Should-Cost Modeling: Calculate What You Should Pay

Should-Cost Modeling: Calculate What You Should Pay

Introduction – Why Should Cost Modeling Matter

Should-cost modeling in Microsoft licensing is a proactive way to calculate the price you should be paying for your software and cloud services.

Instead of blindly accepting Microsoft’s quotes, you estimate a fair cost based on what you use and what similar customers pay.

This approach prevents overpaying and flips the negotiation dynamic in your favor. When you walk into a contract discussion armed with a data-driven price target, you’re no longer at the mercy of Microsoft’s pricing.

In simple terms, if you know what you should pay, you won’t accept Microsoft’s first quote.

Read our complete guide to building Leverage in Microsoft Negotiations: Frameworks and Buyer Strategies.

Step 1: Break Down Your Current Spend

Start by taking a detailed inventory of everything you’re currently paying Microsoft for. This means listing out all your licenses, subscriptions, cloud commitments, and support costs under your Enterprise Agreement (EA) or other contracts.

Break your spending into categories such as:

• Licenses: How many users on Office 365 E3 vs E5? Any Windows, SQL Server, or Dynamics licenses? Identify who has what and check for overlap or unused licenses (shelfware).
• Cloud Commitments: What annual Azure spend have you committed to, and are you on track? Note any true-up history – for instance, did you consistently add more licenses or Azure usage each year than anticipated? This indicates growth (or initial underestimation) that should be factored into your model.
• Add-ons and Extras: List add-on products (e.g., Power BI Pro, security packages, Microsoft Viva, Copilot AI features) and their costs. Determine if they’re widely used or just nice-to-haves that many users don’t touch.
• Support Costs: Include support plans like Microsoft Unified Support. Support is often priced as a percentage of your license spend, so it grows as your other costs grow. Know what level of support you’re paying for and if it matches your needs.

By breaking down your current spend, you establish a baseline. You might discover obvious areas of overspend – such as licenses assigned to inactive users, or E5 subscriptions for people who only use E3-level features.

This analysis ensures your should-cost model starts with right-sized numbers.

For example, suppose 20% of your Office 365 licenses are unused or under-utilized. In that case, your baseline cost is inflated, and your fair price calculation should be lower once you remove or reallocate those.

Essentially, get your own house in order first: know exactly what you pay for and what value you get from it.

In 2025-2026, this will be more important than ever – Using RFPs and Multi-Cloud Strategies to Increase Microsoft Negotiation Leverage

Step 2: Identify Cost Drivers in Microsoft Agreements

Next, pinpoint the major cost drivers in your Microsoft agreement.

These are the factors that most significantly bump up your bill:

• License Type and Mix: The choice between, say, Microsoft 365 E3 vs E5 is huge. E5 licenses cost considerably more per user because they include advanced security, analytics, and telephony features. If you assign E5 to everyone by default, you’re driving costs up dramatically. The ratio of E1/E3/E5 (or similar plans) in your environment is a core cost driver.
• Number of Users and Devices: This one’s straightforward – more users means more licenses. However, note any bundling in play. Microsoft might bundle products (such as Office, Windows, and EMS) in a Microsoft 365 bundle, which can obscure individual costs. Understand how bundle pricing works versus standalone, because bundling can either save money or sneak in features you don’t need.
• Azure Consumption: If you utilize Azure cloud services, your Azure monetary commitment or consumption level is a significant cost factor. The more you commit to spending on Azure, the more leverage you may have to negotiate discounts or credits, but it also commits you to a high spend. Azure costs can balloon if not monitored, so treat cloud usage as a variable driver – it can change month to month based on usage patterns.
• Support Tier: Microsoft’s support plans (like Standard support, Premier, or Unified Support) can be pricey. Unified Support, for example, often charges a percentage of your total Microsoft spend. Opting for a higher support tier or having a very large Microsoft footprint will indirectly drive up support costs. This is a hidden driver – as your other costs go up, support costs rise in tandem unless negotiated separately.
• Auto-Renewals and Escalators: Check if your contract has built-in price escalations (e.g., a 5% price increase in years 2 and 3) or if you’ve been auto-renewing without renegotiation. Auto-renewing an EA as-is can lead to paying more each cycle because Microsoft often applies uplifts (especially if list prices increase). These contractual terms can significantly affect your total cost over a multi-year deal.
• Feature Uptake and Upsells: New add-ons like Microsoft 365 Copilot (AI features at ~$30/user/month) or security suites (Defender, Sentinel, etc.) can add a substantial premium. Microsoft is constantly upselling new product features (Power Platform tools, advanced compliance, Teams Phone, etc.). Each of these upsells drives costs if adopted broadly. Be mindful: enabling a new feature enterprise-wide might double-count costs if it overlaps with something you already have, or it simply adds to the bottom line without replacing anything.

