Microsoft cuts the prices of some Office 365 plans

Microsoft has lowered the prices of some editions of the Office 365 cloud collaboration and communication suite, which was launched about eight months ago and competes directly with Google Apps and other similar products.

Office 365 offers hosted email and productivity and collaboration applications for companies, government agencies and schools. It comes in a variety of editions, all priced differently on a per-user, per-month subscription basis. In most editions, it includes hosted versions of Exchange, Office, SharePoint and Lync.

In a blog post, Microsoft said it is lowering the prices because the cost of running Office 365 has dropped since its launch.

“As we rapidly add customers, the cost to run Office 365 becomes more efficient. This is the beauty of the cloud where we can deliver economies of scale through our worldwide data centres and economies of skill with our engineers, administrators, and support teams operating the service,” wrote Microsoft official Kirk Koenigsbauer.

Prices for the four plans for midsize businesses and enterprises, labeled E1, E2, E3 and E4, dropped, in that order, from US$10 to $8; from $16 to $14; from $24 to $20; and from $27 to $22.

Office 365 also comes in a plan for small businesses, called P1, which has a 50-user limit, and in an email-only option with just Exchange Online, as well as in other alternatives. The price for the P1 plan remains the same at $6 per user, per month.

Meanwhile, plan A2 of the upcoming Office 365 for Education will be free for students, faculty and staff, and prices for other education plans for staff and faculty have been “reduced significantly,” a Microsoft spokeswoman said via email. The A2 plan includes hosted Exchange, SharePoint, Lync and Office Web Apps. Office 365 for Education will be launched in the summer.

A caveat is that the new prices apply only to new customers and to existing customers when their contracts are up for renewal. If, for example, a company is in the sixth month of a one-year Office 365 deal, they will pay the old, higher prices for the remaining six months, and renew the contract at the new, lower prices.

Customers who select the enterprise plans — E1 to E4 — sign up for annual contracts, while small companies that choose the P1 plan renew on a month-to-month basis.

The return-on-investment (ROI) for Office 365 customers has been high at the original prices, said industry analyst Rebecca Wettemann from Nucleus Research, which has done Office 365 case studies.

“This price change is likely a penetration strategy for Microsoft to motivate more customers to move to Office 365, and the SMB market is particularly price sensitive,” she said via email.

Customers usually move to Office 365 from a much more costly hosted option or an on-premise deployment with less reliability and availability, and higher support costs, she said.

“Once customers move to Office 365 and see the benefits of the cloud, they’re likely to explore what other options are there. In most organisations, Office 365 still wins because usability is key and so many users know Office and the Microsoft Outlook interface,” Wettemann said.

It’s interesting that Microsoft is lowering prices after the product has been on the market for eight months, because Nucleus Research has found that more than half of companies that are six months or less into a cloud software deployment are willing to consider a change of vendors, she said.

“That means SaaS vendors such as Microsoft have to continue to invest in making customers successful for two quarters after the sale, as churn in the initial period is high. It drops significantly after six months and doesn’t start to spike up again until after three years,” she said.

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