Microsoft 365 Licensing (E3, E5, F3): A Strategic CIO & Procurement Advisory

Microsoft 365 Enterprise Licensing

Microsoft 365 Enterprise Licensing refers to Microsoft’s subscription plans for organizations, specifically the Enterprise tiers E3, E5, and F3.

Each plan bundles Office 365 apps, cloud services, Windows OS licenses, and security tools at different levels.

The plans are designed for different user types and needs:

• E3 is designed for knowledge workers and standard enterprise users, offering a comprehensive productivity suite with baseline security and compliance.
• E5 is targeted at security-sensitive and analytics-driven enterprises, adding advanced security, compliance, analytics, and voice capabilities on top of E3.
• F3 (Frontline) is designed for frontline and first-line staff who require lightweight email, Teams communication, and basic apps.

Choosing the right Microsoft 365 plan is more than an IT decision – it’s a strategic call that impacts budget, compliance, and risk management. Licensing affects how you allocate IT spend, adhere to regulatory requirements, and protect data.

For example, over-licensing users on E5 could result in millions being wasted, while under-licensing (or using the wrong plan) might lead to compliance gaps or security risks. CIOs, CFOs, and procurement leaders must therefore evaluate these plans not only for their features, but also for their alignment with business priorities and cost optimization.

Core Plan Breakdown – E3, E5, and F3

Microsoft’s Enterprise plans come in three core flavors.

Here’s a breakdown of what each plan includes and who it’s best suited for:

• Microsoft 365 E3 – Productivity Suite + Baseline Security/Compliance: E3 is the core enterprise suite. It includes full desktop Office apps (Word, Excel, Outlook, etc.), enterprise email and calendaring (Exchange Online with large 100 GB mailboxes and archiving capabilities), 1 TB of OneDrive storage per user (expandable), SharePoint for collaboration, and Microsoft Teams for meetings and chat. E3 also provides Windows 10/11 Enterprise OS licensing for each user and basic enterprise security & management via EMS E3 (Azure AD Premium P1 for identity, Intune for device management, basic threat protection, such as Exchange Online Protection, and standard compliance tools, including data loss prevention and eDiscovery). This plan addresses the needs of most information workers, providing a solid foundation in security and compliance. In short, E3 offers all the essential productivity tools and baseline protections at a mid-range price.
• Microsoft 365 E5 – Advanced Security, Compliance, Analytics, & Voice: E5 is the top-tier premium plan. It includes everything in E3, plus a suite of advanced features. With E5, organizations gain best-in-class security, including Microsoft Defender for Endpoint (advanced Endpoint Detection and Response, EDR), Defender for Office 365 Plan 2 (advanced phishing/malware protection), Azure AD Premium P2 (with risk-based conditional access and Privileged Identity Management), and Microsoft Cloud App Security (CASB). Advanced compliance capabilities are unlocked, such as Advanced eDiscovery and Audit, Customer Lockbox, and enhanced information protection for regulatory data control. E5 also includes analytics and AI features, such as Power BI Pro (for business intelligence and data visualization, included at no additional cost in E5), as well as advanced Viva Insights and Workplace Analytics, which enable the analysis of productivity patterns. Lastly, E5 includes telephony and voice features, such as Teams Phone System rights and Audio Conferencing, which are part of the package. This enables PBX-like calling from Teams and dial-in numbers for meetings. (E3 users would need to purchase these as add-ons.) This makes E5 attractive for organizations looking to use Teams as a full phone system or to eliminate third-party security and analytics tools. E5 comes at a significantly higher cost, but it’s justified for high-security environments or data-driven organizations that need those premium extras.
• Microsoft 365 F3 – Frontline Worker Plan: F3 is a stripped-down plan for frontline workers who don’t require a PC or full desktop apps. It provides web and mobile versions of Office apps (no desktop Office installation rights), an email account (typically a 2 GB mailbox with online-only access via Outlook Web), and 2 GB of OneDrive cloud storage. F3 users receive Microsoft Teams for communication (including chat/meetings) and can access SharePoint sites and company intranets. Despite its lean profile, F3 does include basic EMS security: Azure AD P1 and Intune for fundamental device/app management (enforcing MFA, basic conditional access on their mobile devices or shared kiosks). However, F3 lacks the advanced threat protection or compliance tools – it’s focused on essential communication and productivity for staff on the floor, in the field, or on the go. It’s ideal for scenarios such as retail associates, factory workers, call center representatives, or any user who just needs email and Teams on a shared or mobile device without the cost of full E3 licenses.

To clarify the differences, below is a quick comparison of the key features and intended use cases for E3, E5, and F3:

Note: The prices above are indicative list prices (per user per month, assuming annual commitment). Enterprise Agreement customers often negotiated discounts in the past, especially on E5, due to its high price. However, as we’ll explore, Microsoft is changing discount structures in 2025, which may affect these costs.

Rightsizing and Optimization Practices

One of the biggest pitfalls in enterprise licensing is overspending on licenses that aren’t fully utilized.

