We'll get straight to the point. Typically, the cost of technology comes down with time due to significant leaps in technology efficiency. Your cell phone, laptop, and similar technology products are prime examples. The iPhone 13 costs less than it did a few years back.
You can take any industry (except service-oriented sectors), and the underlying technology gets cheaper with time. Do I even need to mention Tesla here? I hope you get the idea. Every end user benefits from economies of scale.
However, this analogy doesn't apply in the Procurement Tech space. Although their core cost of developing a technology largely remains a one-time cost (and then there are maintenance and upgrade opex costs), they do not pass the benefit of this cost base appropriation (getting divided amongst their extensive client base). In fact, their pricing models are so opaque that companies with similar user bases can pay 2 to 3 times higher than some of their aggressive negotiator clients.
Before we dive into the reasons, it is crucial to understand the costs involved in Digital Procurement projects.
Typical Software Costs
I have collected the cost benchmarks of a few industry-leading players. Please feel free to correct me if my estimates are way off!
Some Specific Tools and Their Costs
SAP Ariba
Annual Subscription Fees: Range from $150,000 to over $1 million, depending on the modules and enterprise size.
Implementation Costs: Can be between $500,000 and $800,000, influenced by customization and integration needs.
Total Cost of Ownership (TCO) Over 5 Years: May exceed $3 million for large enterprises.
Coupa
Annual Costs: Start at $125,000 for mid-sized enterprises and can exceed $500,000 for larger organizations.
Additional Modules: Each extra module adds $20,000 to $50,000 annually.
TCO Over 5 Years: Ranges from $750,000 to $2 million.
Jaggaer
Software Licensing: Starts at $100,000, with annual maintenance fees of about 20% of the license cost.
Customization Costs: Additional $50,000 to $200,000 based on requirements.
TCO Over 5 Years: Approximately $600,000 to $1.2 million.
Basware
Annual Fees: Start at $80,000, with costs increasing based on transaction volumes.
Per Transaction Costs: Some models charge $1 to $2 per invoice processed.
TCO Over 5 Years: Between $600,000 and $1.5 million, depending on usage.
GEP SMART
Annual Subscription: Approximately $100,000 to $250,000.
Additional Modules: Each adds $15,000 to $40,000 annually.
TCO Over 5 Years: Ranges from $700,000 to $1.3 million.
Again, I have compiled this based on my experience and information I could find publically. It can be significantly off, so I'd welcome corrections from the readers.
Also, it won't be appropriate to state these costs without ringfencing typical spending on procurement tech according to enterprise size.
Industry Benchmarks and Spending Trends
Average Spending on Procurement Tools:
Small Enterprises: Spend $30,000 to $80,000 annually.
Mid-Sized Enterprises: Allocate $150,000 to $350,000 per year.
Large Enterprises: Expenditures can exceed $1 million annually.
Now, let us get to the absurd part—the core argument. Why does the cost of Procurement Technology continue to go up without any significant rise in user requirements complexity and without any substantial changes to Procurement Technology's time?
First, let us start with the basics, i.e., the negotiation and the contracting structure. The contracts signed with these digital procurement suite providers are not simple. They juggle multiple clauses, which often takes away the so-called commercial benefits provided to you upfront during the negotiation stage. Naive negotiators or non-committed category managers won't spend time digging deep into these contract clauses; hence, their lack of effort benefits these suppliers.
Some of the absurd contract clauses are:
Automatic Renewal Clauses: Such clauses automatically extend the contract without active consent, potentially locking the customer into unfavorable terms. This may include price increases upon renewal without any explicit notification to buyers.
Price Escalation Clauses: I never liked those annual price increases. They are one-sided and discourage negotiation. They are designed to take advantage of you being locked in already and are unlikely to stop the subscription cycle due to higher switching costs.
Supernegotiate has a library of about 21 clauses to watch out for while negotiating these contracts in Digital Procurement and Software licenses in general. Please contact us on Linkedin and DM us if you need a copy.
Ok. So, we have seen potentially one reason so far - the absurd contract clauses. But what is the impact? Well, according to our calculations,
Cost Increase Trends:
Annual Price Increase: Vendors are increasing software prices by an average of 8% annually.
