LSP Margins and Incentives for Microsoft Licensing

LSP Margins and Incentives for Microsoft Licensing

Reseller Incentives: Understanding LSP Margins & Motivations

Introduction – Why Reseller Incentives Matter

Microsoft relies heavily on third-party resellers, known as Licensing Solution Providers (LSPs), to sell and manage its enterprise licensing agreements.

If your organization has a Microsoft Enterprise Agreement or large cloud commitment, you’re almost certainly working with an LSP. These partners play a critical role in your software negotiations – and their financial incentives can significantly influence the deal.

To negotiate effectively, you need to understand how your reseller makes money and what drives their advice. An LSP’s ultimate goal is to maximize its revenue from your account.

This doesn’t always align with your goal of minimizing costs and getting only what you need. Read our overview for how you should be negotiating with Microsoft Resellers (LSPs)

By grasping Microsoft reseller margins and motivations, CIOs and IT procurement leads can better anticipate the reseller’s moves and counterbalance them to achieve a fair outcome.

How LSPs Earn Money

Commission on license sales: Most LSPs earn a base commission from Microsoft on every license or subscription they sell to you. In an enterprise agreement, Microsoft sets a standard price and gives the LSP a small percentage cut as their reseller margin (often just a few percent of the deal’s value).

This commission is volume-driven – the more you spend on licenses, the more revenue the reseller collects. For example, a multimillion-dollar Microsoft 365 or Azure agreement could net the LSP a commission in the low single-digit percentage range.

It may not sound like much, but at large volumes it adds up. Crucially, it means your LSP has a built-in incentive for you to spend more on Microsoft products.

Incentives and rebates: Beyond the base commission, Microsoft offers various incentive programs that reward LSPs for prioritizing certain products and behaviors.

These incentives can take the form of backend rebates, bonuses, or funds paid to the reseller after certain milestones are hit. For instance, if you commit to a big Azure consumption target (or reach a usage threshold), the LSP might receive an extra percentage of that revenue as a bonus.

Similarly, LSP incentives often include rewards for upselling customers to premium offerings. If your reseller convinces you to upgrade from Microsoft 365 E3 to E5, or to add new add-ons like Security suites or the latest AI-powered Copilot, they could earn a higher commission rate or a one-time bonus from Microsoft.

In short, whenever you adopt the products Microsoft is currently pushing hardest, your reseller likely gets a bigger reward.

Tied to Microsoft’s priorities: These incentive programs fluctuate with Microsoft’s fiscal year priorities. One year, Microsoft might focus on driving Azure cloud adoption or security products, offering partners an extra margin for those.

The next year, the emphasis might shift to emerging products (for example, promoting Teams Phone, advanced compliance tools, or Copilot AI features). LSPs stay keenly aware of what earns them the most incentives right now.

This means the “helpful” recommendations coming from your reseller often align with Microsoft’s sales playbook. They’re motivated to sell you not just more, but specifically the mix of products that maximizes their backend rewards.

Services and add-on sales: It’s worth noting that many LSPs don’t stop at Microsoft licenses – they often try to sell additional services and products.

An LSP might treat your Microsoft licensing business as a thin-margin or even loss-leading opportunity, expecting to make more profit by selling you IT services, consulting, training, other software, or hardware. This broader sales motive means the reseller is interested in gaining your trust and expanding the account.

While those additional services might be valuable, they’re another factor in how resellers make money from the relationship.

They may bundle “free” advisory help or aggressive pricing on licenses, hoping to recoup it later through other services. Always consider what else your reseller is pitching – it can reveal where their true profit lies.

Why LSP Incentives May Conflict with Customer Value

A Microsoft reseller’s goals don’t always line up with what’s best for you as the customer.

Here are a few ways their incentives can conflict with delivering customer value:

• Maximizing spend vs. optimizing costs: Your LSP benefits financially when you spend more on Microsoft products. They have no incentive to help you trim unused licenses or cut costs – in fact, reducing your spend cuts into their commission. This is why you might get pushback when trying to eliminate unused licenses or right-size your subscription counts. The reseller’s bottom line improves when you buy as much as possible, not when you save money.
• Microsoft-aligned advice: Resellers often act like “trusted advisors,” but remember they closely follow Microsoft’s sales agenda. If Microsoft is heavily promoting a product this quarter, your LSP’s advice will likely echo that. Their “recommendations” (for example, to consider an E5 upgrade or commit to a bigger Azure package) often mirror what Microsoft wants to sell, because that’s how the reseller earns its keep. The result is advice biased toward selling more product, not necessarily what brings you the most value or ROI.
• Pressure to overcommit in the cloud: Many organizations feel pressure from their LSP to increase Azure consumption commitments or cloud subscription levels beyond actual usage needs. This is no accident – resellers earn bonuses for hitting Azure sales targets. They might urge you to sign up for a higher Azure spending commitment with promises of future growth or a slight discount, even if your current usage doesn’t justify it. Overcommitting can lead to wasted budget on unused cloud resources, benefiting the reseller’s quota but hurting your efficiency.