In 2025, savvy CIOs and IT managers are focusing on rightsizing their Microsoft 365 license mix to avoid common mistakes:

• E5 Oversubscription: Microsoft and resellers often push the narrative that E5 (the most expensive plan) is necessary for modern security and analytics. While E5’s features are powerful, not every user needs them. Buying E5 for all employees “just in case” results in paying 50-70% more per user without a proportional benefit. For example, if only 15% of your staff actually use Power BI, Phone System, or advanced security dashboards, allocating 100% to E5 would be a waste of money. The better strategy is to assign E5 only to those roles that truly require it.
• Underutilized F3 Licenses: Another trap is not leveraging F3 for appropriate users. Some organizations default to assigning E3 or E5 to all employees, even those on the front lines who rarely use desktop Office applications or require large storage. This is overserving those users. F3 licenses cost a fraction of E3, so identify your frontline or light-usage staff (like factory floor or retail workers) and consider downgrading them to F3. Conversely, if you have F3 users who have outgrown the limited features (for example, a frontline manager who really needs desktop Outlook or a larger mailbox), consider upgrading them. The goal is to match each worker to the right tier – neither more nor less.
• Duplicate or Unnecessary Add-ons: Watch out for cases where you’re paying for add-on licenses that replicate what another license already provides. For instance, if you’ve purchased third-party security or compliance tools that overlap with E5’s capabilities, or if you added standalone Power BI Pro licenses for users who then also got upgraded to E5 (which already includes Power BI). Regularly audit your license assignments and addons to eliminate redundant spending.

Rightsizing framework: Start by analyzing your workforce in segments:

1. Baseline with E3: Make E3 your default for knowledge workers. It’s feature-rich and meets most needs at a moderate price. Assume everyone is on E3 unless a specific reason dictates otherwise.
2. Reserve E5 for High-Need Users: Identify roles that handle sensitive data, require advanced analytics, or have demanding compliance/security needs. These may include cybersecurity teams, senior executives, legal and compliance officers, data scientists, or roles that rely heavily on telephony. Allocate E5 only to these groups or consider E5 add-on suites (more on that below) for them. This targeted approach ensures you pay a premium only where it delivers value.
3. Leverage F3 for Frontline Staff: For employees who primarily use shared devices or only occasionally check email/Teams, F3 can drastically cut licensing costs. For example, if you have thousands of retail associates or factory operators currently on E3, moving them to F3 could save hundreds of thousands of dollars annually, while still providing them with the necessary tools. Ensure that their managers or IT provide training on using web/mobile apps, as they won’t have access to desktop Office. However, many frontline workers don’t need full desktop apps anyway.
4. Continuously Monitor Usage: Use Microsoft 365’s admin center reports or analytics tools to see feature usage. Track how many E5 users actually use Power BI, how many E3 users really needed an E5 feature, etc. Adjust licenses periodically as roles change or new projects begin. Also, remove licenses for dormant accounts (e.g., employees who have left) to avoid paying for unused software.

By implementing a disciplined rightsizing practice, enterprises often find they can trim 10-30% of their licensing costs with no impact on productivity.

For example, one company that initially licensed all 1,000 employees on E5 realized that only 200 users were actively using E5-only features.

They downgraded 800 users to E3, saving millions over a three-year term while still equipping those 200 power users properly. This kind of optimization frees budget for other needs and prevents overspending.

Pricing Dynamics & Cost Management in 2025

Enterprise licensing costs are a moving target, and 2025 brings significant Microsoft pricing changes that CIOs and procurement teams must factor into their plans.

Let’s break down the pricing landscape:

• List Pricing for E3, E5, F3: As of early 2025, the list price of Microsoft 365 E3 is in the mid-$30s per user/month (approximately $34–$36 in the US). Microsoft 365 E5 is roughly $57–$60 per user/month (about 60% more than E3). F3 is about $8 (a fraction of E3). These are baseline US prices for enterprise customers with an annual subscription commitment. In the EU and UK, prices are of a similar order (often listed in local currency, e.g., around €35 for E3, €57 for E5). However, European licensing has an added wrinkle. Due to antitrust regulations, Microsoft now offers “no Teams” versions of the suites at a slightly lower price, with Teams available as a separate add-on. This primarily affects new subscriptions in EU countries – it means the suite price might be a couple of dollars/euros cheaper without Teams, but you’d then need to license Teams separately if required. Globally, however, the general price points remain comparable.
• 2025 Price Increases – Narrowing the E3 vs. E5 Gap: Microsoft is implementing targeted price hikes on select services to encourage customers to upgrade to E5. Notably, Power BI Pro and Teams Phone (Phone System) licensing saw steep increases effective April 1, 2025. Power BI Pro (the standalone license for analytics) jumped by 40% (from $10 to $14 per user/month), and Teams Phone Standard (for telephony) increased by 25% (from $8 to $10 per user/month, with the Frontline variant rising from $4 to $5). These are significant because many E3 customers purchase these as add-ons, and Microsoft’s strategy here is clear: make the add-ons more expensive so that upgrading to E5 (which includes them) looks more attractive. In essence, the cost difference between an E3 + Power BI + Phone bundle vs. E5 has shrunk, nudging organizations to consider “might as well go E5.” This tactic is similar to how Microsoft raised Office 365 E3 prices in the past to push the value perception of E5. Beyond these, Microsoft also announced a general 5% price premium for certain monthly billing options (specifically, if a customer chooses to pay month-to-month for an annual commitment in the CSP program, it costs ~5% more). All these changes mean higher costs if you stick with à la carte services on E3, and they strengthen Microsoft’s E5 upsell pitch. Enterprises should analyze their E3 add-on spend – if you’re adding Power BI, audio conferencing, advanced security, etc., individually, it might be crossing over the E5 price anyway.
• November 2025: Elimination of Volume Discounts (Level A Pricing for All): A seismic licensing change will take effect on November 1, 2025. Microsoft is removing the traditional volume-based discount tiers for online services in Enterprise Agreements (and similar volume licensing programs). Historically, large customers purchasing thousands of seats received better pricing (Levels B, C, and D) than smaller ones (Level A). After November 2025, all enterprise customers will pay Level A base prices for Microsoft 365, Dynamics 365, and Azure subscriptions, among others, at the time of renewal or for new purchases. In other words, the automatic discount for sheer size is no longer in effect – a company with 50,000 seats will pay the same list price per seat as one with 500 seats. Microsoft frames this as “pricing consistency” across customers and purchasing channels. The practical impact: if you were enjoying, say, a 15% lower price due to your volume, you could see that cost advantage disappear on your next agreement renewal, translating to millions in added cost over a 3-year term for large enterprises. This change places the onus on customers to actively negotiate for any discounts, rather than assuming volume will automatically grant them. It also levels the field between purchasing channels: the price difference between an EA and a CSP might diminish (since CSP was always effectively “Level A” pricing). CIOs and procurement leads need to budget for potentially higher renewal costs and prepare negotiation strategies (possibly leveraging increased Azure spend or adoption of new Microsoft products as bargaining chips to secure custom discounts).
• EA vs. MCA-E vs. CSP – Pricing and Flexibility: In 2025, enterprises have multiple ways to buy Microsoft 365, each with cost implications:
  • Enterprise Agreement (EA): A traditional 3-year contract with Microsoft for large organizations (generally 500+ seats required). It offered price locks for 3 years and volume discounts (which, as noted, are ending). EA pricing is directly with Microsoft and historically was the lowest unit cost at high volumes. However, EAs are inflexible: you commit up-front to a certain quantity (with the ability to true-up annually if counts grow), and reductions are only allowed at renewal or within certain rules. Microsoft Customer Agreement – Enterprise (MCA-E): This is a new purchasing program that
  Microsoft is rolling out as an alternative to EA. It’s an evergreen agreement (no fixed 3-year term) that allows you to add or remove subscriptions more flexibly (similar to CSP) while buying directly from Microsoft. Pricing under MCA-E is typically at list (like CSP) unless you negotiate custom discounts. There are no minimum seats required, making it accessible to mid-market orgs,
  • too. One key difference: it doesn’t include Software Assurance or on-premise perpetual licensing options by itself (those are handled via separate programs if needed).Cloud Solution Provider (CSP): Buying through a Microsoft partner on a subscription basis. CSP offers the most flexibility – you can have monthly or annual terms for licenses, adjust counts as needed at term end (or even month-to-month for certain subscriptions), and you get a partner’s support services bundled. Pricing in CSP is based on Microsoft’s list prices, but partners can offer some discounts or value-added services. Historically, CSP was slightly more expensive than a large EA on a per-seat basis for big customers (because EA had volume discounts), but with the new flat pricing, CSP and EA prices will be much closer. CSP is often the only option for smaller businesses that can’t enter an EA, and even larger enterprises sometimes use CSP for specific needs (like a subset of users or a subsidiary) to benefit from its flexibility.
  In summary, the pricing dynamic is shifting: Microsoft is standardizing cloud subscription prices, which reduces the built-in discount advantage of an EA. Enterprise buyers will need to focus on cost management through negotiations and license optimization rather than relying on Microsoft’s old discount structure. Additionally, evaluate whether sticking with a strict EA makes sense or if an MCA-E (with more flexibility and similar pricing) might suit your organization after 2025. Some large customers might choose a hybrid approach (e.g., core licenses on an EA for price protection, but overflow or uncertain quantities via CSP for agility).
• Hidden Cost Drivers to Watch: Beyond the sticker price of E3/E5 plans, be aware of add-on costs that can increase your expenses. For example, additional storage – SharePoint and OneDrive include a lot of storage, but organizations with massive archives or Teams recordings might need to buy extra GBs of SharePoint storage. Advanced compliance or security add-ons – if you stay on E3 but need, say, Advanced Threat Protection, Insider Risk Management, or Advanced Compliance, you’ll pay for those modules (often as part of an E5 Compliance or E5 Security add-on pack). Those can add $5–$12 per user. Audio conferencing and calling plans – E5 includes dial-in conferencing, whereas E3 does not (although Microsoft now offers a free Audio Conferencing add-on for E3/F3 that can be manually activated). Similarly, to enable external phone calling in Teams, you need either an E5 license or an add-on Phone System license with a separate calling plan minutes. These telephony costs can be significant if not planned. Third-party software overlap – if you have redundant third-party solutions (e.g., you pay for Zoom or Cisco WebEx in addition to Teams, or you have Splunk or CrowdStrike in conjunction with E5 Security), you may be overspending. Consider consolidating on the Microsoft stack if it meets your needs, to reduce the cost of paying multiple vendors. Finally, Microsoft 365 Copilot (the new AI assistant service) is on the horizon; it’s an add-on (priced at $30/user for enterprise) not included in E3 or E5 by default. If you plan to adopt AI for productivity, that’s an entirely new cost layer to budget for in late 2024 and 2025. In short, read the fine print on what each plan includes, and carefully forecast the total cost of ownership, including any extras your users will require.

Strategic Considerations for CIOs & Procurement

Licensing decisions should align with your business strategy and risk profile.

