Negotiating Microsoft 365 E3 vs E5 Licensing Agreements
Choosing between Microsoft 365 E3 and E5 is an enterprise’s most significant licensing decision.
E3 and E5 are enterprise-tier plans that include Office 365 apps and cloud services, but E5 adds extensive security, compliance, telephony, and analytics features not present in E3. E5’s added value comes at a premium price (often ~50–70% higher per user than E3), so organizations must weigh functionality needs against budget impact.
This article provides a structured approach to negotiating Microsoft 365 E3 vs E5 agreements, covering feature differences, cost considerations, and tactics to achieve the best deal.
Comparing E3 and E5: Features and Costs
E3 and E5 include the core Microsoft 365 suite – Exchange email, SharePoint, Teams, Office applications, and OneDrive – ensuring all users can collaborate with standard tools.
The key difference is that E5 layers on advanced capabilities:
- Advanced Security & Compliance: E3 offers essential security (e.g., multi-factor authentication, basic DLP), whereas E5 includes advanced threat protection, endpoint detection, privileged access management, and advanced compliance tools like Customer Lockbox and Advanced eDiscovery. E5 is ideal for organizations with strict security or regulatory needs.
- Analytics & AI: E5 provides tools like Power BI Pro and AI-driven insights (MyAnalytics/Workplace Analytics), which are not in E3. These help organizations derive intelligence from usage patterns and data.
- Voice and Collaboration Enhancements: E5 has Teams Phone System and Audio Conferencing capabilities, enabling PBX-like calling features. These telephony features (plus Power BI) account for a substantial portion of E5’s cost, and not all companies require them.
- Cost Difference: At list prices, Microsoft 365 E5 can cost roughly 50% more per user than E3 (~$57 vs ~ USD 36 per user/month). Organizations must consider the total cost of ownership: E5 might eliminate the need for certain third-party security or analytics tools, potentially offsetting some costs. However, buying E5 for all users when only some will use the extra features can lead to overspending.
Example: A global firm with 5,000 users found that only 1,000 needed E5’s advanced security and phone system features, while the other 4,000 used primarily email and Office apps. Instead of upgrading everyone, the firm kept 4,000 users on E3 and licensed 1,000 on E5. This mixed approach delivered needed capabilities to power users while avoiding millions of dollars in unnecessary E5 costs.
Negotiation Strategies for E3 vs E5 Agreements
When negotiating an Enterprise Agreement or other volume license deal, leverage the E3 vs E5 decision to optimize value:
- Mix and Match Licenses: Microsoft allows you to assign different license levels per user. Do not feel compelled to upgrade all users to E5 without a business case. Tailor your plan mix to user roles – for example, give E5 only to departments handling sensitive data or requiring advanced compliance, and use E3 for the rest. This targeted deployment can be a bargaining point: you can tell Microsoft you’re considering keeping a significant portion on E3 unless they offer incentives for broader E5 adoption.
- Ask for Pilot Programs: If unsure about E5, negotiate pilot or trial terms. Microsoft may provide E5 features free for a limited time (e.g., a 6-month trial of Teams Phone or Advanced Security) to showcase value. Gaining a trial during negotiations tests E5’s benefits and signals to Microsoft that full deployment isn’t guaranteed without proof of value.
- Leverage Microsoft’s Sales Goals: Microsoft promotes E5 adoption as a strategic priority. Use this to your advantage—express interest in E5 upgrades for a subset of users, or in the future. Microsoft will often respond with better discounts or concessions to secure that commitment. For instance, indicating that you might migrate critical workloads to E5 can prompt Microsoft to offer steeper discounts on those licenses.
- Benchmark and Demand Discounts: Enterprise Agreement discounts off the E5 list price are commonly 10–25% (or more) for large deals. Research what similar companies pay and begin negotiations with an aggressive discount ask. If Microsoft’s initial offer is only a 5% discount, but you have data that peers achieved 20%, use that to justify a better price. Microsoft expects customers to counter-offer; be prepared with data.
- Consider Timing and Alternatives: Plan negotiations near Microsoft’s fiscal year-end (June) or quarter-end when sales teams are eager to close deals. They may be more flexible on E5 pricing or throw in add-ons at no cost. Also, don’t overlook alternatives: if viable, mention evaluating Google Workspace or remaining on E3 with third-party add-ons. Credible competitive pressure can improve your bargaining position.
