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In 2024, the SaaS industry outlook is cautious, to say the least. Overall, while software companies are still growing, the rate has slowed, and the future remains uncertain despite potential interest rate declines.
The reasons are many. Slower growth, investor wariness, geopolitical instability, and recession concerns have all played a part in this complicated landscape. Not to mention the impact AI has had in the market.
Cledara’s latest Software Spend Report provides critical insights into how companies of various sizes and regions manage their software spend, highlighting key trends, benchmarks, and challenges.
Key Findings:
- Software Spend Benchmarks: As companies grow, their software spend per full-time employee (FTE) drops significantly.
- Regional Variations: US companies consistently outspend their UK and EU counterparts across all company sizes, particularly at early growth stages.
- Hidden Costs of Software: The most common sources of wasted spend include unused licenses, redundant tools, and duplicate functionalities across departments.
- AI Adoption and Spending: AI spending has grown in the past year, with tools like ChatGPT leading the charge. However, despite widespread adoption, only a percentage of companies report seeing tangible value from their AI investments.
- Perceptions of Software: High-growth companies are more likely to view software as an investment rather than an expense.
Research for this Report
Input from Cledara: At Cledara, we have a unique vantage point to observe the AI landscape. Our platform helps small and medium-sized tech companies manage their software, from tracking usage to paying for tools. Since its inception, Cledara has gathered data from over 1 million transactions with more than 5 thousand vendors. This gives us a bird's-eye view of how businesses purchase and use software in the real world.
Input from 200+ Companies: To complement the data we hold, we ran a survey with more than 200 tech companies with less than 200 staff across the United States (US), United Kingdom (UK), and Europe (EU) to understand their software spend habits.
Chapter 1: Software Spend Benchmarks
1a. Software Spend Benchmarks by Company Size
I'm sure it comes as no surprise that as company size increases, so does software spend. Here we have the average spend at different sizes before we dive into more detailed views around regions and per FTE.
Key findings
- Smaller companies (0–20 employees) spend an average of $121,336 annually on software.
- Mid-sized companies (50–100 employees) spend around $193,716.
- Larger SMBs (100–200 employees) invest approximately $251,119 in software annually.
1b. Software Spend per FTE
One of the most striking trends is the significant efficiency gained as companies grow. The software spend per full-time employee (FTE) drops dramatically from around $8,000 for companies with up to 20 staff to just $1,741 for those with 100-200 staff. That is 4 times less expensive.
Note: Bigger companies are not necessarily more efficient. They need to buy the same amount of tools, but because they have more employees, they usually just have to add seats, which tend to be cheaper than a new subscription.
Key findings
- Startups (0–20 employees) spend $8,000 per FTE.
- This figure drops considerably to $2,583 per FTE for companies with 50–100 employees.
- This falls further to $1,741 for larger SMBs (100–200 employees).
What it means for you:
- For Startups (0–20 employees): Your high per-employee spend isn't unusual. You're likely investing in foundational tools that will scale with your growth. Focus on selecting versatile, scalable solutions that can grow with you.
- For Growing Companies (20-50 employees): This is a critical phase for optimizing your software stack. Look for opportunities to consolidate tools and negotiate better rates as your user numbers increase.
- For Established Companies (50–200 employees): You're likely seeing economies of scale kick in. However, with size comes complexity. Be vigilant about unused licenses and redundant tools to keep your per-employee spend efficient.
1c. Regional Variations in Software Spend
The survey reveals significant geographic differences in software spending patterns across the US, UK, and EU markets. These variations offer crucial insights into how companies in different regions approach software investment and adoption.
Key findings
- US Dominance: The United States consistently outspends both the UK and EU at every stage of company growth. This gap is most pronounced among smaller companies, but persists even as organizations scale.
- UK and EU Alignment: While the UK and EU show lower overall spend compared to the US, their spending patterns closely mirror each other, suggesting similar market dynamics and approaches to software adoption in these regions.
- Scaling Patterns: All regions show increased total software spend as companies grow, but the rate of increase varies.
