In case you missed the news, Microsoft is increasing its subscription prices for Microsoft 365 in March 2022 — the first substantive pricing update since they launched Office 365 in 2011. For those who prefer to get straight to the point, there will be an increase of up to 25% on Microsoft 365 monthly subscription pricing, with most license types seeing an increase of 10–20%.
It is not just a price increase. Microsoft is also changing the way it sells Microsoft 365. Microsoft will charge a 20% premium on Microsoft 365 products unless customers choose to be billed annually. Microsoft appears to be using its dominance to force some of the monthly-paying customers into a major decision. Pay the price increase or make a commitment to a longer annual subscription.
For Microsoft, the opportunity to have their customers locked into longer arrangements will likely mean increased revenue and a reduced likelihood that clients will leave and go elsewhere. Larger organizations may be able to withstand the price of annual payments. However, some smaller organizations that hope to preserve cash will be unhappy with the changing price model. It is a complex situation and there is certainly going to be some growing pains as everyone gets used to it. The following are some experts’ takes on this situation:
Kenny Riley, Technical Director at Velocity IT:
Starting on March 1, 2022, Microsoft will be rolling out its first substantive price increase across various Office 365 subscriptions for the first time since the platform launched nearly a decade ago. These price increases are part of a more significant change in the Microsoft 365 landscape called the New Commerce Experience. While there has been a lot of information published regarding Microsoft’s New Commerce Experience, many organizations are finding it challenging to understand these changes and how they affect their business.
Briefly, Microsoft is not only rolling out price increases across several of their Office 365 subscriptions, but they are trying to entice businesses to spend more upfront to save more in the long run. They are doing this by providing incentives and cost savings to companies that purchase their Office 365 licenses annually while penalizing month-to-month subscriptions with a 20% price increase. These changes will allow organizations to save in the long run by locking in their pricing on a one or 3-year term while allowing businesses to continue to have flexible licensing options if they are willing to pay a premium to do so.
The customer feedback we have received on these changes has been mixed. Larger organizations seem to be more open to moving their licensing over to an annual commitment to experience the savings. Still, smaller organizations are not thrilled about committing annually to subscriptions. Instead, they are opting to take the price increase to allow them to have the flexibility to cancel unnecessary licensing as needed.
Michael Anderson, President of 365tech.ca:
Microsoft’s global price increase taking place next month is hardly surprising. By now, businesses have seen prices of nearly everything go up as suppliers pass along their increased costs. What’s more surprising is the decision to apply a 20% premium for the flexibility of a month-to-month subscription. Both businesses and consumers understand monthly subscriptions, and while there are often discounts in exchange for committing to a longer-term, this is framed more as a penalty or deterrent. For the majority of clients that have stable headcounts, a term commitment will make sense. For others, who may have seasonal workers or other variations in their staffing levels, this change creates more administrative headaches than a simple price increase.
Ashu Singhal, President of Orion Networks:
It is not surprising that the price is going to increase. Microsoft has thwarted a lot of competition in this space and overcome the usual churn while moving customers from perpetual to monthly. Microsoft is also focusing on getting better revenue visibility by nudging customers towards annual commitments as a good chunk of monthly-only customers are bound to go for annual commitments to beat the price increase.
Michael Nelson, Owner of TLC Tech:
I do not think it is unfair that Microsoft has introduced a price increase. It is the first increase in 10 years and over those past years, they have increased the value and the functionality of Office 365 at an impressive pace. I do believe they have introduced a component that is unfair to their channel partners. There are two issues:
- The new model ties the license to the MSP that procures the license for their customers. This puts the MSP at risk if a client stops paying. The MSP will still be billed for the licensing.
- The new model also ties the license to the distributor for the length of the term. That now forces the MSP to stay with the same distributor, even if it is not getting the service they need.
We have been a Microsoft Partner for 18 years and I have always been an advocate for them. This “New Commerce Experience” is putting too much liability on AND limits the options of their partners. In addition, the Windows 11 transition is introducing a lot of unknowns to one of its biggest revenue streams. Therefore, it is just better to go into that storm with stable/increased revenue from another solid business.
Jeremy Kushner, CEO of BACS Consulting Group, Inc.:
With inflation currently touching nearly every aspect of our economy, the price hike from Microsoft is not surprising. Customers are accepting this much like all the other current price increases — stoically and without much commentary. After all, Microsoft is essentially the only game in town here.
However, what customers generally do not understand, and the underlying mess here, are the contractual obligations and administrative nightmare that come along with this hike. Price increases can be minimized and, in some cases, outright avoided, by signing up for annual contracts rather than going month to month on the commitment. The issue here is that these annual commitments, now fully enforced, bring problems of their own, including the inability to remove excess licenses and the inability to move Microsoft tenants to a different partner. What this boils down to is the following:
- If you sign up for 100 licenses for a specific SKU for an annual term and, at some point down the road of that term, determine that you need fewer, you are stuck. You will pay for those 100 licenses for the life of the term. Microsoft’s suggested solution to this problem is to have customers sign up for hybrid licensing, meaning, in this particular case, to sign up for, say, 60 licenses with an annual commitment and at the lower price, and then another 40 licenses on a month to month basis at a higher rate. Sound good? Not really. This model is overly complicated for the customer to understand and will require clarification conversations with each and every billing contact. This is not to mention the administrative overhead this creates for the partners, who need to manage this license administration and billing octopus. The small margin that partners earn from selling these products hardly compensates for this heavy administrative load.
- Secondly, as mentioned prior, the unintended consequence of this new annual subscription enforcement is that end-users will be unable to move their Microsoft tenants to other partners if they are currently under subscription commitments. This means that if they cease to do business with IT managed services providers, but are under Microsoft contracts, they will be forced to continue to do business with those MSPs until the contracts come to a close. Worse still, the winning MSP in this case (the MSP that is unable to take control of the tenant due to Microsoft contractual obligations) will be forced to coordinate with the losing MSP for license additions for the remainder of the contract term.
Frankly, at a bare minimum, Microsoft should allow for tenant migrations with current contractual obligations left in place. However, apparently, at least at the moment, this is not in the cards. In speaking with Microsoft’s largest worldwide distributor, TD Synnex, we understand that partner feedback has been overwhelmingly negative, with comments consistently similar to the salient points above. However, we also understand that Microsoft has not made any indication of bending here. At least not yet. Time will tell how this really plays out.
