The 20% Monthly Premium Might Be Cheaper: Run This NCE Math First
TL;DR
- Under NCE, monthly terms carry a 20% price premium over annual terms, but customers with fluctuating seat counts can still come out ahead on monthly.
- Compare A, the trailing 12-month average license count times monthly pricing times 12, against B, the maximum license count plus a 10% cushion times annual pricing, and pick annual only when B is less than or equal to A.
- A trailing 12-month average seat count makes a sound floor for annual contract quantities, with additions above the floor evaluated as monthly seats.
- As of January 2022, roughly 60 NCE products, including add-ons like Business Voice, offer no monthly term at all.
- NCE seat decrements and cancellations are only possible in the first 72 hours, so contracts should simply prohibit mid-term reductions.
Most MSPs looked at New Commerce Experience pricing, saw the 20% monthly premium, and concluded annual commitments were the only sane option. Then they signed up for a year of liability on every seat. We think a fair number of those decisions were sticker shock rather than arithmetic, because for customers whose seat counts move around, monthly can actually cost less.
This post gives you a simple formula for the monthly-versus-annual call, plus contract guidance that shifts NCE liability off your books. It assumes you already understand New Commerce at a high level; if you are just getting started, this NCE breakdown covers the fundamentals.
The formula: when does monthly beat annual?
If a customer has many move-add seat changes per month, run both options before you position either one:
A = Trailing 12-month average license count x Product monthly pricing x 12
B = (MAX license quantity during trailing 12 months + (MAX x 10%)) x Product annual pricing x 12
The MAX x 0.10 term is a cushion for potential seat count increases. You can drop it or raise it to taste.
If B <= A, annual at the high-water mark makes more sense. Otherwise, monthly deserves a serious look.
A worked example with Business Premium
Take Microsoft 365 Business Premium at the pricing in effect after March 1, 2022:
- A = 26 (average license count) x $26.40 (Business Premium monthly rate) x 12 months
- A = $8,236.80
- B = 30 (max license count) + (30 x 0.10), times $22 (Business Premium annual rate), times 12 months
- B = $8,712
The monthly contract, over the course of the year, is actually cheaper than the annual. Remove the cushion and annual wins at $7,920, but only by $316. A $316 difference might be a fair price for skipping an annual commitment and keeping flexibility for move-add changes, contract workers, and the rest.
Three caveats before you trust the math
- Growth rate matters. If a customer will be stagnant over the year, annual is still the way to go.
- The high-water mark may arrive late. You might not hit your maximum seat count at the start of the commitment; mid-term seat additions are prorated for the remainder of the term and co-terminate, so slowly incrementing toward the peak costs less than holding it all year. The takeaway: if the customer will hit their high-water mark early in the term, monthly gets more attractive.
- Not every product offers a monthly term. Base plans like Business Standard, Business Premium, E1, and E3 all have monthly commitments, but some add-ons, Business Voice for instance, are annual only. There are rumblings of Microsoft adding monthly terms to these products, but as of January 2022 roughly 60 products have no monthly option.
The floor strategy for annual quantities
Even where annual wins, the trailing 12-month average is useful: treat it as the floor of the annual contract quantity. If a customer averages 26 seats, put 26 on an annual commitment, then evaluate every seat addition individually: does it raise the floor, or is it seasonal enough to ride on monthly terms? At renewal, re-evaluate what the floor should be.
Six contract terms that move liability off your books
The formula is one lever. The other is the contract language itself. We are not lawyers, so treat these as recommendations to take to a legal professional rather than boilerplate:
- Commitment terms and payment options: commit annual or pay the 20% monthly premium. Take a firm stance: the customer commits to an annual contract (they can still pay monthly) or pays the premium for flexibility. They can do no better going direct, so keep the billing simple and keep the business with you.
- No decrements or cancellations during the term. You could try to operationalize the 72-hour window of prorated cancellations, but managing that is a nightmare. The cleaner stance: no cancellations and no decrements mid-term, on both monthly and annual contracts.
- Mid-term seat additions co-terminate and prorate mid-month. This mirrors Microsoft policy: seat increments mid-month are prorated and join the total billable quantity the following month.
- Some products are annual-commit only. A customer who buys none of those roughly 60 products today might add one tomorrow, so the contract should note that commitment terms are evaluated per request.
- Renewal notices at 30, 14, and 7 days. Depending on your distributor, products may auto-renew, and the renewal window is your only chance to reduce quantities before being locked into another full commitment. Give customers notice so changes happen before the contract renews.
- Commitment timelines begin at the purchase date, per subscription. Buy licensing on the first of the month where you can, to stay aligned with how you bill out of your PSA, but expect customers with multiple subscriptions carrying different renewal dates, including two subscriptions of the same product on different terms with different renewals. Separate contracts per subscription can compensate. Subscriptions only co-terminate when they share the same commitment term and the same purchase date.
Run the numbers per customer, write the terms down, and NCE liability stops being a thing that happens to you.
Frequently asked questions
When does an annual NCE commitment clearly win?
When the customer's seat count is stagnant. If headcount will not move over the year, annual pricing beats monthly pricing by the full 20% premium and the flexibility of monthly buys you nothing.
Do mid-term seat additions on an annual NCE commitment get their own renewal date?
No. Mid-term seat additions are prorated for the remainder of the term and co-terminate with the original subscription's renewal date.
Can a customer cancel an NCE subscription mid-term?
Only within the first 72 hours of the term. After that, the customer is committed to paying the remainder of the term in full, which is exactly the liability your contracts need to pass through.
Licensing math is monthly. Security drift is daily.
While you tune NCE terms, CloudCapsule keeps watch on the tenants themselves: 250+ controls per customer, checked in about 60 seconds, with reports you can hand to the client.
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Written by
Nick Ross
CEO · Microsoft MVP · Founder, T-Minus 365
Nick is not just a CEO, he's a respected thought leader and influencer in the MSP space. Tens of thousands of MSPs learn through his YouTube channel, T-Minus365. Nick has been honored as a three-time Microsoft MVP for his educational content; his expertise and influence are the backbone of our mission, ensuring that you are in the best hands when it comes to security.
Nick joined Pax8 in 2017, where he would ultimately oversee product management for PSA and Microsoft integrations. Following his tenure at Pax8, Nick has continued to demonstrate his leadership prowess as an executive at various MSPs, culminating in his most recent role at Sourcepass.
Nick holds a Bachelor's Degree in Business Management from Florida State University, as well as a Minor Degree in Entrepreneurship. In his free time, Nick is an avid hiker, reader, and fitness-junkie.
