What Step-Up Licensing Is and How Microsoft Uses It
Step-up licensing is a mechanism within the Microsoft Enterprise Agreement that allows customers to upgrade from a lower-edition product to a higher-edition product mid-term, paying only the price differential rather than the full cost of the higher edition. In theory, it is an efficient way to increase capability within an existing EA without purchasing entirely new licences. In practice, it is one of the mechanisms Microsoft most frequently uses to accelerate revenue from existing accounts — and one of the areas where buyers consistently pay more than the commercial situation warrants.
The mechanism works like this: if your EA includes M365 E3 at £27.40 per user per month, and you decide mid-term to step-up to M365 E5 at £46.00 per user per month, you pay the differential — approximately £18.60 per user per month — rather than the full E5 price. This is presented as a saving. It is a saving relative to an alternative framing, not necessarily a saving relative to the best commercial outcome available.
Step-up licensing is offered as a standard mechanism in EA Subscriptions for M365 products, Dynamics 365, and certain Security and Compliance products. It is not available for all products and not available in the same form across all EA types. Understanding exactly when step-up pricing applies — and when it does not — is the first step toward managing it effectively.
How Step-Up Pricing Is Calculated
Step-up pricing is calculated as the difference between the higher-edition price and the lower-edition price, at the current price list rates applicable to your EA. Three elements make this more complex than it appears.
The Differential Is Calculated at Current, Not Locked, Rates
Your original E3 price was locked at EA signing. If Microsoft has raised E3 prices since you signed — as happened with the 2022–2023 M365 price increases — the step-up differential is calculated against the new E3 list price, not your locked rate. This means you pay a higher differential than you would expect based on your current EA price. The effect is small on a per-user basis but material at scale: for 2,000 users stepping up from E3 to E5 after a 9% E3 price increase, the annual cost differential may be £30K–£50K higher than anticipated.
Step-Up Additions Are Priced for the Remaining Term
Step-ups processed at the annual true-up are pro-rated for the remaining term of the EA. A step-up in month 13 of a 36-month EA covers 23 months — which is presented as a "cost saving" because you are only paying for the remaining term. In reality, you are paying for 23 months of the differential regardless of whether you ultimately renew at E5 — there is no pro-rata refund if you step down at renewal.
SA Benefits Transfer to the New Edition
When you step up from E3 to E5, your Software Assurance rights transfer to the E5 product set. This is commercially positive for AHUB eligibility and certain training/support benefits, but it also means you are now committed to the E5 product set's SA obligations for the remaining term. If you step down at renewal, the SA benefits accumulated during the step-up period do not carry forward to a lower edition.
Common Step-Up Scenarios and Their True Cost
The most common EA step-up scenarios in 2025–2026 involve M365 E3 to E5, Dynamics 365 Business Central to Finance/Operations, Microsoft 365 Business Standard to Business Premium, and in some cases Exchange Online Plan 1 to Exchange Online Plan 2 or Microsoft 365 Apps for Enterprise.
| Step-Up Path | Typical Differential/User/Month | 2,000-User Annual Cost | Key Decision Factor |
|---|---|---|---|
| M365 E3 → M365 E5 | £18–22 | £432K–£528K | Defender P2 + Purview actual use |
| M365 E3 → M365 E5 Security | £11–14 | £264K–£336K | Defender P2 + Entra P2 use |
| M365 E3 → M365 E5 Compliance | £9–12 | £216K–£288K | Purview + eDiscovery actual need |
| Exchange Online P1 → Exchange Online P2 | £6–8 | £144K–£192K | Archiving/litigation hold requirement |
| Dynamics 365 Business Central Essentials → Premium | £18–24 | Varies by user count | Manufacturing/Service modules actual use |
The figures above are typical but not universal — your specific EA pricing and product list will determine exact differentials. The key principle is that these differentials must be assessed against the alternative: waiting for renewal and negotiating the higher edition from scratch, potentially with better discounts and more favourable terms than a mid-term step-up provides.
Step-Up Mid-Term vs. Wait for Renewal: The Decision Framework
The question buyers rarely ask — and Microsoft's account teams never raise — is whether a mid-term step-up is commercially superior to waiting for renewal and negotiating the higher edition with full leverage. This analysis should precede every step-up decision.
When Mid-Term Step-Up Makes Sense
A mid-term step-up is commercially justified when: (1) there is a genuine, immediate operational requirement for the features in the higher edition — not an anticipated future requirement, but a current deployment driver; (2) the step-up differential is at or below the renewal differential you would expect to negotiate; and (3) the step-up occurs close enough to your renewal date (within 12–15 months) that the pro-rated cost is not materially higher than a renewal-based purchase.
