entirely impossible—Microsoft is a suitable &#34;backup plan&#34;.
Adam Mansfield, consultant at IT consulting firm UpperEdge, said that some cost-conscious customers would not have seriously considered migrating from Salesforce, but in &#34;certain cases&#34; they are starting to consider it.
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Like these little things - price increases and tactical issues - the people in control will say, &#34;Well, maybe we should really start considering this.&#34;
In addition, Microsoft knocks on the door every day: &#34;Hi, we're your other trusted strategic supplier. Do you want artificial intelligence? We have artificial intelligence.&#34;
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Analyst Mark Moerdler of Bernstein said that Microsoft is adding artificial intelligence capabilities to some of its sales and service products without charging customers extra. Combined with the company's leading position in the field of artificial intelligence through its investment in ChatGPT maker OpenAI, this may influence customer decisions:
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In contrast, Salesforce's artificial intelligence products are priced higher.
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SHOP

Price increase is a double-edged sword.

From Salesforce to Shopify, the growth of software giants comes from "price increases". Which comes first, AI increment or customer churn?