New Microsoft 365 Pricing Goes into Effect on July 1, 2026

On December 4, 2025, Microsoft announced a range of price increases for Microsoft 365 monthly licenses. The new pricing (Figure 1) goes into effect from July 1, 2026, the start of Microsoft’s FY27 fiscal year.

According to Microsoft, they want to “give customers ample time to plan.” However, there’s not much choice for tenants if their operations are embedded in the Microsoft 365 ecosystem, so this is a case of “getting used to new pricing” rather than “having time to consider migrating away from Microsoft 365.” Once you’re embedded in the Microsoft 365 ecosystem, it’s hard to leave.

Some organizations do consider going back to on-premises servers. It’s certainly an option, even to the now available and oddly named Microsoft 365 Local, a product that shares precisely nothing but its name with the rest of the Microsoft 365 ecosystem.

Last Microsoft 365 License Increase in 2022

Microsoft last increased Microsoft 365 license prices in March 2022. At the time, Microsoft added $3/monthly to Office 365 E3m and E5, and $4/monthly to Microsoft 365 E3. The Microsoft 365 E5 price was left unchanged.

This time round, the monthly increases range from zero (Office 365 E1) to $3 (the big plans used by large enterprises like Office 365 E3 and Microsoft 365 E5). At $2/average across the Microsoft 365 base (around 446 million paid seats based on data provided at Microsoft’s FY26 Q1 earnings), the increase could bring in an extra $10.7 billion. The price changes shown in Figure 1 apply to the commercial cloud. Equivalent increases apply to other sectors, such as education and government.

In FY26 Q1, the Microsoft Cloud operated at a healthy 68% operating margin, so it’s not as if Microsoft does not achieve an adequate return from Microsoft 365. However, as noted in the earnings transcript, the operating margin for the Microsoft Cloud is down year-over-year due to “investments in AI.” One interpretation is that the extra $10 billion from the price increases will offset some of the red ink Microsoft is bleeding because of the investments they’re making in datacenter capacity, hardware, and software needed to make Copilot useful,

Justifying the Additional Cost

Just like last time around, Microsoft justifies the increase by pointing to an array of new features and functionality that they’ve delivered. Microsoft 365 E5 customers recently received news that they will soon get Security Copilot, and another announcement revealed that the Microsoft 365 E3 and E5 plans will both gain functionality from the Microsoft Intune Suite in the coming months.

Plans that don’t get Security Copilot or the Intune Suite must do with new apps like Microsoft Loop, Clipchamp, and Places, all introduced since the 2022 price increase. Good as these apps are, a tenant has to use them to extract value to justify the additional cost,. A welcome change is the addition of Microsoft 365 Defender for Office 365 P1 to Office 365 E3 and Microsoft 365 E3, even if this might provoke further worry about incurring cost to license shared mailboxes that benefit from Defender functionality.

So Many New Features

Curiously, the blog highlights the release of 1,100 new features in the last year across “Microsoft 365, Copilot, and SharePoint.” I thought SharePoint was a core part of Microsoft 365, but apparently, it’s so important that SharePoint deserves its own mention. Teams just doesn’t get a mention these days. I also wonder how many of the new features are related to Copilot and are therefore useless to tenants that don’t use Copilot.

By comparison, in 2022, Microsoft claimed the release of 1,400 new features in communication and collaboration (aka Teams), security and compliance, and AI and automation (not Copilot!). At the time, I asked how many of the updates were useful. The same could be asked now. Quantity of updates pushed out in a never-ending stream is no substitute for usefulness or quality.

A Question of Value

I’m unsure if any organization can use all the functionality bundled into Microsoft 365. It’s a feature-rich environment with lots to recommend it. I worry about quality of software, the pace of change, the way that Microsoft relentlessly pushes AI at every opportunity, and poor communication about the value of changes at times.

Overall, Microsoft 365 remains very a competitive offering, even if the basic enterprise license is now $312/user/year and the headline E5 license a whopping $720/user/year. Then again, it wasn’t too long ago since a shrink-wrapped copy of Office cost over $300, so perhaps the cost isn’t so bad after all. Either way, I’m sure the increases will cause tenants to devote some time to study their current license mix and allocation to see if any savings are possible (the Microsoft 365 licensing report script might be useful here).

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