I’ve been using a particular software tool for several years. I pay an annual rate based on the number of seats (i.e., licenses) I need and pay the full amount once a year. At renewal time, the price has always been the same as on the original contract I signed, and I’ve happily renewed for another year of the service.

I recently received a renewal notice, and it included a cost increase. It points to a clause in our agreement that gives the company the option to automatically increase pricing annually. I’m fine with the increase, but I became curious. Why enforce this clause this year after not enforcing it in past years?

A SaaS entrepreneur I talked to had a hypothesis. During the last few years, the company grew quickly. Its product is quite good and has been popular. (I personally referred a few companies to it.) It probably added new customers easily. The entrepreneur believes the company’s revenue growth from new customers was so impressive that it didn’t need to enforce the contractual price increase (or didn’t think to).

 Now, in 2023, it’s a different story. The product is still good, but many of the technology companies it sells to have cut employee headcount and budgets. He suspects this led to a material reduction in the number of seats companies renewed for and that, in some cases, companies declined to renew their contract at all. The company likely wants to show revenue growth (or mitigate revenue decline as much as possible), so that’s why it’s exercising the contractual price increase option.

It’s an interesting hypothesis. I have a call scheduled with the company to discuss my contract. I’ll end up renewing, but I’m going to ask if that hypothesis is true.