Total Cost Growth Over 5 Years: This could result in a 40% increase in software costs over a five-year period.
I dont want to divert the focus here, but the average tenure of a Procurement professional in an organization is generally lower than five years. So, the new person will have little to no idea about these contract traps! So, the cycle continues.
Okay, so what are the other factors then? Well, you won't be surprised, but let me articulate those factors anyway. 3rd one is the main culprit, in my view.
Integration of Advanced Technologies
Artificial Intelligence (AI) and Machine Learning (ML): Incorporating AI and ML increases software development costs by an estimated 20-30%.
So, while all the digital procurement platform providers are raving about their GenAi capabilities, they are basically luring CPOs into the higher billing tariff structure.
I have stated this before: None of the Procurement Tech providers have their own GenAi capability. They utilize the OpenAI API (or similar LLM APIs) and add a nice UI for you to consume.
Shift to Subscription-Based Models
Cost Over Time: Subscription models can result in a 30-50% higher total cost of ownership over five years compared to one-time licensing fees (Source: Gartner).
Monthly Fees: Enterprise-level subscriptions range from $5,000 to $30,000 per month, leading to annual costs of $60,000 to $350,000. This can become even more so for large enterprises. Refer to the Industry benchmark and spending trend section mentioned above.
Customization and Integration Expenses
As mentioned above, this is the main reason for continuous cost increases. Vendors will try to sell their plain vanilla software and recommend that you change your process according to their workflow.
They will not evaluate your as-is process to conclude any reasonable assessment genuinely. Nope. They will discourage every deviation that you ask (by suggesting that you are opting for a suboptimal process and going against the best practice)
They intentionally make customization extremely expensive. It is almost similar to an insane upgrade you have to do to your Macbook! It's super expensive and ridiculously priced. Here is my simulation of the costs they charge us (the buyers) versus what it might cost them!
The markup on their costs can be up to 3 to 4 times! Click on the image to expand it and read the numbers!
The simulation above considers only one instance of ERP. If there are multiple versions/instances, the cost will increase further!
I hope you get the idea! The customizations are kept cost-prohibitive on purpose. But, for CPOs and Procurement teams, these customizations are mandatory requirements for the system to work. Secondly, because of such large upfront costs, it creates as entry barrier for any new entrant. The cost of ripping apart an existing Procurement technology solution, along with time, resources, and change management effort, makes it almost unworthy. The incumbent vendor capitalizes on this lockin state to extract more cost increases.
In fact,
Implementation Costs: Customization can add upto 30% to the base software cost. A platform priced at $150,000 might require an additional $30,000 to $50,000 for customization.
New Startups and Price Increases Post Merger:
Following mergers, some vendors have increased prices by up to 15% due to reduced competition. This aspect is becoming quite possible in 2025 as the Procurement Tech ecosystem approaches the consolidation phase. There are far too many players with similar platform features addressing the same problem. So, the consolidation is inevitable. However, the market is still controlled by the top 5 players only. The top five procurement software providers now control over 65% of the market, giving them significant pricing power.
Cost of Building Features that No One is asking:
This is another point. Most of the Digital Procurement providers will have "Quarterly Feature Releases". While some of them are bug fixes and expected, most are marginal improvements or unnecessary releases that have nothing to do with any material impact on the outcome of the business process.
There are multiple issues with this constant stream of Quarterly Feature releases:
a.) Constant workload on your change management teams to manage, conduct UAT, roll out, and then do training sessions. These features have a 1 in 100 chance of getting adopted by a minimal user base. So, while the cost of developing these minor features is minimal, deploying them is extremely expensive (in terms of time and resources).
b.) Change in existing workflows: The constant influx of new features interferes with existing processes and disrupts business as usual.
Conclusion
It is unlikely that Procurement Technology software providers will give you or me the benefit of economies of scale. On the contrary, they will keep finding hidden avenues of marking up the prices even though it costs them marginally higher.
So, how can we protect ourselves from these cost surges? Well, I'll write a follow-up article on this if necessary. Tag me in your post and say I need a follow-up on your article!
I can be found here:
(Just a way for me to stay motivated)
I hope you found this article informative! Tell your friends about Supernegotiate! It will help them too.
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