1d. Regional Variations in Software Spend by FTE
To better understand these differences, let's examine the spend per full-time employee (FTE):
This chart reveals even more nuanced insights
- Early-Stage Investment: US companies show a significantly higher spend per FTE at the 0-20 staff level, investing nearly twice as much per employee compared to their UK and EU counterparts.
- Convergence at Scale: As companies grow, the spend per FTE in the US aligns more closely with that of the UK and EU. By the 100-200 employee range, the gap narrows considerably.
Potential Factors Influencing Regional Differences
Higher per FTE spending in the US, may be driven by:
- More mature market with early tech adoption
- Larger funding rounds for startups
- Greater competition driving rapid innovation
- Regulatory differences and higher labor costs
These factors create an environment where significant software investment is often viewed as crucial for success and maintaining a competitive edge.
“The average amount of capital raised by startups in Europe has historically been lower than in the US at every stage of the startup journey. The management of European startups must be more resourceful and selective with their expenditure in areas such as software, talent, and marketing.
At Nauta, we work closely with portfolio companies to help them plan their use of capital efficiently based on their unique goals and milestones. This way we enable them to grow leaner and compete successfully irrespective of the funds raised.”
What it Means for You:
US Companies
- Your higher initial investment in software may be providing a competitive edge. Ensure you're maximizing the value of these tools.
- As you scale, look for opportunities to optimize spend. Your per-FTE investment decreases faster than in other regions when managed correctly.
- Evaluate whether your software investments are translating into proportional productivity or competitive advantages.
UK + EU Companies
- Consider whether increased early investment in software could accelerate your growth. Are there mission-critical tools you're delaying adoption of due to cost concerns?
- Your lower initial spend might indicate a more cautious approach to software adoption. While prudent, ensure this isn't hindering innovation or growth.
- Investigate US companies in your industry. Are there software-driven strategies you could adapt to your market?
By understanding these regional dynamics, companies can make more informed decisions about their software investments, potentially uncovering opportunities for strategic advantages or efficiency gains.
1e. Number of Software Tools
At Cledara, we've uncovered a startling trend: businesses consistently underestimate their software usage by an average of 40%. Our data reveals that for every 10 tools a company thinks they're using, there are actually 14 in play.
As we grow, we have a dual approach to software spend. If the software helps to improve our team’s productivity, efficiency, or long-term growth, it’s considered an investment. This would be the case with the AI tools we’re adopting to accelerate task execution. Otherwise, it’s categorized as a necessary operational expense
This discrepancy stems from two key factors:
- Decentralized Management: Without a unified view of software across teams, it's easy to lose track of what's being used company-wide.
- Shadow IT: Unofficial software purchases and usage spread across teams, payment methods, and even personal accounts, flying under the radar of official oversight.
As organizations grow, so does this gap between perceived and actual tool usage. This widening disparity underscores the escalating challenge of effective software management in scaling businesses.
Chapter 2: The Hidden Costs of Software
2a. Wasted Spend: A Growing Concern
As companies scale, the challenge of managing software efficiently becomes increasingly complex. Our data reveals a troubling trend:
- Organizations with 100–200 staff waste an average of $89,033 (34%) of their software budget
- Companies with over 200 staff waste a staggering 48% of their software spend
This trend highlights the urgent need for better software management practices, especially in rapidly growing companies.
Common Sources of Wasted Spend
- Unused Seats and Tools
- Paying for more licenses than actively used employees
- Continuing to pay for tools that are no longer in use
- Duplicate Tools
- Different teams using separate tools for the same purpose
- Example: One department using DocuSign while another uses HelloSign
- Similar Apps with Overlapping Features
- Multiple tools with crossover functionalities that could be consolidated
- Missed opportunities for cost savings through feature consolidation
This trend underscores the growing challenge of effectively managing software as organizations become larger and more complex. It points to a clear need for better software management practices, especially in rapidly growing companies.
We consider about 40% of our software spending to be an investment and the rest expenses. Last year our team went into growth mode and ended up spending more than 300K USD. We are doing a better job at managing SaaS and reducing our expenses. We have eliminated duplicate and unused tools. Additionally, we conduct monthly Software audits and have adopted budgets by department.
