I think we can all agree that one of the largest concerns of New Commerce with Microsoft is liability. In this article, I wanted to provide you a simple formula that will help you decide whether or not to put customers on annual or monthly contracts as well as some guidance for the legal contracts you draft as a whole. Ultimately, both should help you reduce some of your liability.
This article assumes you have a high level understanding of New Commerce. Check out my previous blog post for more info if you are just getting started with New Commerce Experience.
Monthly or Annual contracts?
What if I told you that you may be able to show your customers that they could actually save money by moving to a monthly contract even with the 20% premium pricing over annual? That may not sound possible, but I think many are getting sticker shock from the 20% premium without actually running numbers.
I believe if you have customers with many move-add seat changes per month, you need to evaluate which offering you want to position. I derived a simple formula to follow in order to calculate your two options here:
A = Trailing 12-month Avg license count x Product Monthly Pricing x 12
B = MAX license quantity during trailing 12-month + (MAX * 10%) x Product Annual pricing
(the MAX *.10 here is just giving you a cushion on potential seat count increases. You could choose not to add it or go up in cushion.)
If B <= A then it makes more sense to just go with annuals at a high-water mark. Lets take a look at a real life example
Ex. Microsoft Business Premium
A = 26 (avg license count) x $26.40 (BP on monthly rates after march 1) x 12 (Months)
B = 30 (Max count on licenses) + (30*.10) X 22 (BP on Annual rates after March 1) X 12 (Months)
B = $8,712
Here in this example we can see that the monthly contract, over the course of the year, is actually CHEAPER than the annual. When we take the cushion out, the annuals become cheaper ($7,920 without cushion) but its by a factor of $316 dollars. This $316 dollar difference might be acceptable to avoid an annual contract and gain more flexibility each month with move add changes, contract workers, etc.
Now there are some heavy asterisks here that you need to be cognizant of when running these numbers:
- Customer growth rate needs to be factored in. If a customer is going to be stagnant over the course of the year, annuals are still the way to go.
- You may not be hitting your high water mark immediately when you start you term commitment. This means you could not be paying the full amount of your high water mark if you slowly incremented your way up to that over your yearly term. (mid-term seat adds get prorated for the remainder of the term and co-terminate.) I think the key takeaway here is that if you think you are going to hit your high water mark earlier in your commitment term, it still may make more sense to do monthly.
- Not all products have a monthly term at the moment. The base level plans like Business Standard, Business Premium, E1, E3, etc. all have monthly commitments but some add-ons like Business Voice, for instance, are only offered on annual contracts. There are rumblings of Microsoft trying to course correct here and offer monthly terms on these products, but as of today there is a list of 60 or so products that don’t offer a monthly term.
With all that being said, I think you can still leverage a trailing 12 month average seat count to determine the floor of your annual contract quantities. Meaning, if your average quantity for a customer is 26, you get them into an annual contract for 26 licenses and all other seat additions are evaluated to see if they should contribute to the floor or if it makes more sense to add those as monthly for the flexibility, seasonal workers, etc. When your annual contract comes up for renewal, you can re-evaluate what your floor quantity should be.
Trying to get customers on monthly contracts leveraging the formula above is one way to reduce your liability. The other is how you structure your contracts to your customers. Unfortunately, I am no lawyer so I cannot exactly provide you with a boiler plate contract that you could modify but I can at least give you some recommendations on what I would make sure is in my contracts:
- Commitment Terms and payment options =>Commit Annual or pay 20% premium on monthly
I believe you have to take a firm stance on forcing the customer into an annual contract (they can still pay monthly) or having them pay 20% for monthly so they can have flexibility. The main consideration here is that they can do no better going direct so might as well keep things simple from a billing perspective and keep the business with you.
- No decrements and cancellations throughout the term
We could really get into the weeds with the whole “72 hour window of prorated cancellations” when you order, but I think that is a nightmare to manage from an operation standpoint. It is much cleaner to take the stance of no cancellations and no decrements throughout the contract term. This would apply to both monthly contacts and annuals.
- Seats added Midterm co-terminate and prorate mid-month
This is following Microsoft policy here. Seat increments mid-month are prorated and will add to the total billable quantity for the next month.
- Some products may be only available for annual commits
As I mentioned earlier, at the time of this post, there are 60 or so products that are only annual term commitment. This is important to point out because while the customer may not be purchasing one of those products today, they could choose to in the future as an addition to their base plan or something like that. It should be noted that products will be evaluated for commitment terms on a per-request basis.
- Notifications will be provided 30,14, and 7 days before renewals to evaluate contract
Depending on your distributor, products may auto-renew. This period of time in which they renew is your only chance to change quantity downward before your are locked back into a full commitment. For this reason, you will want to give customers notice before that renewal so they have chance to change before renewing the contract.
- Commitment timelines begin at the date of purchase on a per subscription basis
This is another important call out here. I would recommend you try to purchase licensing at the first of the month to keep things more inline with how you bill out of PSA today but it is possible that you have multiple subscriptions with different renewal dates under a single customer. It may also be possible that you have two subscriptions of the same product to the customer with two different commitment terms (Monthly and Annual) and two different renewal dates. You may choose to have different contracts per subscription to help compensate here but it needs to be known that different subscriptions do not co-terminate by default. They would only ever do that if they have the same commitment term and they were purchased on the same date.
I hope this article provided more guidance on how you can reduce liability on NCE. Please comment below with any questions or to share any best practices you are following with your customers.