Microsoft's new love of subscriptions could bring in up to 80% more revenue per customer

Steve Kovach/Business Insider

There's one very good reason that Microsoft is so keen to get customers on board with its Microsoft Office 365 subscription service.

Companies that go with Office 365 are more likely to buy more Microsoft services, and more likely to install Office everywhere in their business, Microsoft believes.

In fact, Office 365 customers may well end up spending 20%, 40%, or even 80% more with Microsoft over the long run, CFO Amy Hood told Wall Street analysts earlier this month.

That's a nice scenario when you consider that boxed Microsoft Office sales are shrinking like crazy.

Traditionally, business customers have purchased new versions of Office every five to seven years, Hood explained in her presentation. (It's hard to know exactly how much big companies pay for Microsoft Office, thanks to volume discounts and package plans, but it's generally a one-time payment.) 

With Office 365, business customers typically pay Microsoft $20 per user every month. Add on "some incremental services" like Microsoft's Power BI, Windows Azure cloud, OneDrive storage, Skype for Business, or whatever else, and the value of that customer to Microsoft goes up. 

This approach "results in a 1.8 times lifetime value of that user in the transition," Hood explained.

The subscription model is appealing to businesses because of its flexibility and because it eliminates the headache of paying separate licensing fees for various features. Office 365, for example, includes licenses for smartphone and tablet versions of all the key apps such as Word, PowerPoint, Excel and Outlook. 

Companies are responding. Even as the traditional Office business declines, Microsoft keeps reporting higher and higher rates of business Office 365 adoption. In fact, there's a lot of buzz to indicate it might just be beating Google Apps. If people like it that much, Hood's assertion that people are buying more Microsoft services to go with it may be well-founded. 

Given that subscription-based Office has turned into such a cash cow for Microsoft, it's no wonder that the company is trying a similar model with the forthcoming Windows 10 operating system, with major updates to come on a subscription basis.