For each driver, consider how it impacts the final price. For instance, switching 1,000 users from E5 to E3 could save hundreds of thousands annually – that’s cost driver power.

On the other hand, committing to a higher Azure spend might reduce unit costs (through larger discounts or credits), but you must actually use that capacity to benefit.

Identifying these drivers clarifies which levers you can pull in your should-cost model to bring the price down.

Read how to build your strategy, Defining Your BATNA: Alternatives to Microsoft’s Deal.

Step 3: Build the Should-Cost Framework

Now it’s time to calculate what you should pay. Building a should-cost model for a Microsoft deal means figuring out a fair target price using a mix of list prices, typical discounts, and your specific situation.

Here’s how to construct it step by step:

1. Start from Microsoft’s list pricing: Begin with the official list prices for all the products and services you plan to purchase. This is the published price (often Level A pricing in Microsoft terms). For example, if Microsoft 365 E3 lists at around $34 per user/month, use that as your starting point for each of your 5,000 E3 users. Do this for every element – e.g., total list price for your Azure commitment, list price for any add-ons per user, etc. This gives you the un-discounted total as a baseline.
2. Apply realistic discount ranges: Microsoft rarely charges large customers full list price. Based on your deal size and what’s common in the market, apply a discount to each item. Typical Enterprise Agreement discounts might be in the 15–30% range off list for many products. For instance, on Office 365 E3, a common discount might be ~20% off. Azure often sees negotiated discounts or credits equivalent to 20–25% or more, especially if you’re considering AWS/Google alternatives. Use any benchmarks you have: if you know similar companies get 25% off E5 licenses, factor that in. If you lack specific data, err on the conservative side but still offer achievable discounts (e.g., at least 15%).
3. Adjust for unique factors: Every organization has some unique leverage points. Maybe it’s the deal timing – your renewal is at Microsoft’s fiscal year-end when they’re eager to close deals, so that you could push for an extra 5% discount. Or perhaps your industry or partnership status qualifies you for special pricing (some industries or public sector clients receive better rates). Consider competition too: if you genuinely might move to Google Workspace or AWS, Microsoft may come back with a sweeter offer to prevent losing you. Adjust your target price downwards for these factors. For example, if you’re a very large enterprise bringing a huge Azure workload, you might aim for the higher end of the discount range (say 30% off Azure, instead of 20%).
4. Compare against your usage profile: Finally, ensure the model reflects what you actually need. This is where your baseline from Steps 1 and 2 comes in. If your usage analysis showed, for instance, that 30% of your E5 licenses are unnecessary, your should-cost calculation should assume many of those are downgraded or removed. In other words, don’t model the cost of overspending on items you plan to eliminate. Your fair price target should be based on an optimized mix of licenses and realistic consumption. Essentially, you model the cost as if you’ve already rightsized your environment and received fair discounts.

Let’s illustrate with a simplified should-cost breakdown table for clarity:

In this example, if you needed 5,000 E3 licenses, at list price you’d pay $34 * 5,000 users. But with a 20% expected discount, your target is about $27 * 5,000.

Similarly, for a $1M Azure plan, you might consider negotiating it down to $750k. The Should-Cost Target column reflects the price you aim for in negotiations.

A quick note: Microsoft is actively changing its pricing models (for instance, by late 2025, they’re eliminating the old volume-based price tiers for online services).