In negotiations, these conflicting incentives can play out in subtle ways. The LSP might downplay cost-saving moves, exaggerate the benefits of upgrades, or create a sense of urgency to close a deal.

The following table highlights some common customer goals versus the reseller’s incentives, and the impact on your negotiation:

As you can see, a customer’s objective to streamline and stay flexible is often at odds with a reseller’s objective to lock in a larger, longer deal. Recognizing these opposing interests is the first step in preparing your negotiation strategy.

Review your contracting options, Microsoft EA: When to Go Direct vs. Through LSP.

Strategies to Counter Reseller Incentives

Knowledge is power – and knowing your reseller’s motivations enables you to counterbalance them. You can still get a good deal and unbiased insight, but you have to be proactive and sometimes a bit skeptical.

Here are some strategies to keep the negotiation playing field level:

• Engage multiple LSPs for competitive proposals. Don’t put all your trust in a single reseller’s narrative. Invite quotes or input from more than one LSP when you’re renegotiating an enterprise agreement or large purchase. When resellers know they’re competing, they’re far less likely to inflate margins or push unnecessary extras. Even if you intend to stay with your incumbent provider, having another option on the table keeps them honest. A little competition motivates your LSP to give you their best pricing and service offer instead of the most profitable one for them.
• Demand transparency on pricing and margins. It’s fair to ask your reseller for a clear breakdown of costs. For instance, ask them to distinguish Microsoft’s list price vs. any added fees or services the LSP is charging. While they might not reveal their exact commission, pressing for transparency signals that you’re aware of how they make money. You can also inquire if any manufacturer incentives or rebates are tied to your deal, and if so, request that some of that value be passed on to you (either as a discount or added services). The more you make the financial structure visible, the less wiggle room there is for an LSP to pad their profit, unknown to you.
• Separate advisory from sales. Be cautious about relying solely on your reseller for licensing advice and strategy. If possible, separate the advisory role from the transactional role. This could mean bringing in an independent licensing consultant or using your own internal experts to validate what the LSP recommends. The idea is to get guidance that isn’t colored by a desire to sell you more. Even if you don’t hire outside help, make it clear that you’ll be cross-checking the reseller’s suggestions against your own data and possibly a second opinion. When the LSP knows you have independent oversight, they’re more likely to stay truthful and reasonable in their proposals.
• Tie commitments to real needs, not sales pitches. Keep your purchase commitments grounded in facts and internal analysis. Determine your license quantities based on actual usage and growth projections you are comfortable with – not just the rosy scenarios the reseller paints. If your LSP pitches a big Azure commitment, insist on mapping it to a detailed consumption plan your team creates. If they suggest a premium product upgrade, request a pilot or proof-of-value period first. By linking every expansion or new product to a verified need or clear ROI, you avoid buying into hype. This strategy cuts through sales fluff and ensures you’re spending for the right reasons.

Checklist – Managing Reseller Negotiations

• Validate recommendations with data: Cross-check every reseller recommendation against your own usage statistics and requirements. For example, if they say you need 500 more Office 365 licenses, verify how many people are actually using the ones you have. Trust your data over their pitch.
• Ask for cost breakdowns: Require the LSP to provide a detailed quote that separates licensing costs, support fees, and any services. This clarity helps you see if they’re adding extra margin or selling you services you might not need. It also makes it easier to compare offers between providers.
• Compare multiple quotes: Don’t assume the first proposal is the best you can do. Compare pricing and terms from at least two qualified LSPs side by side. Use one quote as leverage against the other – if LSP A offers something extra (like training credits or a bigger discount), ask LSP B to match or beat it.
• Challenge upsells with ROI requirements: When a reseller pushes a costly add-on or upgrade, ask them to prove the value. For instance, if they encourage an upgrade to E5 licenses, have them outline how the additional features will save or earn your company money. If they can’t demonstrate tangible benefits, you have grounds to push back or delay the purchase.
• Get promises in writing: If your LSP offers any “extra” perks to close the deal – whether it’s free workshops, deployment assistance, or a special discount – ensure it’s documented in the contract or order form. Verbal promises evaporate after signing. Make sure every incentive or commitment is clearly written down so you can hold them to it.

The importance of choosing right, Choosing an LSP: How Your Reseller Impacts the Deal

Pitfalls to Avoid

Even savvy negotiators can be caught off guard by common reseller tactics.

