Microsoft CEO Satya Nadella speaks at the Next: Economy conference in San Francisco on November 3, 2015.
Liz Hafalia | Chronicle of San Francisco | Hearst Newspapers | Getty Images
Microsoft is using its dominant position in the productivity software market to force some customers of its Office suite to make an important decision: pay more or commit to a longer subscription.
In 2022, Microsoft is rolling out what it calls the New Business Experience for Office, revamping the way customers buy its software through business partners. While the company hasn’t publicly announced a specific price change, it has informed its partners that organizations paying monthly will face a 20% increase unless they switch to annual subscriptions.
For Microsoft, the ability to lock customers into longer agreements potentially means better revenue visibility and less worry about the churn rate, a critical part of subscription businesses. Software vendors typically offer discounts for annual subscriptions over monthly subscriptions, and many large companies prefer this option.
However, some small businesses trying to preserve cash flow as they face the challenges of the pandemic are frustrated by the evolution of the model, which comes just after the announcement of a price increase in August for Microsoft 365. , a bundle formerly known as Office 365.
Meanwhile, Microsoft is booming. Its stock has risen 46% this year, pushing its market cap to over $ 2.4 trillion, while revenue growth has exceeded 20% in each of the past two quarters.
The majority of Microsoft’s revenue comes from business customers rather than consumers, and 95% of its business revenue comes from partners. Customers who purchase specifically through Microsoft’s Cloud Solution Provider program are those affected by the change in subscription plan, and Microsoft is not disclosing how what percentage of its customers purchase products this way.
Rob Schenk, co-founder of Intivix, a Microsoft partner with offices in the Bay Area, said he has started notifying his customers about the 20% increase in monthly arrangements. Responses have been mixed, he said, and some customers have told him they “don’t like him at all.” Deployment can be particularly difficult for channel partners like Intivix, as they have had to act as a messenger to customers.
Microsoft’s lack of clear information about the monthly price hike made conversations with customers difficult, Schenk said. And Microsoft will wait for subscriptions to pay even if customers decide they no longer want Office services mid-term, according to an internal document obtained by CNBC.
Partners backed down in a number of forums. People have spoken on Reddit, and more than 1,400 have signed a Change.org petition to have Microsoft reverse its planned price increase. The backlash has led to intense meetings between Microsoft and its partners, said a person familiar with the launch who asked not to be named for privacy concerns.
“Microsoft provides flexible purchasing options to meet the diverse needs of our customers, and we do not publicly disclose information about our approach to bonuses and pricing for partners,” a spokesperson told CNBC in a statement. E-mail.
The new program “introduces a monthly duration option that will allow partners to offer customers flexibility at a premium price,” the email said. Although Microsoft has not officially sold Office 365 subscriptions on a monthly basis, customers have in practice been able to switch from month to month and increase or decrease the number of users as needed, the partners said. This option has proven to be invaluable for organizations that downsized during the pandemic due to declining demand.
The inability to reduce subscriptions may be a bigger problem for customers than the higher prices, said George Hammerschmidt, executive vice president of Nortec Communications, a partner based in the Washington, DC area.
“There are people who are going to be upset,” Hammerschmidt said
Microsoft had planned to implement the New Commerce Experience in October, but postponed it until January 2022. New orders will have to go through the New Commerce Experience from March, and renewals must use it from July, Microsoft said in a blog post.
Between January and June, Microsoft will charge the same price for monthly and annual offers, the company said. After that, the monthly increase takes effect.
The change follows a publicly announced increase in August, when Microsoft announced that it was increasing prices in March 2022 for subscriptions to its Microsoft 365 bundles from 8.5% to 20% per user, depending on the tier. The company said at the time that it was “the first substantial price update since the launch of Office 365 ten years ago.” Microsoft noted that the bundle now includes more collaboration, security and automation tools.
Adam Mansfield, who helps companies negotiate software purchases from Microsoft, Salesforce and ServiceNow at consulting firm UpperEdge, told CNBC that the August hike announcement was bad news for some organizations.
Microsoft is betting customers will stay, in part because Google’s Workspace plan, formerly known as G Suite, is the only significant competitor.
“Customers who use Google today are very price sensitive or very small,” Hammerschmidt said.
Mansfield said a concern for Microsoft, however, should be the potential for disgruntled customers to choose another public cloud provider when they have upcoming projects. In this market, Microsoft is lagging behind Amazon Web Services, while Google is investing heavily to attract new customers.
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