The Number That Should Make You Nervous
SaaS pricing increased 11.4% year-over-year in 2025 per the Vertice SaaS Pricing Index. That's not a blip. That's the trend. And the thing about percentages is they compound.
Most finance teams budget SaaS costs as a flat line item. Maybe they add 5% for growth. They're wrong by a factor of two or three, because they're not modeling what compounding price increases actually do over a multi-year horizon.
Let's fix that.
Key Takeaways
The 5-Year SaaS Cost Model
Start with a real scenario. Your company pays $100,000/year for a mid-market SaaS tool. Could be a CRM, a workflow platform, an analytics suite -- the category doesn't matter. What matters is the math.
SaaS vendors raise prices. They always have, but the pace has accelerated. The average increase in 2025 was 11.4%. For this model, we'll use a conservative 10%.
| Year | Annual SaaS Cost | Cumulative SaaS Spend |
|---|---|---|
| Year 1 | $100,000 | $100,000 |
| Year 2 | $110,000 | $210,000 |
| Year 3 | $121,000 | $331,000 |
| Year 4 | $133,100 | $464,100 |
| Year 5 | $146,410 | $610,510 |
Your "flat" $100K/year tool costs $610K over five years. Not $500K. That extra $110K appeared out of nowhere because you didn't model compounding.
And this is the conservative case. At the actual 2025 average of 11.4%, the five-year total hits $640K.
The Custom Build Alternative
Now model the alternative. A custom replacement for the same tool:
| Year | Annual Custom Cost | Cumulative Custom Spend |
|---|---|---|
| Year 1 | $56,000 (build + maintenance + infra) | $56,000 |
| Year 2 | $11,000 (maintenance + infra) | $67,000 |
| Year 3 | $11,000 | $78,000 |
| Year 4 | $11,000 | $89,000 |
| Year 5 | $11,000 | $100,000 |
Five-year total: $100,000 vs. $610,510 for SaaS.
That's an 84% reduction in total cost of ownership. And the gap grows every single year.
The Gap Accelerates
This is the part most people miss. The savings don't grow linearly. They accelerate.
| Year | SaaS Cost | Custom Cost | Annual Savings | Cumulative Savings |
|---|---|---|---|---|
| Year 1 | $100,000 | $56,000 | $44,000 | $44,000 |
| Year 2 | $110,000 | $11,000 | $99,000 | $143,000 |
| Year 3 | $121,000 | $11,000 | $110,000 | $253,000 |
| Year 4 | $133,100 | $11,000 | $122,100 | $375,100 |
| Year 5 | $146,410 | $11,000 | $135,410 | $510,510 |
Year 1 savings: $44K. Year 5 savings: $135K. By year 5, the annual savings alone exceed the entire five-year cost of the custom build.
The breakeven point is somewhere around month 14. After that, every month is pure savings.
The PE-Owned Vendor Problem
The model above assumes a steady 10% annual increase. For PE-owned SaaS vendors, the reality is far worse.
When a private equity firm acquires a SaaS company, the playbook is predictable: cut R&D, reduce support headcount, and raise prices aggressively. Documented examples include increases of 200-900% within 12-24 months of acquisition.
If your vendor has been acquired by PE -- or is likely to be -- your 10% model is dangerously optimistic. Some vendors have implemented:
For PE-owned vendors, the five-year model looks more like this:
| Year | Scenario: PE Acquisition in Year 2 | Cumulative |
|---|---|---|
| Year 1 | $100,000 | $100,000 |
| Year 2 | $180,000 (80% increase post-acquisition) | $280,000 |
| Year 3 | $216,000 (20% increase) | $496,000 |
| Year 4 | $259,200 (20% increase) | $755,200 |
| Year 5 | $311,040 (20% increase) | $1,066,240 |
Over a million dollars for a tool that started at $100K/year. The custom alternative is still $100K total. That's a 91% difference.
"But Custom Software Has Risks"
Fair. Let's address them.
"What if the build costs more than estimated?" Pad it. Double the build cost to $90K. The five-year total becomes $134K. Still 78% less than SaaS at $610K.
"What if maintenance costs more?" Triple the maintenance to $24K/year. Five-year total: $186K. Still 70% less than SaaS.
"What if we need to rebuild it?" Budget a complete rebuild in Year 3 for another $45K. Five-year total: $145K. Still 76% less than SaaS.
Even in the worst-case scenario where you double the build cost, triple maintenance, AND do a full rebuild -- the five-year total is $231K. That's still 62% less than the SaaS alternative.
The math is resilient because the fundamental problem with SaaS pricing is structural: compounding increases on a recurring base will always outrun fixed costs on an owned asset over any meaningful time horizon.
Which Tools Have the Worst Compounding Exposure
Not every SaaS tool has the same price increase profile. The highest-risk categories:
Tier 1 -- Aggressive compounders (10-15% annual increases):
Tier 2 -- Moderate compounders (5-10% annual increases):
Tier 3 -- Infrastructure (harder to replace, but also harder to raise prices):
Your replacement strategy should target Tier 1 tools first. That's where the compounding damage is worst and the replacement ROI is highest.
Running Your Own Model
The formula is straightforward:
5-Year SaaS Cost = Year 1 Cost x ((1 + annual increase rate)^5 - 1) / annual increase rate
5-Year Custom Cost = Build Cost + (Annual Maintenance + Annual Infra) x 5
5-Year Savings = 5-Year SaaS Cost - 5-Year Custom Cost
Breakeven Month = Build Cost / (Monthly SaaS Cost - Monthly Maintenance)
Run this for every tool in your stack over $25K/year. The aggregate number will surprise you. For a company spending $500K/year on SaaS across 8-10 tools, the five-year savings from replacing just the top 3-4 candidates typically exceeds $1.5 million.
Want us to run this model on your actual stack? Get your free SaaS audit. We'll build the 5-year projection for every tool you're running and show you exactly where the compounding is costing you most.