How to Reduce Microsoft 365 Licensing Costs

Microsoft 365 Is Likely Your Largest SaaS Line Item

For most mid-market companies, Microsoft 365 represents 30-50% of total SaaS spend. And yet, research consistently shows that 20-40% of Microsoft 365 licenses are either unused, underutilized, or assigned at the wrong tier.

That's not a rounding error. For a 300-person company paying for E5 licenses at $57/user/month, that's potentially $60,000+ per year in waste — just on one vendor.

The good news: Microsoft 365 licensing optimization is one of the fastest ways to cut SaaS costs, and most of the savings require no change to employee workflows.

Understanding the License Tiers

The first step is understanding what you're paying for and whether your employees actually need it.

The pricing gap between tiers is significant. Moving one user from E5 to E3 saves $252/year. Moving them from E3 to E1 saves another $312/year. Across hundreds of employees, these differences compound rapidly.

Five Strategies to Reduce M365 Costs

1. Detect and Reclaim Unused Licenses

This is the lowest-hanging fruit. Look for licenses assigned to:

• Former employees who were never deprovisioned. This is shockingly common — our research shows that incomplete offboarding leaves 15-20% of departed employees with active licenses.
• Inactive users who haven't logged in for 30+ days
• Service accounts assigned full user licenses instead of the appropriate service plan
• Shared mailboxes with unnecessary premium licenses

Action: Run a Microsoft 365 usage report monthly. Flag any license with zero sign-in activity over 30 days for review. Automate deprovisioning for terminated employees.

2. Right-Size License Tiers

Most companies assign the same tier to everyone — usually whatever the IT admin had when they set up the tenant. This creates massive waste.

The reality: In a typical 300-person company:

• 10-15% need E5 features (advanced compliance, telephony, analytics)
• 40-50% need E3 features (desktop Office apps, standard security)
• 30-40% only need E1 or Business Basic (web apps, email, Teams)

Action: Pull usage data for premium features like Advanced eDiscovery, Power BI Pro, and Phone System. If a user isn't using E5-exclusive features, downgrade them to E3. If they only use web apps and email, E1 or Business Basic is sufficient.

3. Optimize Shared Mailboxes

Shared mailboxes in Microsoft 365 don't require a license for basic functionality. Yet many organizations assign full E3 or E5 licenses to shared mailboxes like info@, support@, and sales@.

The math: 10 shared mailboxes with unnecessary E3 licenses = $4,320/year in pure waste.

Action: Audit all shared mailboxes. Remove assigned licenses unless the mailbox specifically needs archive or compliance features that require a license.

4. Eliminate Duplicate Functionality

Microsoft 365 E3 and E5 include features that many companies also pay for separately:

This is where SaaS sprawl meets licensing waste. You may be paying for Microsoft's version of a tool and a third-party tool that does the same thing.

Action: Map your SaaS inventory against Microsoft 365 features. Identify overlapping tools and evaluate consolidation. Not every duplicate should be eliminated — sometimes the third-party tool is genuinely better — but you should be making conscious choices, not paying by default.

5. Use Group-Based Licensing

Instead of manually assigning licenses per user, use Azure AD group-based licensing to automatically assign the right tier based on department, role, or location.

Benefits:

• New hires automatically get the correct license tier
• Role changes trigger license adjustments
• Departures automatically reclaim licenses
• Eliminates human error in license assignment

Calculating Your ROI

Here's a realistic example for a 300-person company:

These aren't theoretical numbers. They're the kind of savings SaaS cost optimization tools identify in the first scan.

The Challenge: You Can't Optimize What You Can't See

The biggest barrier to Microsoft 365 optimization isn't technical — it's visibility. Most companies don't have a clear picture of:

• How many licenses are actually assigned vs. used
• Which tier each employee actually needs
• What third-party tools duplicate M365 features
• Which shared mailboxes have unnecessary licenses

Manual audits are time-consuming and immediately outdated. A shadow IT discovery tool like Coax automatically maps your full SaaS landscape — including Microsoft 365 usage — so you can see exactly where the waste is.

Start With a Quick Audit

You don't need to tackle everything at once. Start with these three steps:

1. Pull your M365 admin usage report — identify licenses with zero activity in the last 30 days
2. List your shared mailboxes — check which ones have paid licenses assigned
3. Map duplicate tools — identify any third-party apps that overlap with M365 features

Or book a demo with Coax and get a complete picture of your Microsoft 365 licensing waste — along with every other SaaS app in your organization — in 15 minutes.

Related Reading

• How to Cut SaaS Costs by 30% — a broader framework for SaaS spend reduction
• What Is SaaS Sprawl? — understanding the root cause of licensing waste
• Google Workspace Cost Optimization Guide — similar strategies for Google-first organizations
• SaaS Offboarding Checklist — ensure departing employees don't leave costly orphaned licenses