Security-driven step-ups are the most defensible. If a specific Defender P2 or Purview capability is required to respond to a board-level security mandate or regulatory obligation, the cost of waiting until renewal — measured in operational risk — may genuinely exceed the step-up cost premium. Even in these cases, the step-up should be negotiated, not accepted at list price.
When Waiting for Renewal Is Better
Waiting is almost always preferable when: (1) the operational requirement is anticipated but not yet mandated; (2) the step-up would occur in the first half of the EA term (more than 18 months from renewal), when the pro-rated cost is highest; or (3) you are already preparing for an EA renewal where the higher edition can be proposed as the starting point, generating the full leverage of a competitive renewal rather than a mid-term amendment.
The discount available on M365 E5 at renewal — particularly in a well-prepared competitive renewal with benchmarked pricing and a documented competitive evaluation — is typically 5–12 percentage points better than the discount implicit in a mid-term step-up differential. On a 2,000-user deployment, that gap is worth £200K–£480K over the next three-year term. Our EA renewal preparation guide details how to position E5 as the renewal starting point rather than a mid-term addition.
How to Negotiate Step-Up Pricing
If a mid-term step-up is the right decision, it must be negotiated — not accepted at the differential Microsoft's account team presents. Three principles guide effective step-up negotiation.
Benchmark the Full Edition Price Before Discussing Differentials
Microsoft will present the step-up as a differential. Anchor the negotiation on the full higher-edition price first. If M365 E5 is priced at £46 per user per month and you have benchmark data showing comparable enterprises receive E5 at £39–41 per user through competitive renewals, use that data as the basis for the differential calculation. A step-up differential calculated on a discounted E5 price is materially better than a differential calculated on list price. See our EA pricing benchmarks guide for how to build and deploy this data in negotiations.
Use the Step-Up as a Renewal Anchor
If you decide to proceed with a step-up, negotiate it as a pre-commitment to the higher edition at renewal on defined terms. Language to request: the step-up differential agreed now, combined with a renewal price cap on the higher edition that locks renewal pricing within 0–5% of the step-up rate. This converts a mid-term cost into a strategic pricing position — and creates renewal certainty worth more than the short-term cost of the step-up itself.
Negotiate the Step-Up Against the Full EA Commercial Relationship
A mid-term step-up is an amendment to your EA — which means it passes through the same approval chain as any commercial change. Use it as an opportunity to improve other EA terms simultaneously. Enterprises that frame a step-up as a commercial event — "we will step up 2,000 users to E5 in exchange for improved audit rights language and a price cap on the next renewal" — consistently achieve better overall terms than those that treat the step-up as a standalone transaction. The EA negotiation leverage principles apply equally to mid-term amendments as to full renewals.
Step-Up Licensing and Compliance Risk
Step-ups that are processed inconsistently with actual deployment create compliance exposure. The most common risk: an organisation processes a step-up for a subset of its user population, deploys the higher-edition features to a wider population, and creates an unmanaged true-up liability. This is particularly common with M365 E5 security features, which are often deployed at the tenant level rather than per-user — creating de facto E5 access for users whose licences have not been stepped up.
Before any step-up decision, validate the deployment scope precisely. If E5 features will be deployed tenant-wide, the step-up must cover all affected users — and the true-up obligation at the next annual measurement point needs to be planned into the budget. Partial step-ups in multi-tier deployments are a frequent source of unexpected true-up charges. Our true-up and compliance advisory service covers the management framework for complex step-up deployments.
Copilot as the Most Common Current Step-Up Decision
In 2025–2026, the most frequent step-up conversation in enterprise EA negotiations centres on Microsoft 365 Copilot — currently positioned as an add-on at £24.70–£30+ per user per month, depending on agreement type and negotiation outcome. Copilot is not technically a step-up product (it remains a separate add-on rather than a true edition upgrade), but the commercial dynamics are identical: Microsoft's account teams are actively driving mid-term Copilot additions, and the same principles apply.
Copilot additions mid-term are almost always priced better at renewal, when a full business-case evaluation and competitive positioning is possible. The exception: organisations with a specific, board-mandated Copilot deployment timeline in the current term. In those cases, negotiate the per-user addition price against the benchmarks in our Copilot licensing traps guide — which shows that negotiated Copilot pricing for enterprise accounts ranges from £18 to £27 per user per month depending on volume and competitive context, well below the list price Microsoft's reps quote as standard.