Here are key considerations for technology and procurement leaders as you plan your Microsoft 365 licensing strategy in 2025:

• Align Licensing with Business & IT Strategy: Consider your organization’s 3-5 year roadmap. Are you prioritizing data security and zero-trust architecture? Do you have regulatory audits to pass or eDiscovery needs? Are you doubling down on data analytics and BI, or on enabling frontline productivity? Your Microsoft 365 plan should support those goals. For instance, a bank with heavy compliance requirements might prioritize E5 for compliance officers and lawyers, while a manufacturing firm with thousands of plant workers will focus on maximizing F3 usage. Also consider upcoming changes, such as office reopenings, remote work policies, or mergers/acquisitions – these can impact license needs (e.g., more F3 licenses if you hire more frontline staff, or temporary CSP licenses if acquiring a company to integrate them into your tenant).
• When is E5 Justified vs. When E3 Suffices: E5 is only worth the premium when its advanced features solve a problem or reduce another cost. Ask: Can we justify E5 by eliminating other tool costs (e.g., getting rid of a separate security software, or a separate Power BI-like tool)? Do we need the full E5 bundle, or just parts of it? Often, E3 with one or two add-ons can cover requirements at a lower cost. For example, if security is the only gap, you might keep E3 and add an “E5 Security” add-on for select users, rather than upgrading to E5 for all. E5 is often justified for:
  • Strict compliance environments (finance, healthcare) where Advanced Audit, Customer Key, etc., are mandatory.
  • Organizations facing sophisticated cyber threats want Microsoft’s top-tier security across identity, device, and email.
  • Companies planning to use Teams as a global phone system – E5 can be more cost-effective than separate PBX solutions when fully utilized.
  • Enterprises heavily using data analytics across departments – the inclusion of Power BI Pro for all E5 users can be a huge benefit if hundreds of users need BI capabilities (otherwise buying those licenses separately for each E3 user would add up).
    Conversely, E3 is sufficient (and far more cost-effective) for the bulk of standard employees who use “core” Office 365 services. Treat E5 as the exception, not the default. Microsoft’s sales teams might push all-in E5 as “future-proofing,” but evaluate it with healthy skepticism through the lens of your actual use cases.
• Leveraging F3 for Frontline to Reduce Spend: Labor-intensive industries (retail, hospitality, manufacturing, healthcare, etc.) often have a majority of employees in frontline roles. Microsoft 365 F3 is a tailor-made opportunity to extend collaboration tools to them at a low cost. If you currently only license a portion of your frontline (or not at all due to cost concerns), F3 can bring those workers onto your digital platform (Teams, SharePoint, etc.) without breaking the bank. Or if you’ve been giving them E1 or E3 licenses just to have email, that’s overspending. Migrating thousands of users to F3 can free up budget that might be reallocated to licenses for strategic projects (like E5 for your security team, or new AI tools). Just ensure that managers understand the limitations (no desktop apps, smaller mailbox) so they don’t unknowingly assign F3 where it doesn’t fit. With the right assignment, F3 boosts communication and engagement for frontline staff (they feel included in the Office 365 environment) while significantly cutting licensing costs per head.
• Audit and Compliance Readiness: Misuse of licensing can lead to compliance risks, both in terms of Microsoft audits and regulatory audits. Ensure you’re adhering to Microsoft’s licensing rules – for example, using F3 licenses only for users who don’t need desktop Office (the F3 license technically doesn’t permit desktop app use except on shared devices), or not giving out shared accounts that violate per-user licensing terms. Regularly review Microsoft’s Product Terms for any changes (e.g., use rights for virtualization, hybrid rights, etc., especially if you use Windows Enterprise). From a regulatory standpoint, consider if your licensing choices impact compliance: e.g., do you have the right licenses to hold data for legal retention (if not, you might need an E5 compliance add-on to avoid penalties in an audit), or are you maintaining proper records via eDiscovery. Non-compliance in licensing can also result in hefty true-up fees if Microsoft audits your usage and determines that you should have had certain licenses (such as using Teams Phone without the proper license). Conduct annual plan true-ups and internal audits to ensure there are no surprises.
• Security, Analytics, and Compliance as Decision Drivers: Ultimately, the decision to pay for premium licenses should map to your organization’s priorities in security, analytics, and compliance. For instance, if cyber incidents have affected your company or you have a mandate to enhance cybersecurity, that might justify budgeting for E5 Security features across multiple users. If your leadership is pushing for a “data-driven culture,” enabling Power BI for many employees via E5 could accelerate that (versus limiting BI to a few analysts). On the other hand, if cost reduction is the top priority this year, you might lean more on E3/F3 and find alternative solutions for any gaps, or use cheaper third-party tools selectively. Make licensing a strategic discussion: involve the CISO, the Chief Data Officer, compliance officers, and other relevant stakeholders to weigh in on what features are truly needed. Sometimes an external audit or a breach will make the case for E5 clearer; other times, a tight budget and good enough alternatives will favor sticking to E3. By treating licensing choices as a cross-functional strategy issue, you ensure that decisions aren’t made in a vacuum by IT alone – they will be tied to tangible business outcomes (risk mitigation, innovation, cost control).

Microsoft 365 Licensing in 2025 – Market & Vendor Trends

The Microsoft licensing landscape is not static – Microsoft’s own strategy and market forces influence how customers should plan their approach.

Key trends in 2025 include:

• Microsoft’s Push for E5 as the Default Enterprise SKU: Microsoft is strongly incentivizing customers to adopt the E5 SKU. Their sales messaging often highlights E5 as the solution to all needs (security, voice, analytics), and recent pricing moves (making E3 + add-ons approach the cost of E5) are deliberate. We see more bundling of features exclusively in E5 and even limited-time promotions (e.g. Microsoft sometimes offers temporary E5 discounts or trials) to seed E5 usage. Expect your account reps to tout the value of an “all-in” E5 environment. Be prepared with your own analysis of who truly needs E5. Microsoft’s endgame is clearly to maximize ARR (annual recurring revenue) per user – and E5 does that – but you should adopt it on your terms and timeline. The vendor trend is towards premiumization of the suite, with E5 (and add-ons like Copilot) being the growth drivers.
• Cloud-First, Subscription-Only Licensing: 2025 confirms that the era of perpetual licenses and on-prem bundles is fading. Microsoft 365 is a fully cloud-based subscription, and Microsoft has no new version of the on-premises Office suite announced beyond Office 2021 (for those few who still purchase perpetual Office licenses). Even features like the coming Microsoft 365 Copilot AI will only be available via cloud add-ons. Microsoft is also continuing to invest in cloud-only services (like Microsoft Viva, Security Cloud, etc.), which require these subscriptions. For customers, this means fewer options to “own” software; almost everything is moving to a recurring subscription model. From a planning perspective, you can’t avoid cloud licensing, and any holdouts (such as sticking to Office 2016 offline or older CAL-based setups) will become increasingly untenable due to support and compatibility issues. Microsoft’s strategy is clear: get customers onto the cloud and keep them there with expanding services (and upsell opportunities).
• Flattening of Discount Tiers – Impact on Negotiations: As discussed in the November 2025 change, traditional volume discounts are being phased out. This flattening means large enterprises no longer automatically get a better price just by being large. Negotiation leverage thus shifts: it’s less about “We have 10,000 seats, so give us level D pricing” and more about what strategic commitments you can trade for discounts. Microsoft will likely offer special pricing or concessions if you commit to broader adoption of their portfolio – e.g., “If you roll out Azure AD P2 to all users” or “if you purchase Microsoft 365 E5 for at least 50% of your users” or “if you adopt the new Microsoft Copilot AI across the org, we’ll give X% off”. The leverage for customers now stems from the scope and breadth of Microsoft’s adoption, not just the sheer number of seats. Additionally, since standard discounts are no longer available, you may see Microsoft promoting multi-year agreements or early renewals by offering bespoke discounts (“commercial offers”) that require higher-level approval and come with specific conditions. The market trend is that negotiations are becoming more complex – it’s like negotiating a custom deal rather than simply slotting into a price tier. Enterprises will need solid data on usage and alternatives to push back effectively.
• Hybrid Licensing Strategies Emerge: With flexibility increasing (via CSP and MCA) and the need to optimize cost, many enterprises are adopting a hybrid approach to licensing. This could mean combining E3, E5, and F3 licenses within your tenant (which is fully supported and common) – for instance, 70% E3, 20% F3, 10% E5 as a mix. But it also can mean mixing agreement types: for example, using an Enterprise Agreement for your base committed count of 5,000 E3 users (to lock pricing and get centralized billing), but then using CSP through a partner for an extra 500 project-based contractors on 3-month assignments, or for piloting 100 E5 users for 6 months without modifying your EA. Another hybrid approach is to utilize third-party tools or services in conjunction with Microsoft to keep costs in check – for example, using Zoom for external webinars instead of purchasing additional Teams Advanced Communications licenses, or employing a more cost-effective mobile device management tool for frontline devices rather than upgrading all to EMS E5. In short, customers are getting creative in mixing and matching to avoid one-size-fits-all. Microsoft, of course, prefers you do everything in their ecosystem, but the market reality is that enterprises are finding value in retaining some flexibility around the Microsoft contract.

Choosing the Right Licensing Mix in 2025

Different sizes and types of organizations will approach Microsoft 365 licensing in various ways. Here’s a guide based on the organization profile:

• Small and Medium Businesses (SMBs): Smaller organizations (generally under 300 employees, although “SMB” can extend up to 500 in Microsoft’s view) typically cannot access Enterprise Agreements due to minimum seat requirements. These businesses will acquire licenses through CSP partners or directly from Microsoft via web purchases, typically on the Microsoft 365 Business plans or smaller-tier Enterprise plans as needed. Key advice for SMBs is to stick to the Microsoft 365 Business line if they have fewer than 300 users (Business Premium is a great value, offering many E3-like features at a lower price). If you exceed 300 or need Enterprise features, you’ll be on E3/E5 via CSP. SMBs should avoid over-buying – e.g., don’t let a partner upsell you to E5 unless you have a clear security/compliance need. With no EA, your focus is on flexibility and managing monthly vs annual commitments to control cash flow (CSP allows monthly true-down if you go month-to-month, at a higher cost, or annual commitments at a lower cost). SMBs generally benefit most from CSP’s managed support – leverage your partner to help rightsize and administer licenses, since you likely have a small IT team.
• Mid-Market and Upper Mid-Market: Organizations with 300 to 5,000 employees now have more choices. Historically, if you had 500 or more seats, you’d qualify for an EA, which offered the best pricing. Now, with the Microsoft Customer Agreement (MCA) option and CSP improvements, mid-market firms can choose either to continue with EA for price protection or switch to an MCA-E (no term, direct billing) or a purely CSP model for greater flexibility. Many mid-market companies find that CSP through a good partner gives them sufficient discount and a lot more service (since the partner might include support or consulting). Others might use MPSA or MCA for specific needs (for example, you might use an MCA to consolidate cloud spend for Azure and Microsoft 365 without a formal EA). The decision comes down to your preference for commitment vs flexibility: if your user count is stable and you want predictable 3-year costs, an EA or a 3-year MCA commitment (if offered) could work; if you expect fluctuation or growth where you’ll add/remove users often, CSP/MCA with its agility is better. Mixing license types is also an option: e.g., your core 1000 users on an EA, but you acquire another company of 200 users – you might put them on CSP temporarily until the EA renewal, then fold them in. Mid-market IT leaders should also closely monitor Microsoft’s product mix. For instance, if you don’t need Windows Enterprise for all, consider mixing some Microsoft 365 E3 and some Office 365 E3 licenses (Office 365 E3 is slightly cheaper since it excludes Windows/EMS). Or use E3 plus separate EMS rather than full Microsoft 365 – sometimes that saves money if you don’t need everything in the bundle.
• Enterprises (Large Organizations): Enterprises with thousands of seats will likely be on an EA, but as renewal approaches, consider if you should renew it or transition to the newer MCA structure. Microsoft is subtly nudging large customers toward the Microsoft Customer Agreement, which doesn’t expire and can cover Azure and Microsoft 365 under a single umbrella. Some enterprises piloting the MCA model report easier admin and co-terming with Azure spend. Still, one downside is losing the 3-year price lock of an EA (though Microsoft might allow price holds via custom terms). For enterprises, a key decision is whether to renew EA or migrate to MCA-E: evaluate the costs of both options with your Microsoft representative and a licensing advisor. Additionally, large enterprises in 2025 must prepare for the removal of discount tiers – meaning, if you were on Level D pricing, model the budget impact of going to Level A. Use the time before renewal to lobby for alternate discounts or incentives (maybe saying “we’re considering moving to Google Workspace” or “we won’t adopt Azure unless we get a better deal” – whatever leverage you have). Also, enterprises often have complex needs like hybrid use rights, server CALs, etc., which still might lean toward an EA (since SA benefits come with EA). However, if your environment is now 100% cloud-based, the argument for EA versus a more flexible model strengthens. In terms of license mix, enterprises should absolutely be segmenting E3/E5/F3 as discussed in rightsizing. It’s not uncommon for a Fortune 500 firm to use all three plans: execs and specific teams on E5, the majority on E3, and plant/shop workers on F3. Microsoft 365 supports mixing within the same tenant, so utilize this feature to optimize costs.
• Decision Framework – A Summary: Regardless of size, create a decision matrix:
  • Profile your workforce by role and needs (e.g., “Developers – need Power BI? Need Cloud App Security?”; “Call center reps – mainly Teams and email, no, they don’t need E5.”; “Field sales – can they live with F3 on iPad only?” etc.).
  • Map those profiles to the minimum viable license level (F3, E3, or E5, or even a Business SKU if applicable). This becomes your target allocation.
  • Check for any gaps – if a profile on E3 needs one feature from E5, consider an add-on instead of bumping the whole group to E5.
  • Consider future needs: If you anticipate new initiatives (such as adopting an E5-only feature, like Microsoft Defender for Endpoint), plan whether you’ll upgrade certain users or purchase separate licenses for that purpose. Also, keep an eye on new Microsoft releases – e.g., if Microsoft unbundles or re-bundles features in 2025, you may need to adjust your course.
  • Finally, factor in budget constraints. You might desire E5 for 30% of users, but you can only afford it for 15%. In that case, prioritize those 15% and have a roadmap for the rest (maybe phase it over years or wait for a better deal).

By systematically analyzing needs and available plans, organizations can arrive at an optimal licensing mix that balances capability and cost. The right mix in 2025 is likely a blend of all three Enterprise SKUs tailored to your unique workforce.

Negotiation & Procurement Strategy

With major changes afoot, negotiating your Microsoft 365 licensing agreement in 2025 requires strategic timing and tactics.

Here are strategies for CIOs and procurement teams to get the best deal:

• Leverage Early Renewals (or Extensions) to Bypass Price Hikes: If your Enterprise Agreement renewal is due in late 2025 or 2026, consider negotiating an early renewal in 2024 or early 2025. By renewing before November 1, 2025, you could lock in current pricing tiers (keeping your volume discount for one more term) and potentially avoid the immediate hit of the pricing consistency update. Microsoft often allows and even encourages early renewals, especially if you’re willing to extend for another full 3-year term – it secures their revenue. It could secure you better terms. Similarly, if you anticipate needing more licenses, purchasing them before the April 2025 add-on price increases or before the discount removal could yield savings (since any new purchases post-change will be at higher rates). Obviously, weigh this against cash flow and whether you’re ready to commit, but timing can save money.
• Use Selective E5 Adoption as a Bargaining Chip: Microsoft wants you to adopt E5 broadly. You can use that to your advantage in negotiations. For instance, you might tell Microsoft, “We are considering moving 500 users to E5 for its security features, but we need a price concession to make that feasible.” Often, Microsoft will find room to discount E5 or include some add-ons if it means securing a larger E5 footprint in your organization (which they can report as a win). Alternatively, propose a phased E5 rollout – “We’ll move to 50% E5 over the next 18 months if you can maintain our prior pricing level” – to see if they bite. Be specific: if, for example, dropping the volume discount means a $2M increase, consider committing to an E5 upgrade that also costs $2M and ask to keep the effective pricing flat. The key is to demonstrate a willingness to adopt strategic products (e.g., E5, Azure services, Power Platform) in exchange for better overall pricing.
• Negotiate for Bundles or Step-Ups Instead of Full Upgrades: If Microsoft is pushing you for an all-E5 deal, counter by asking for step-up pricing or bundles. Step-up means you pay a smaller incremental fee to upgrade certain users from E3 to E5. Microsoft has offered step-up SKUs in the past that essentially charge the difference on a pro-rated basis. Ensure any unused time/value on E3 is credited. Another approach is security/compliance bundles – e.g., “Instead of E5 for all, sell us the E5 Security bundle at a discounted rate for all users, and maybe a handful of full E5 licenses.” This way, you address your main concern (security) without paying for things you don’t need (like a Phone System for everyone). Sometimes, Microsoft can create custom SKUs or arrangements (particularly in large deals) if it means more adoption of certain features. Don’t be afraid to propose a creative deal structure. For example, ask for a “free period” or phased payment for new features: “We’ll try Windows 365 Cloud PC for 100 users for a year – throw that in at no cost, and if we continue, we’ll pay in year 2.” Microsoft may consider these if they align with its goals of seeding new tech.
• Explore Hybrid Licensing and Purchasing Channels: As noted, you don’t have to source all licenses the same way. In negotiations, this can be a pressure point: if Microsoft knows you could move to CSP or split off some licenses to a competitor’s service, they might be more flexible. For example, mention: “We might shift 1,000 seasonal workers to a month-to-month CSP plan through a partner if the EA doesn’t allow flexibility for ramping down – unless Microsoft can accommodate that in our agreement.” Microsoft might respond with a more flexible clause or a shared pool arrangement. Additionally, consider using quotes from cloud solution provider partners to benchmark – sometimes partners offer aggressive pricing to win business. Even if you prefer to stay direct with Microsoft, having a partner quote can give you leverage (“Partner X offered us 5% off list for the same, why shouldn’t we go with them in CSP?”). Microsoft might then match or provide equivalent value (like funding for deployment or training services). The main idea is to keep procurement options open, so Microsoft competes for your business rather than assuming it’s already locked in.
• Challenge the “All-in” Messaging with Data: Go into negotiations armed with your own analysis of usage (as recommended in rightsizing). If Microsoft says “E5 for everyone is best practice,” counter with “Our telemetry shows only 10% would use Feature X; we propose 10% E5 and here’s why…”. If they claim you need more licenses, show them your active user counts and other relevant information. By demonstrating that you’re a data-driven customer, Microsoft’s team is more likely to engage on specifics and avoid blanket pushes. Also, don’t accept the first offer; Microsoft usually has some wiggle room, especially if you escalate to higher management or negotiate close to quarter-end or year-end when they’re hungry to close deals. Build a negotiation playbook internally – know your must-haves (e.g., price per user not above $X, or ability to reduce seats by 10% annually without penalty, etc.), your tradeables (e.g., longer term, adding some Azure spend, adopting a new product line), and your walk-away alternatives (in worst case, which workloads could you move off Microsoft to save cost). Engaging Microsoft with a rigorous, business-driven negotiation stance often yields a better outcome than simply renewing the status quo.