This means the list price is becoming the same for everyone, regardless of whether they are big or small.

In practice, large customers will need to negotiate more to obtain the once-automatic discounts. So building your should-cost model with strong discount targets is more important than ever.

Step 4: Benchmarking Your Model

No should-cost model is complete until you’ve compared it with the real world. Benchmarking is the sanity check that ensures your “fair price” isn’t just theoretical, but grounded in market reality.

Here’s why and how to do it:

Why benchmarking is critical: You might calculate that you deserve a 25% discount on a certain product, but is that actually achievable? Benchmark data lets you know if your targets are in line with what other companies are getting. This prevents you from aiming too low (leaving money on the table) or too high (holding out for a discount that Microsoft would never agree to). Essentially, benchmarks turn your should-cost model from an internal estimate into an evidence-backed argument.

Sources of benchmarks: Gather data from multiple angles. If you work with a software licensing advisor or consultancy, they often have anonymized data on what discounts other clients have secured. Peer networking groups or industry forums can also be a source – CIOs and procurement leaders sometimes share ballpark figures privately. Don’t overlook quotes from Cloud Solution Providers (CSPs) or resellers; even if you plan to stick with an EA, seeing what a CSP would charge for the same licenses can reveal the true going rate. Market research firms occasionally publish average discount ranges for large vs. small deals. The key is to get at least a couple of reference points for major cost items (e.g., “enterprises of our size usually pay around $X per user for E5”).

Validating and refining: Once you have benchmark info, compare it against your should-cost model line by line. If your model assumed 20% off Office 365 E3, but benchmarks show savvy negotiators often get 25% off, you now know you can push harder – adjust your target to match. Conversely, if you hoped for 30% off Azure but all data suggests 15-20% is the norm for your spend level, you may dial back that expectation or plan a stronger justification for why you deserve more. Use benchmarks to identify any gaps between your model and reality. Every gap is either an opportunity (to negotiate more) or a risk (of asking too much). Refine your model until you’re confident that the prices in it are aggressive yet attainable given current market conditions.

Step 5: Using the Should-Cost Model in Negotiations

With a solid should-cost model in hand, you’re ready to put it to use at the negotiating table. The goal is to make your model the anchor of the negotiation – the reference point that discussions revolve around.

Here’s how to leverage it effectively:

Present your data to Microsoft: Come into the meeting with a clear breakdown of your expected pricing (you might not share every internal detail, but you can certainly quote figures). For example, you can say, “Based on our analysis, a fair price for Office 365 E3 for us is about $27 per user. That’s the target we need to hit.” Show your math in a high-level way: list price, minus X% discount, yielding $Y per unit. When you back it up with external benchmarks – e.g., “and we know other companies in our sector pay roughly the same” – it lends credibility.

Be confident, not confrontational: The tone should be that you’ve done your homework and this is a data-driven position. It’s not a bluff or a random lowball number; it’s grounded in analysis. Microsoft’s reps are used to customers asking for discounts, but when you literally show them how you arrived at a figure, it changes the conversation. You’re effectively saying, “We know the game, we know the market, let’s skip to a fair deal.” This can pressure the sales team to cut out the fluff and meet you closer to your terms, especially if they realize you won’t easily swallow an inflated quote.

Use it to counter proposals: When Microsoft comes back with an offer, always measure it against your should-cost model. If they propose $30/user and your model says $27, you have a concrete reason to push back: “Our number is based on what we genuinely should be paying – we can’t justify $30 because we know it’s above market for us.” Use your model to reject unreasonable uplifts (like a 10% price increase at renewal – you can counter with evidence that nothing material justifies that increase). Likewise, if they claim “this is the best we can do,” your model and benchmarks empower you to respond, “We’ve seen better in the market, so we expect better from this deal.”

Negotiate beyond price when needed: If Microsoft is rigid on certain line-item prices, your should-cost analysis can still help you negotiate value elsewhere. For example, if your model price for Azure is hard to reach, maybe you push for a commitment that any overage (beyond your commitment) will get the same discount, or for a price cap on Azure rates for the term. Use your data to discuss options such as price caps, multi-year protections, or additional value (free training, support upgrades) to bridge the gaps. The message to Microsoft is clear: you will not agree to a deal unless it meets your should-cost expectations in value, one way or another.

