Microsoft used to receive a lot of criticism for the price of their software.

They had arguably the best products on the market, but even still, were they worth a three-digit price per program?  How do they justify charging $110 for just a word processer?

Then came cloud computing, which allowed Microsoft to shift from an up-front to a subscription-based pricing model. Instead of buying your own license that never expires, you can save some money (in the short-term, at least) by renting out the product suite for a low monthly fee instead.

Office 365 has been touted by Microsoft as a cheaper alternative, and it does appear to be cheaper, at least on the surface. It’s a lot easier to put down $5 or $10 initially instead of $110.

But over time, Office 365 actually cost businesses more than what they were paying previously when they got a permanent license and that was the end of it.

“Over the lifetime, the increased reach, the increased frequency… results in a 1.8 times lifetime value of that user in the transition,” explained Microsoft CFO Amy Hood.

In simpler terms: for every $100 that Microsoft would have made with the traditional pricing model, they make $180 using the current subscription-based model. At least, that’s how the math works out according to Amy Hood.

But Microsoft’s self-reported 1.8x revenue multiplier is thought by many experts to be an incredibly conservative estimate.

“A 1.8x multiplier? How about a 6x or 20x multiplier? I think those numbers are conservative,” said Paul DeGroot, a Microsoft licensing expert and principal consultant at Pica Communications. “I always remind customers that Microsoft’s internal rationale for the cloud is not superior technology or a better fit for customers, but that they can switch customers from purely transactional strategies… to a subscription model where the customer owns nothing and must continually pay Microsoft.”

To be fair, Office 365 will save you money in other ways, the most significant cost-cutting measure being that you won’t have to manage email on-premises anymore. But that’s not enough to compensate for the never-ending investment in access, rather than ownership, to the programs that are vital to your everyday operations.

Dangling the carrot of low monthly rates may be able to convince many businesses that Office 365 is an affordable option, but the numbers don’t lie: over time, this is a situation that plays to Microsoft’s favor, not yours.

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