2b. Cloud and Advertising Spend
In addition to general software spend, we also examined spending patterns on cloud services and advertising to see how these strategic expenses compare to software. We found that the distribution is similar with spend on the 'big three' similar across business sizes.
Accounting-wise we treat all software spend as an expense. However, on a strategic level, our Finance and Accounting team considers certain key applications like a CRM or Cledara as an investment.
Chapter 3: Perceptions and Future Outlook
3a. Software: Expense or Investment?
The majority of businesses still view software more as an expense than an investment. However, this perception shifts significantly when we compare high-growth companies to the rest of the market:
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Fast-growing companies are more likely to treat software as an investment rather than an expense. This mindset correlates with higher software spend per FTE among these high-growth organizations.
At Orange, we view software spending as an investment rather than a mere expense. We've focused on integrating our software selection and implementation processes to enhance efficiency, streamline operations, and foster collaboration across our organization. As a non-profit, it's been important to align technology with our mission to improve our capabilities and ensure long-term sustainability.
What It Means for You
High-growth companies often see software as a critical enabler of scalability and efficiency. By viewing software as an investment, these companies may be more willing to adopt cutting-edge tools that drive productivity and innovation. Consider re-evaluating your perception of software spend – could a shift in mindset unlock new growth opportunities?
3b. Perception of Current Spend
To get an idea of how the 'big three' expenses of Software, Cloud and Advertising are currently perceived, we asked we asked CFO's and Founders if they thought they were overspending, or underspending.
- 45% of companies believe they are overspending on software.
- The majority of companies (66%) believe they are spending the right amount on cloud services.
- Interestingly, most companies (52%) thought they were underspending on advertising.
3c. Future Spending Intentions
Looking ahead, the outlook for software spending remains positive:
- 58% of companies plan to increase their software spend in the coming year.
This trend suggests continued growth in the software market and highlights the increasing importance of digital tools in business operations.
What It Means for You
As the majority of companies plan to increase their software investments, staying competitive may require keeping pace with these spending trends. However, focus on strategic investments that align with your business goals rather than increasing spend for its own sake.
Chapter 4: The AI Revolution - The Future of Software?
It's impossible to ignore the seismic impact of artificial intelligence on the software landscape. Our recent AI Usage, Spend and Outlook 2025 report offers fascinating insights into how AI is reshaping the way businesses approach software. Here's a brief overview of key findings:
4a. AI Adoption and Usage
- Exponential Growth: Since January 2023, we've seen exponential growth in AI tool usage, with ChatGPT leading the charge.
- Diverse Ecosystem: While ChatGPT dominates with 33 times more usage than its closest competitor, emerging players like Perplexity and Claude are showing impressive growth rates of 238% and 367% respectively since January 2024.
- Comparison to Traditional SaaS: Despite high adoption rates, AI tools still see significantly less usage than established SaaS platforms. For instance, ChatGPT has 9 times less usage than HubSpot, despite being adopted by more companies.
We are thoroughly tracking how AI tools affect our productivity, and since last year, we have tried out most of the AI tools on the market that are compliant with applicable data privacy laws. We learned that AI tools boost productivity in all departments. From GitHub Copilot and ChatGPT to Midjourney and Grammarly, they all reduce the time needed for manual work and often enhance the final result.
4b. AI Spending Trends
- Rapid Growth: AI spending grew by a staggering 446% in the last 12 months, compared to 36% growth in overall SaaS spending.
- Emerging Players: While giants like ChatGPT and OpenAI continue to grow, niche AI tools are seeing explosive growth. For example, Clay, an AI-powered data enrichment tool, has seen 600% growth since January 2024.
- Department-wise Adoption: Marketing leads in AI spend, with Sales showing the fastest growth rate. This indicates AI's increasing role in customer-facing operations.
AI tools have significantly increased our team's productivity by automating routine tasks, enhancing data analysis, and enabling faster, data-driven decision-making. This has allowed us to focus on other crucial business areas such as driving strategic initiatives.
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4c. Value Perception and Future Outlook
- Widespread Experimentation: 82% of surveyed companies are using or experimenting with AI tools.