In short, the should-cost model is your negotiation anchor and shield. It helps you argue from facts and strength. Microsoft’s pricing power diminishes when they realize you have pegged the fair price and you’re prepared to walk away or explore alternatives (like third-party vendors or delaying purchases) if the deal doesn’t hit that target. Stick to your data – it’s far more persuasive than any gut feeling or generic plea for a discount.

Step 6: Common Pitfalls in Should-Cost Analysis

Before you declare your model infallible, be aware of some common mistakes.

Even a solid should-cost analysis can be undermined by these pitfalls:

• Overestimating achievable discounts: It’s easy to get optimistic and plug in a 50% discount to see how great the price looks. But is that realistic? If you overshoot what’s feasible (without a basis in benchmarks or precedent), you risk setting expectations internally that can’t be met. An unrealistic model can lead to disappointment or a breakdown in negotiations if Microsoft simply won’t go that low. Always base your discount assumptions on something tangible (historical data, known benchmarks, the size of your deal). Aim high, but within the realm of possibility for your scenario.
• Not accounting for hidden costs: A should-cost model is not only about unit prices – remember to include all the costs that will hit you. One common oversight is the cost of Microsoft support. If your licensing spend increases, your Unified Support bill might jump unless you’ve negotiated a cap. Also consider compliance or true-up charges, foreign exchange rates (if you’re dealing in multiple currencies over a multi-year term), and any required dependency licenses. For example, if you plan to drop Software Assurance on some on-prem licenses, will you incur upgrade fees later? Ensure your model doesn’t omit these side costs, or your “fair price” could end up looking artificially low.
• Failing to update the model regularly: Microsoft’s product catalog and pricing are not static. New products emerge (like Copilot), old ones get retired or rolled into bundles, and list prices often increase annually or at renewal. If you built a should-cost model two years ago and haven’t refreshed it, it’s probably outdated. Make it a practice to update your assumptions and data at least annually – or ahead of any major negotiation. Adjust for any known upcoming price changes Microsoft announced, and incorporate the latest benchmarks. A stale model can be misleading. For instance, if Microsoft 365 list prices went up 5% this year, your previous target prices need a corresponding tweak or you’ll under-shoot and end up frustrated in talks.

By watching out for these pitfalls, you keep your should-cost analysis honest and effective. The model should evolve as your business changes and as Microsoft’s pricing evolves. Think of it as a living tool in your procurement strategy.

FAQs

Q: What’s the typical discount range in Microsoft Enterprise Agreement deals?
A: It varies, but generally, large enterprises can negotiate significant discounts off Microsoft’s list prices. Typical ranges might be 15–25% off for many Microsoft 365 (Office 365) license bundles if you’re a mid-to-large customer, and sometimes more for very large deals or strategic products. Azure consumption deals often see effective discounts or credits in the 20%+ range if you commit to substantial spend (and especially if Microsoft knows you are weighing AWS or Google). Smaller organizations might see more modest discounts (10–15%) since Microsoft reserves the deepest cuts for big, competitive opportunities. The key is to benchmark what similar-sized companies get – if your initial offer is only, say, 5% off, that’s likely far from the “market rate” for an EA of your size, and you should counter based on typical ranges.

Q: Do small enterprises benefit from should-cost modeling?
A: Absolutely. Even if a smaller business doesn’t have the buying clout of a Fortune 500, should-cost modeling is still valuable. It helps a smaller enterprise decide the most cost-effective way to license (perhaps an EA isn’t even right for you – maybe a Cloud Solution Provider program or business plans would be cheaper). By calculating what you should pay, you might discover you’re better off with a different licensing approach or identify that Microsoft’s quote has unnecessary extras. Smaller organizations might not get huge discounts, but they can still avoid overspending by negotiating out things they don’t need and making sure they’re paying fair market price. In short, knowing your should-cost gives you negotiating confidence, no matter your size.