Be on guard for these pitfalls when dealing with an LSP:

• Believing the myth of “exclusive” discounts: Don’t be swayed by claims that “only we can get you this special price.” Microsoft sets baseline pricing and discount bands that apply to all partners; one LSP doesn’t have secret better prices that others can’t access. If a reseller insists they have an exclusive deal or an end-of-quarter miracle discount, maintain healthy skepticism. Chances are, any genuine discount is coming from Microsoft and could be achieved through another partner as well.
• Letting the reseller define your needs: Avoid the trap of letting the LSP dictate the scope of your agreement or your Azure commitment levels. It’s easy to let them draft up an attractive-looking bundle, but remember, they might pad the deal with extra licenses or services you don’t actually require. Always define your own requirements first. If you let the reseller draw the map, you’ll likely end up overspending on a larger deal than necessary.
• Rushing due to quarter-end pressure: Be cautious with the “deal expires this month” or “we need to sign now for this discount” pressure. Resellers (and Microsoft sales teams) commonly push customers to close deals by the end of Microsoft’s quarter or fiscal year. While there can be real discounts tied to that timing, don’t agree to terms you’re uncomfortable with just because of a deadline. This urgency is often driven by the seller’s need to meet targets. If you feel the deal isn’t right, be prepared to walk away or wait – Microsoft often finds a way to extend “expired” offers when they truly want your business.

FAQ – Understanding LSP Incentives

Q1: Do all LSPs make the same margin on Microsoft products?
Not exactly, but they’re similar. Microsoft’s standard commission rates are largely consistent across LSPs – most partners get only a few percent on your licensing spend. One reseller might give you a slightly better overall deal than another by cutting their own fees or sharing a rebate, but huge differences in margin are uncommon. In other words, no reputable LSP is making 20% off your Microsoft EA while another makes 2%. They all operate within a narrow margin set by Microsoft, so core pricing should be relatively close, no matter which LSP you use.

Q2: How do Microsoft promotions affect reseller behavior?
They have a big influence. When Microsoft runs promotions or bonus incentives for selling a certain product or hitting a target (for example, extra commission for Azure consumption or doubling rebates on security add-ons), resellers take notice. You’ll see them pushing those promoted products much more aggressively. Essentially, LSPs will prioritize whatever Microsoft is paying them extra to sell at the moment. Always keep this in mind: if your reseller suddenly suggests a new product or a bigger commitment “for your benefit,” consider whether Microsoft’s behind-the-scenes incentives are nudging them. It doesn’t mean the product is bad, just that you need to evaluate it with a critical eye rather than pure trust in the pitch.

Q3: Can my LSP negotiate better terms than another?
In terms of Microsoft’s base pricing, it is usually not by a wide margin. Microsoft determines the discount levels for your enterprise agreement based on factors like your deal size and segment, and any LSP can access those same discount tiers. However, one reseller might offer better overall terms by being more flexible with their portion of the deal. For example, an LSP could choose to give up some of their own margin to win your business, or include value-added services (like free training or dedicated support) that effectively improve the deal for you. That’s why it pays to get competing quotes: while the license pricing should be similar, the differences will come down to things like service quality, extras, or minor price concessions one partner is willing to make. So yes, one LSP might appear to get you a better deal, but it’s often because they’re adjusting their side of the equation, not because Microsoft gave them a secret advantage.

Q4: Are reseller incentives transparent to customers?
Generally no, no-reseller incentives are usually hidden from customers unless you explicitly negotiate visibility. The commissions and rebates Microsoft pays to your LSP happen in the background. When you get a quote, you see the prices for licenses and maybe some services, but you won’t see “and Microsoft will pay the partner X% of this” on any document. Some sophisticated customers do ask for incentive disclosure or even a share of those rebates (for instance, negotiating that a portion of Microsoft’s rebate to the partner is passed through as a discount or credit to you). If transparency is important to you, you can attempt to include a clause in your agreement for it. But be prepared: many LSPs will deflect if you ask directly about their margins or Microsoft payouts. It’s not in their interest to reveal that without pressure. Assume that unless it’s in writing, the reseller is keeping the full incentive that Microsoft gives them for your deal.

Q5: Should I always separate licensing advisory from my reseller?
Whenever possible, it’s a smart practice to separate the two – or at least ensure you have an independent perspective. The reason is simple: an LSP’s “free” licensing advice is not truly independent. They make money when you buy more, so their guidance will naturally tilt toward solutions that benefit them financially. If you have the budget, using an independent licensing consultant or advisor for strategy can pay for itself by ensuring you only buy what you need on the best terms. That said, not every organization can bring in a third-party advisor. If you must rely on the reseller for advice, do so with eyes open. Ask probing questions, do your own homework on Microsoft licensing, and verify the advice through your internal data or peers in the industry. Even within the reseller relationship, you can separate advisory from sales by having clear boundaries – for example, let the reseller know you will decide scope and strategy internally (or with independent help). Their role is to execute the transaction and provide pricing. The key is to avoid blindly outsourcing your strategic decision-making to a party that profits from your decisions. Always keep a healthy tension between what’s best for your organization and what’s being suggested by a sales-motivated partner.

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