- Value Realization Gap: However, only 46% of these companies report seeing tangible value from their AI investments so far.
- Optimistic Future: Despite mixed results, 54% of businesses plan to increase their AI spend in the coming year, indicating confidence in AI's potential.
- Job Impact: Contrary to popular fears, only 6% of businesses expect to reallocate funds from areas like payroll to fund AI initiatives, suggesting AI is viewed more as a complement to human labor than a replacement.
The Big Picture
The AI revolution is still in its early stages, with businesses enthusiastically adopting these tools but still working to unlock their full potential. As AI technologies mature and businesses develop more strategic implementation approaches, we expect to see a significant impact on overall software spending patterns and usage trends.
Bonus: Chargebee’s 4 software spend predictions for 2025
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We spoke with Guy Marion, Chief Marketing Officer at Chargebee, about his software predictions for 2025. Guy leverages over 15 years of strategic marketing and leadership to drive SaaS growth and before joining Chargebee, Marion was CEO and Founder of Brightback, now Chargebee Retention.
“Looking ahead to 2025,” shared Guy, “we expect a big shift in how companies spend on software. We predict that subscription billing and tools that help grow recurring revenue will be in focus with Automation, AI insights, Integrations, and Security also being major themes. Those that jump on these trends will be in a great position to grow and succeed.”
Top 4 Software Spend Predictions for 2025
- Increased Investment in Automation: As businesses strive for efficiency, we’ll see an increase in spending on automation tools. Subscription models thrive on streamlined processes, and companies will prioritize software that automates billing, invoicing, and customer management. This will reduce operational costs and provide better customer experiences through timely, error-free transactions.
- Focus on AI-Driven Insights: Artificial Intelligence is set to be a game-changer for recurring revenue and subscription platforms. People are now using AI not just for the sake of having it, but to dig deeper and gain real insights. I predict a surge in investment in AI capabilities that analyze customer behavior and predict churn. These insights will allow businesses to proactively engage customers, tailor offerings, and refine marketing strategies, ultimately driving higher retention rates. At Chargebee, we’ve invested in AI offers, and they’re helping our customers create and deploy personalized retention offers at scale that reduce churn and foster stronger customer loyalty.
- Integration and Interoperability: As organizations start using more specialized tools, we’re likely to see a shift back toward “best of breed” solutions rather than just relying on one-stop shops. Historically, the SaaS landscape has swung back and forth between these two approaches every few years. Now, with the growing need for software that works well with what companies already have, the focus will be on finding those standout tools that excel in specific areas. Whether it’s a marketing automation platform, a CRM, a revenue reporting platform, or another integration. Companies will increasingly seek platforms offering robust APIs and compatibility with other business solutions, making creating a cohesive technology ecosystem easier.
- Emphasis on Security and Compliance: With the rise in data privacy regulations, I foresee a heightened focus on security features in subscription platforms. Investment in compliance-related tools will become a priority as companies continue to protect customer data and maintain trust.
ChartMogul on Balancing Growth with Efficiency
Written by ChartMogul
As SaaS companies navigate shifting economic conditions and evolving customer demands, the landscape for software spending has changed significantly. ChartMogul delves into the data behind these shifts, providing insights into key trends such as retention strategies, emerging pricing models, and the growth potential for SaaS companies in 2025.
As New Business Slows, Retention Takes Center Stage
Throughout 2020-2021 SaaS experienced a growth boom. With low interest rates and easy access to capital, companies increased their purchasing power to invest in software. Combined with the rapid digitization driven by the pandemic, SaaS saw a peak in new business Annual Recurring Revenue (ARR) growth.
However, by mid-2021, rising interest rates and shifting economic conditions caused new business growth to decline. SaaS is now indispensable in any tech stack, but the space is becoming increasingly competitive. The growth at all costs mentality is shifting towards efficiency and retaining existing customers has taken the center stage.
Shifting Focus Toward Efficiency Metrics
As companies grow and find product-market fit, they rely more on expansion. Compared to 2021, a larger portion of revenue today comes from existing customers, a trend especially evident in companies with high ARR. With new business lagging in 2024, it's no surprise that SaaS companies are focusing more heavily on customer expansion.