Strategic Recommendations for 2025 Renewals

To wrap up, here are five key recommendations for enterprises approaching Microsoft 365 licensing decisions and renewals in 2025:

1. Perform a Thorough Usage Audit and Right-Size Before Renewal: Don’t enter a renewal with your current license allocation blindly. Analyze the past 6-12 months of usage. Identify underused E5 licenses, dormant accounts, and users who could be downgraded to F3. Clean that up before signing a new deal. This way, you won’t be carrying unnecessary licenses forward. Microsoft won’t proactively suggest that you drop licenses, but they will happily let you over-buy – it’s up to you to police this. By right-sizing first, you also strengthen your negotiating hand by offering a (smaller quantity or a more optimized mix to price out).
2. Adopt a Hybrid Licensing Model for Flexibility and Cost Savings: Rigid one-size licensing is yesterday’s approach. Embrace a mix of plans (E3/E5/F3) to suit different needs, and consider mixing contract types if necessary (EA + CSP). This dual approach can yield savings (paying only for what each group needs) and provides flexibility to adjust. For example, consider maintaining a core commitment via EA for stability, while leaving headroom to fulfill any overflow or short-term growth via CSP. That way, you’re not over-committed, and you can reduce CSP licenses easily if the workforce shrinks or a project ends. The key is building flexibility so you’re not locked into paying for unused capacity.
3. Align Your Roadmap with Licensing – Plan for Security and Compliance Needs Early: If you know, for instance, that next year you must implement stricter compliance archiving or plan to roll out company-wide MFA and endpoint protection, factor those into your licensing strategy now. It might mean negotiating an E5 Compliance add-on for a future start, or locking in pricing for an upgrade in year 2 of your agreement. Microsoft often includes future options in a deal (such as agreeing on a price for additional licenses or features activated later) if you bring them up. Don’t wait until after renewal to realize “Oh, we need that advanced feature”. Anticipate and include it so you have budgeted and possibly pre-negotiated terms. This also prevents scrambling mid-term and paying whatever Microsoft asks when you’re in a time crunch to add something.
4. Negotiate Aggressively on Price, Bundles, and Terms: Given the elimination of automatic discounts, everything is essentially up for negotiation. Push for custom pricing – especially if you’re a large customer, Microsoft expects you to counter their initial quote. Ask for things like price holds beyond one year (e.g., “cap our year-over-year increase at 5% even if global prices rise”), or multi-year phased pricing (smooth out the increase across years rather than a big jump). If you’re committing to new products (such as Azure or security), ask for free credits or deployment funds. Also, scrutinize contract terms: ensure you have the flexibility to reduce licenses at renewal, seek to add a transformation clause (if you divest parts of the business, you can remove those licenses), and check for any penalties or policy lock-ins. The more detailed and prepared you are, the more likely Microsoft will concede on some points to secure your signature.
5. Time Procurement Activities Around Microsoft’s 2025 Changes: Finally, be strategic about when you do things. If possible, execute renewals before major price hikes or the removal of discounts take effect (as noted earlier). Conversely, if you missed that window, consider short-term bridging (e.g., extending your agreement by 6 months with a bridge to push the renewal into mid-2026, allowing you time to prepare and potentially giving the market time to adjust). Be aware of Microsoft’s fiscal year (ends June 30) – sometimes they give better discounts in Q4 (April-June) to hit targets. Monitor announcements: Microsoft may introduce new bundles (e.g., a “Copilot + E5 bundle”) or incentives – use these to your advantage if the timing aligns. In 2025, change is constant, so keep your procurement timeline somewhat flexible to either move fast when an opportunity arises or delay to avoid headwinds.