Q: How do I handle Microsoft saying, “This is the best price”?
A: This is a common scenario. Microsoft’s rep might insist that they’ve given you the best possible deal. If your homework says otherwise, politely push back. Ask them to help you understand why your analysis shows a different number. Often, you can counter with specifics: “We’ve done an analysis and were expecting a 20% discount on X, but you’re offering 10%. Can you explain the gap? Have other similar customers paid this rate?” By questioning it, you signal that you won’t take the claim at face value. Sometimes the “best price” line is just a tactic to test your resolve. When you present data (your should-cost model and benchmarks), it challenges them to either match those figures or provide justification why not. If they truly stand firm, consider escalating the discussion to a higher-level Microsoft contact or exploring alternative solutions (e.g., third-party vendors or phased rollouts). Sometimes, walking away (or appearing ready to) is what it takes to get to the best price.

Q: Can should-cost analysis apply mid-term, or only at renewal?
A: While the big payoff is at renewal or when signing a new agreement, you can use the should-cost principles mid-term as well. For example, if you’re mid-way through your EA and need to purchase additional licenses or products (say you’re adding 500 new users or rolling out a new module), do a quick should-cost check for that increment. Don’t assume you have to pay the full prorated list price just because you’re mid-cycle – you can sometimes negotiate mid-term adjustments or at least ensure any add-on is priced consistently with your original discount levels. Another mid-term use is internal: tracking whether your actual usage and costs align with your model. If they start diverging (perhaps you’re consuming Azure faster than expected, or not using some licenses), you can take corrective action (optimize usage, plan for a contract amendment, etc.). However, meaningful price changes typically require a formal negotiation, which usually happens at renewal. In between, your best leverage for repricing is somewhat limited, but staying informed via your should-cost model means you’ll never be caught off guard by what something should cost if you need to make a move.

Five Expert Recommendations

To wrap up, here are five expert tips to get the most out of should-cost modeling and your Microsoft negotiations:

1. Always start with list pricing as your baseline: Know Microsoft’s official prices for every component. This transparency ensures you understand the full price and the value of any discount. It also helps you spot if Microsoft’s quote hides list prices (sometimes quotes just show “your price” – ask for list references to see the discount being given).
2. Validate your model with multiple benchmarks: Don’t rely on just one source of truth. Check at least two independent benchmarks or data points for your key costs. For instance, verify your target price for Office 365 E5 against both a peer organization’s deal and a reseller quote. If both align with your model, you know you’re on solid ground.
3. Update your model annually (or whenever things change): Treat your should-cost model as a living document. Microsoft pricing updates, new product launches, and changes in your own user count or usage all influence what a fair price looks like. Regular updates ensure you’re never using old assumptions in a new negotiation. Being up-to-date is especially crucial given Microsoft’s frequent licensing changes (e.g., pricing model shifts, new bundles, or inflation adjustments).
4. Use the model as your negotiation anchor: Go into negotiations with your should-cost figure front and center. Let Microsoft know early on that “this is our target price based on analysis.” It sets the expectation that you’re negotiating from data, not from a wish or from their starting quote. This anchor helps ground the conversation and can deter Microsoft from throwing exorbitant numbers at you, because they see you have a rationale for what you will pay.
5. Never reveal your full budget – only reveal your should-cost target: In negotiations, knowledge of your budget or willingness to pay is power, and you want to keep that power. If Microsoft asks about your budget or what you’re prepared to spend, stick to discussing the should-cost analysis and fair pricing. For example, “Our analysis shows we should be at $X million for this renewal,” rather than “Alright, we have $Y million approved to spend.” If you let slip that you have more in the budget than your target price, Microsoft will naturally aim to capture that. By focusing on your should-cost number, you frame the negotiation around merit and value, not how deep your pockets are.

By following these recommendations, you’ll approach your Microsoft contract with the confidence and strategy of a seasoned licensing negotiator.

Should-cost modeling is your compass for a fair deal – use it well, and you can significantly tilt the balance of power in your favor when dealing with Microsoft’s sales machine. Good luck, and happy negotiating!

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