To support this, efforts are shifting toward reshaping the customer success role and investing in retention tools. This explains improved Annual Recurring Revenue per Full-Time Employee (ARR/FTE) metrics, which may not mean that companies are being more efficient, as Cledara points out. In fact, this might reflect successful expansion strategies deployed by SaaS companies.
Another metric on the rise is Net Revenue Retention (NRR), where an ideal score of ≥100% is the goal in B2B SaaS. However, achieving this has become increasingly difficult. In 2024, only the top decile of companies surpass this benchmark, and even those are seeing a decline in NRR performance.
New pricing models emerge to face competition
Post-pandemic, companies have become more budget-conscious. The layoffs of 2022-2023, combined with inflexible SaaS subscriptions, helped expose software wasted spending. While there’s still a clear need to invest in SaaS as part of your tech stack, businesses are becoming more aware of their spending, particularly around unused seats and underutilized tools.
In response, SaaS companies are updating their pricing models, experimenting with value-based or usage-based options. This is especially true in the AI space, where consumption-based pricing is gaining popularity. If SaaS companies want to stay competitive and avoid future churn, they'll need to adopt a model that provides the most value to customers.
Great net retention = high growth
ChartMogul data shows that companies with NRR above 100% are the most successful. In 2024, these companies are growing at twice the rate of those with lower NRR. Much of this growth comes from expansion, but they also exhibit strong customer acquisition, reflecting a solid product-market fit.
Cledara’s research reveals that high-growth companies view software spending as an investment, not an expense. This suggests that achieving product-market fit goes beyond having a great product or pricing strategy; it’s also about how these companies extract value from their tech stack and cultivate a forward-thinking team mentality.
Increasing software spend are both an opportunity and challenge
According to Cledara, 58% of companies plan to increase their software spending in the coming year. While this presents a growth opportunity for SaaS businesses, it also poses a threat. Mature companies may reduce or downgrade their existing tools during budget reviews. These will likely go towards newer AI-driven solutions.
To capitalize on this opportunity, SaaS providers must continue innovating their products, experimenting with pricing, and refining their brand positioning to stand out from the competition. At the same time, they need to maintain a strong focus on customer retention by consistently delivering value.
Conclusion: Navigating the Software Landscape
As we look to the future, it's clear that software will continue to play a crucial role in business success. The data presented in this report highlights several key takeaways:
- Efficiency through growth: Larger companies can achieve significant efficiencies in their software spend, but they must be vigilant about managing waste.
- Regional differences matter: US companies tend to invest more heavily in software, especially in early growth stages. Companies in other regions might consider whether increased software investment could drive growth.
- The investment mindset: High-growth companies are more likely to view software as an investment. This perspective correlates with higher spending and potentially faster growth.
- Room for optimization: With high levels of wasted spend, especially in larger organizations, there's a clear opportunity for better software management practices.
- Future growth: With the majority of companies planning to increase software spend, the market is set for continued expansion.
What to Do Next
Based on the insights from this report, here are some practical steps your business can take:
- Conduct a Software Audit: Take stock of all the software tools your company uses. Identify any redundancies or underutilized licenses.
- Implement a Software Management System: Consider adopting a centralized platform for managing software licenses, usage, and costs.
- Reassess Your Software Budget: Compare your spending to the benchmarks in this report. Are you investing enough in software to stay competitive?
- Focus on ROI: For each software tool, evaluate its return on investment. Consider both quantitative metrics (like time saved) and qualitative benefits (like improved collaboration).
- Plan for Growth: If you're a high-growth company or aspiring to be one, consider how your software strategy can support and enable that growth.
- Optimize Cloud and Ad Spend: Given the perceptions around cloud and advertising spend, reassess your allocations in these areas.
- Stay Informed: Keep abreast of software trends in your industry. The landscape is evolving rapidly, and staying informed can help you make strategic decisions.
As businesses navigate this complex landscape, the key to success will be striking the right balance between investment and efficiency. By treating software as a strategic asset and implementing robust management practices, companies can leverage these digital tools to drive growth and maintain a competitive edge in an increasingly digital world.
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