By following these recommendations, enterprises can proactively navigate the 2025 licensing landscape, turning potential cost increases into opportunities for optimization and enhanced value.

Related articles

• Microsoft 365 E3 vs E5: Choosing the Right Plan for Your Enterprise
• Microsoft 365 F3 Licensing Strategy for Frontline Workers
• Microsoft 365 License Optimization Pricing and Savings Insights
• Microsoft 365 Pricing and Licensing Changes Explained

FAQ – Microsoft 365 Enterprise Licensing

• What is the key difference between E3 and E5?
  E3 vs E5 comes down to breadth of features. Microsoft 365 E3 provides the core Office applications, email, file storage, standard security features (such as basic threat protection and device management), and compliance tools necessary for a typical enterprise user. E5 includes everything E3 has, plus it adds advanced security (more sophisticated threat protection, endpoint detection, identity governance), advanced compliance (tools for eDiscovery, auditing, information governance beyond the basics), analytics (Power BI Pro, advanced analytics/insights), and voice capabilities (Teams Phone System and conferencing). In short, E3 covers productivity and baseline security, while E5 adds top-tier security/compliance, business intelligence, and telephony. E5 is about 60% more expensive than E3, so the key question is whether those advanced capabilities are requirements for your organization or specific users.
• Can I mix E3, E5, and F3 in one tenant?
  Yes. In fact, Microsoft’s licensing is designed to be a mix-and-match approach. You can assign different users different license plans (even within the same department or location). Many companies do this to optimize costs – for example, a company might have 500 F3 licenses for frontline workers, 5,000 E3 licenses for office staff, and 500 E5 licenses for IT and execs, all under the same Microsoft 365 tenant. Users can collaborate with each other seamlessly regardless of their plan. Be mindful to manage the assignments so that each user receives the appropriate license for their role. Microsoft’s admin portal makes it easy to transact and monitor multiple SKU types in parallel.
• Is E5 necessary for advanced security?
  It’s necessary for Microsoft’s most advanced security features, but not every organization needs those. E3 already includes decent security: Office 365 ATP Plan 1 (basic anti-phishing/malware protection), Azure AD P1 (which provides MFA and basic conditional access), and Intune for device management. However, E5 is required if you want features such as endpoint detection & response (Defender for Endpoint P2), threat investigation and hunting across email and identity (Defender for Office P2, Azure AD P2), as well as additional tools like Cloud App Security and advanced audit logs. If your organization faces targeted cyber threats or has a mandate for zero-trust with granular controls, E5 (or the E5 Security add-on for E3) becomes quite valuable. Note that you can purchase Microsoft 365 E5 Security as a separate add-on to E3 licenses – this gives you all the major security components of E5 without buying the full E5 (it doesn’t include Power BI or Phone System, for example). So if security is the only gap, you could use that route. In summary, for top-notch, integrated Microsoft security, you need E5 or its add-ons; however, many companies secure themselves effectively with E3 plus selective add-ons, combined with good practices. Evaluate the threats and compliance requirements you have – that will determine if E5-level security is a “must” or a “nice-to-have”.
• What are the cost implications of the November 2025 changes?
  The removal of volume-based price levels on November 1, 2025, means that if you are a large EA customer, you may notice a noticeable cost increase at your next renewal. Essentially, every online service license (Microsoft 365, Azure, Dynamics, etc.) will be priced at the Level A (base list) rate instead of the discounted B, C, or D level you might have enjoyed. For a Level D customer (the largest enterprises), that could be roughly a 10-15% unit price increase. Over thousands of users, that’s substantial. Another implication is that budget predictability is tougher – you can’t assume you’ll get a lower unit price by growing your seat count. Organizations need to budget assuming higher list prices and then actively negotiate a lower price if possible. Additionally, since everyone pays the same base rate, some mid-sized customers will effectively be paying what big customers pay – a leveling of the playing field. Outside of the EA changes, remember the April 2025 price increases for certain products (Power BI, Teams Phone) – those also need budgeting. In short, the financial impact is that you can expect higher per-user costs going forward, unless you offset them by reducing quantity or obtaining custom discounts. Companies should run scenarios (what if we pay list for everything? How much more is that vs. today?) and have plans to mitigate that through negotiations or license optimization.
• How should enterprises prepare for renewals in 2025?
  Enterprises should prepare very proactively. Start at least 6-12 months before your renewal date to gather data and set goals. First, do the internal audit of usage and determine your ideal license allocation (how many of each SKU you truly need). Then, engage with your Microsoft account team early – get their initial quote/proposal and don’t accept it at face value. Simultaneously, consider engaging a licensing expert or a consulting firm to benchmark your deal (2025 is bringing changes, and having expert insight can help identify where Microsoft might be flexible). Next, develop your negotiation strategy – know what you want to achieve (e.g., “keep cost increase under 5% despite losing discounts” or “upgrade 200 users to E5 but keep within $X budget”). Prepare to leverage commitments (such as Azure growth or longer-term commitments) to secure concessions. Also, consider alternative options: for example, is this the time to explore other vendors for certain services to gain leverage (even if you don’t switch, quoting alternatives like Google Workspace for email or Zoom for meetings can be a negotiation tactic)? Finally, get executive alignment – brief your CIO/CFO on the stakes and get buy-in for possible trade-offs (such as approving an early renewal or bundling new products). When negotiations begin, you want all internal stakeholders to be on the same page regarding priorities and walk-away points. In summary, preparation involves analysis, stakeholder alignment, exploring alternatives, and clear goals. With that groundwork, you can approach the 2025 renewal ready to turn Microsoft’s changes into an opportunity for a better-optimized (and hopefully reasonably priced) agreement for your organization.

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