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This week, Microsoft announced significant price cuts on Office 365, ranging from 13% to 20% for its Office 365 Enterprise plans, 22% to 24% on SharePoint, and 92% on SharePoint storage. Microsoft indicated that the reasons for the significant price cuts are a) greater efficiencies in its data center operations, and b) improved leveraging of its administrative and security staffers.
While I don’t doubt that Microsoft is gaining greater efficiencies in managing its Office 365 data centers, I suspect (along with lots of others) that there may be more to the price cuts than that. A key reason for the price cuts is likely that Microsoft’s enterprise adoption numbers are not quite where the company wants them to be (only 10% of Office 365 corporate customers have 50 or more employees), although detailed numbers are not published. While Microsoft has gained some high profile adopters in the enterprise space, Office 365 – and cloud services in general – are integral to the future of the company (as evidenced by Steve Ballmer’s personal involvement in many deals). Hence, its enterprise adoption targets are probably somewhat higher than it has so far been able to achieve.
Will price cuts help to drive demand for Office 365? Probably, but only to a point. Our own research finds – not surprisingly – that price cuts spur demand, but there is substantial variability in the increase of demand at different levels of price reduction. For example:
- At $20 per seat per month, 16% of mid-sized and large organizations are likely or definite adopters of cloud-based email services.
- Dropping the price by $5 increases likely or definite adoption to 27% (an increase of 69%).
- Dropping it another $5 increases potential adoption to 49% (an increase of 81%).
- Dropping prices another $5 will increase demand, but only a modest 24%.
I suspect that Microsoft has done its own research and come to a similar conclusion – that the just-announced price cuts may be significant enough to create sufficient demand among its potential enterprise customers to meet the company’s enterprise adoption targets. Moreover, Microsoft is probably banking not only on the price cuts themselves, but on the fact that they may create enough of a perceived delta between enterprises’ internal calculations of on-premise TCO and Office 365 that decision makers will finally be convinced of the cost benefits of migrating to the cloud.
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