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Microsoft is using its market dominance in productivity software to force some customers of its Office suite into a big decision: pay more or commit to a longer subscription.
Microsoft is going to change the way customers buy its software through business partners. The company hasn't publicly announced a specific price change, but it has told partners that if they don't switch to annual subscriptions by the month, they will face a 20% hike.
Microsoft has the opportunity to lock customers into longer arrangements, which could mean better visibility into revenue and less concern about customer turnover. Many larger enterprises prefer the option of annual subscriptions over monthly sign-ups.
Some smaller companies that are trying to preserve cash as they deal with Pandemic related challenges are frustrated by the changing model, which comes just after a price increase was announced in August for Microsoft 365, a bundle formerly known as Office.
Microsoft is doing well. Its stock is up 42% this year, pushing its market cap past the $2 trillion mark, while revenue growth has grown 20% in each of the past two quarters.
Most of Microsoft's revenue comes from business customers, rather than consumers, and 95 percent of its commercial revenue is derived from partners. Microsoft doesn't reveal how many of its customers buy products through the Cloud Solution Provider program, but clients that specifically buy through it are the ones affected by the subscription plan change.
The co-founder of Intivix, a Microsoft partner with offices in the Bay Area, said he has started telling clients about the 20% increase for month-to-month arrangements. Some customers have told him they don't like it at all, he said. Distribution partners like Intivix have had to play the role of messenger to their customers in order to make the roll out easier.
Microsoft has a lack of clear information on the monthly price increase. According to an internal document obtained by CNBC, Microsoft will expect payment for subscriptions even if customers no longer want the Office services halfway through the term.
There are a number of forums where partners have pushed back. More than 1,400 people have signed a Change.org petition to stop Microsoft from raising its prices. A person familiar with the launch who asked not to be named because of confidentiality said that Microsoft and its partners had intense meetings after the backlash.
A Microsoft spokesman told CNBC in an email that Microsoft provides flexible purchasing options to meet customers' diverse needs, and that they don't publicly disclose information about their premium and pricing approach for partners.
The new program will allow partners to provide customers with flexibility at a premium price, according to the email. Customers have been able to increase or decrease the number of users as needed, even though Microsoft has not officially sold Office365 on a per-month basis. The option was useful for organizations that reduced their staff because of the Pandemic.
The inability to scale back subscriptions may be a bigger issue to customers than the higher prices, said George Hammerschmidt, executive vice president at Nortec Communications, a partner based in the Washington, D.C. area.
Hammerschmidt said that some people are going to be upset.
The New Commerce Experience was supposed to be implemented in October but was delayed. New orders will have to go through the New Commerce Experience in March, and renewals will have to use it in July, Microsoft said in a post.
Microsoft will charge the same price for monthly and annual offers between January and June. The monthly increase starts after that.
Microsoft said in August that it was raising prices in March of 2022, depending on the tier, by 8.5% to 20% per user. The company said at the time that it was the first substantive pricing update since they launched Office 365 a decade ago. The bundle now includes more collaboration, security and automation tools.
The hike announcement in August was bad news for some organizations, according to Adam, who helps companies negotiate purchases of software from Microsoft.
Microsoft is betting that customers will stick around because of the only significant competition, which is the new G Suite.
Hammerschmidt said that customers running Google are price-sensitive or small.
One concern for Microsoft should be the potential for unhappy customers to choose a different public cloud provider when they have upcoming projects. Microsoft trails Amazon Web Services in that market.
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