Microsoft recently announced upcoming price adjustments that will likely affect their customer’s future purchasing decisions. Specifically, they announced 10% price increases for on-premise Office 2019 commercial prices in conjunction with a few “programmatic pricing changes” (i.e., changes to the volume discounting structure and various licensing programs). Though the announcement seems relatively simple, the implications reach far beyond face value.
One of the most obvious means of increasing revenue is by increasing the price of what’s being sold. For many software vendors like Microsoft, price increases are often planned and accounted for well before a customer is actually presented with the change at their next purchase or renewal. When taking a deeper look at Microsoft’s pricing plans, it becomes apparent that there is a larger motivation than simply increasing revenue through price increases.
Program Pricing Changes
The first changes identified are the programming pricing changes. Depending on the licensing program, certain volume discount tiers are either completely removed or modified to be more consistent across the various licensing programs. For example, if you are a customer operating under an Enterprise Agreement (EA), Microsoft Products and Services Agreement (MPSA) or Select program, there will be no more volume discounting for the volume Level A pricing tier.
This is problematic for many reasons. The above example forecasts increased pricing for smaller enterprise organizations with up to 2,399 employees (Microsoft even said to expect ~4% increases). By doing this, Microsoft is forcing organizations to increase user counts in order to gain the benefit of volume discounts.
“Providing consistent pricing through the removal of level discounting for small and midsize commercial customers purchasing…. should help customers compare solutions based on their organization’s need, not just price, accelerating their journey to modern commerce through a modern discounting approach.”
While these program considerations are impactful, the most important takeaway from this change is Microsoft’s true intention behind their price increase. Although many of the specific pricing changes revolve around adjusting price levels to be more consistent (which is the cloud product’s price impact), many on-premise solutions such as Office 2019 and several Client Access Licenses (CAL) and server products are seeing pure price increases of 10-30%!
It is very clear that this change is a direct and not-so-subtle effort to turn up the heat and more aggressively push organizations to the cloud. By increasing on-premise product pricing, the corresponding cloud solutions instantly become more attractive. If your organization is considering the cloud, Microsoft will probably even offer additional discounting on cloud solutions to incentivize adoption. Microsoft states to their partner community:
“These changes should help focus sales conversations on solutions rather than price, and open sales channels to create more opportunity for partners that offer strong value-added services.”
It is almost comical the way that Microsoft justifies these changes, saying that modernization and customer benefits (namely transparency and focusing on solutions rather than price) are the main reason.
In reality, they are blatantly forcing their customer’s hand to motivate adoption of Microsoft cloud solutions. Microsoft does this because they are confident that they will still land the business, regardless of the heartburn they are causing customers to feel. Microsoft knows that once an organization migrates to the cloud, they have that organization right where they want them. As you may know, cloud subscriptions offer no ownership of any licensing (this means that the customer pays subscription fees in perpetuity) and due to the complex nature of the solution, Microsoft knows how difficult it will be to move away from their cloud.
Make sure you are confident that you are adopting the cloud for the right reasons — and just as important — with the right commercial construct in place.