Cost Pitfalls to Avoid
Making the wrong licensing choice can lead to wasted budget:
- Over-Licensing: A common mistake is purchasing E5 for all users “just in case” its features might be useful. Unused E5 capabilities are sunk costs. It’s better to start with E3 for most and selectively upgrade users who will truly leverage E5’s extras. You can always expand E5 later as needs grow or new features justify it.
- Paying for Redundant Tools: Evaluate whether E5’s features can replace third-party products you’re already paying for. For example, E5 includes advanced threat protection and Power BI. If you upgrade, you might retire separate email security gateways or BI software. Failing to do so means double-paying for overlapping solutions. Conversely, if you have long-term contracts for equivalent tools, you might stick with E3 until those expire.
- Ignoring Long-Term Needs: On the flip side, some organizations stay on E3 to save costs, then bolt on multiple individual security and compliance add-ons that cost more than E5 would. If you foresee needing several advanced capabilities (e.g., advanced eDiscovery, Defender suite, telephony) for many users, a full E5 license might be more economical than patching together add-ons. Always run the numbers.
- Undervaluing Compliance Risks: If regulatory compliance is a concern (finance, healthcare, etc.), skimping on necessary E5 compliance features could result in more fines or breaches later. Build the value case (and budgetary case) for E5 where it genuinely lowers risk. Microsoft often negotiates pricing on compliance-related components if it knows it’s key to closing the deal.
Negotiation Leverage Points
Knowledgeable procurement teams exploit a few leverage points when finalizing M365 E3/E5 deals:
- Volume Commitments: Larger seat counts and multi-year commitments earn bigger discounts. If you’re increasing users or expanding Microsoft 365 usage, let Microsoft know early and use that to secure price breaks (e.g., “If we go E5 for 500 more users, we expect a 20% discount on those licenses”). Microsoft’s volume discount tiers and business desk approvals can yield significant savings for big moves.
- E5 as a Negotiation Chip: The possibility can be leveraged even if you don’t initially plan for E5. Microsoft representatives have quotas for E5 and Azure consumption. Strategically communicate that your organization might adopt more E5 features over the agreement term – in return, ask for price protections or flexible terms. For example, negotiate an option to convert some E3 licenses to E5 later at the same discounted rate agreed upon.
- Flexible Mix and Adjustments: Ensure your agreement allows swapping licenses (upgrading/downgrading between E3/E5) during the term. Microsoft may resist downgrades mid-term, but you can negotiate provisions like the ability to reduce a certain percentage of licenses at renewal or the right to some E5 -> E3 readjustment if usage changes. This safety valve prevents you from being stuck overpaying if your needs shift.
- Concessions Beyond Price: If direct discount limits are reached, seek value in other forms. Microsoft can sometimes provide free add-on licenses, extended support, or funding for deployment services. For instance, you might get several free Audioconferencing licenses with E3 or Microsoft consulting hours to help implement E5 security features. Such perks can enhance the deal package when list price discounts hit a ceiling.
Read Microsoft 365 Add-ons: Security & Compliance Licensing.
The Role of Independent Licensing Experts
Navigating E3 vs E5 negotiations can be complex. Engaging an independent Microsoft licensing advisor (such as Redress Compliance) provides an unbiased assessment of your needs and Microsoft’s proposal.
These experts bring:
- Benchmark Data: Consultants know what discounts and terms similar clients have obtained, helping you set realistic targets and avoid seller bias.
- License Optimization Insights: They might identify that a certain department could use cheaper licenses (or needs higher ones), or spot bundled features you’re not utilizing. This ensures you’re not leaving money on the table or exposing the company to compliance gaps.
- Negotiation Support: Seasoned licensing negotiators can manage or coach your negotiation with Microsoft, pressing for better terms on your behalf and countering common sales tactics. Microsoft’s sales teams negotiate deals daily; having a licensing expert evens the playing field.
- Contract Safeguards: Independent advisors also ensure the final contract language protects you – for example, making sure any special discount or flexibility promised is written into the agreement, not just verbally agreed.
In summary, negotiating between E3 and E5 involves aligning technology needs with cost efficiency. By clearly understanding the differences, strategically mixing license types, and leveraging Microsoft’s desire to sell E5, you can craft an agreement that delivers the right capabilities at the right price.
Always base your decisions on real usage patterns and business cases, not marketing hype. With thorough preparation and help from unbiased experts, you can confidently enter Microsoft 365 E3 vs. E5 negotiations and exit with an agreement that maximizes value for your organization.
Read about our Microsoft Negotiation Services.
