Microsoft’s New Copilot Licensing: What Needs to be Negotiated

Microsoft announced a new Copilot licensing model in late-September, leaning into a hybrid approach that keeps the current per-user license and adds consumption fees for advanced AI, including Cowork, Code, Autopilot, and Work IQ.

Hybrid structures are not unique to Microsoft. Salesforce and ServiceNow have used hybrid pricing, as opposed to pure consumption or outcome-based models. But as hybrid AI licensing becomes the norm across vendors, customers need to prepare to challenge these structures before they sign their next deal, whether that be part of an in-term buy or at renewal.

If your Microsoft renewal is underway, lands next June or is at year end, here’s what you need to know about the new hybrid model and negotiating with Microsoft in light of this announcement.

What did Microsoft Announce about Copilot Licensing?

The new licensing “Plug-in” Hybrid model that Microsoft announced mostly merges pricing components that were already in place. Microsoft 365 Copilot still carries a seat-based component, with a list price of $30 per user per month covering AI in Word, Excel, PowerPoint, Teams, and Outlook.

The change is a layer of additional fees for advanced AI products that will run through consumption. Microsoft meters that usage in Copilot credits, similar to how Copilot Studio already works with the already in place Copilot Credit Pre-Purchase Plan (P3) being the relevant commercial construct.

How Does the Copilot Credit Pre-Purchase Plan (P3) Work?

The plan is a pool of credits you buy in advance with an annual upfront commitment. This pool has a “use it or lose it” condition. It has nine tiers, ranging from 300 thousand to 300 million Copilot Credits, and standard discounting tiers that start at 5% and go up to 20%.

Everything ultimately gets tracked and metered based on Copilot Credit Commit Units (CCCU), with one Copilot Credit Commit Unit (CCCU) equaling 100 Copilot Credits. Every advanced AI component you use draws from the same Copilot Credit pool, including Copilot Studio if you already use it or add it at some point in the future.

Tracking usage at the CCCU level and understanding the conversion to Copilot Credits becomes essential, because heavy use across the several Copilot offerings can burn through your Copilot credits and leave you owing Microsoft more without really understanding what is coming and when.

Why Does a Hybrid Licensing Model Create Risk?

Pairing a headcount-based fee with a consumption component creates ambiguity, and ambiguity lets costs spin out of control. Microsoft, and other SaaS vendors like Salesforce and ServiceNow, use this fly-wheel effect to drive revenue, making it critical for customers to demand transparency around forecasting Credit needs, how the structure works, and the underlying pricing (upfront and downstream) when they come to the negotiation table.

In fact, best practice would be to force transparency before Microsoft even gets the chance to sit at the negotiation table. Why is a particular volume of Copilot Credits going to be sufficient? At what point will we need more Copilot Credits? What happens at that point? What actually happens if I don’t consume all the pre-purchased Copilot Credits?

What Should You Position and Negotiate with Microsoft?

Start with price. The upfront monthly per user Copilot subscription cost is a given but do not accept the standard discount tiers offered in the Copilot Credit Per-Purchase Plan (P3). Negotiate the volume discounts hard and go after the “use it or lose it” terms of the annual upfront commitment, because credits you do not use within the year may be forfeited.

Ask why the standard thresholds fit your organization’s unique needs. Microsoft is likely not going to have a good answer to this. Use that as additional leverage to improve these key items and push Microsoft away from standard constructs and pricing..

Next, position a requirement that Microsoft provide line of sight into anticipated Copilot Credit Commit Unit and Copilot Credit consumption and usage. Make Microsoft walk you through the drawdown it expects from your organization across the advanced AI components and any Copilot Studio use, should that also be part of our Microsoft Copilot product portfolio.

Additionally, challenge Microsoft’s terminology. Microsoft calls these components “Advanced AI,” which implies the foundational Microsoft 365 Copilot is not. Ask whether you are overpaying for the “foundational” Microsoft 365 Copilot subscription.

Lastly, it will be important to ensure you achieve proper downstream price certainty tied to the user-based and consumption-based components of Microsoft’s new Hybrid Copilot licensing model. Don’t accept the protection being tied to a set discount off list pricing.  Microsoft has shown customers that list pricing can change, whether it was through the removal of volume discounting or the repeat list price increases they announced.

The Bottom Line

Microsoft needs AI to drive its revenue, and an unfavorable Copilot hybrid structure will turn that needed revenue into a burden for you that you cannot tie back to real value. Demand transparency and forecasting, confirm expected usage, and make Microsoft earn the deal while providing proper pricing and commercial commitments.

Microsoft is changing how it charges for AI, and every renewal is a chance to push back. Talk to UpperEdge’s Microsoft advisory team before you sign your next agreement.