Microsoft 365 E3 vs E5, E1 or F3: how to right-size licenses from usage data

Microsoft 365 E3 vs E5, E1 or F3: for each user, the right plan is the cheapest one that still covers what they do. Moving people to that plan is called license right-sizing. You find the candidates by comparing each user’s activity in Microsoft’s usage reports and audit log with what their plan adds. Then you check two things before changing anything: Microsoft’s licensing rules and your renewal date.

This guide covers the three downgrades that save the most: E5 to E3, E3 to E1 or F3, and idle Copilot seats. It also covers the add-ons people forget, and when your agreement lets you cut.

What is Microsoft 365 license right-sizing?

Right-sizing matches each license to how the person works. It covers people who use the service every day but pay for more than they use: an E5 for someone who never touches the E5 features, an E3 for someone who only opens Outlook on the web, a Copilot seat nobody has prompted in two months.

Licenses on inactive or departed accounts are a separate, simpler problem. You remove those rather than downgrade them. For that list, see how to find unused Microsoft 365 licenses.

The Microsoft 365 price increase in 2026 makes downgrades worth more

Microsoft raised most Microsoft 365 commercial prices on 1 July 2026, applied at each customer’s next renewal. The gap between plans widened with them.

In Microsoft 365 E3 vs E5 terms, each E5 to E3 move saves $21 a month, or $252 a year, at list price. Across 100 users that’s $25,200 a year. Your own prices depend on your agreement, so use your invoice figures when you build the business case.

Microsoft’s announcement: Microsoft 365 packaging and pricing updates.

Which data shows that a user can move to a cheaper plan?

Microsoft records the evidence you need, spread across several reports. Each answers one question.

Two things to know before you pull any of this:

• Report data typically lags 24 to 72 hours. Read 90 or 180 days, never last week.
• Reports hide user names by default. A global admin can change that under Org settings > Reports, and the change is recorded in the audit log. Agree it with your data protection officer first.

Microsoft’s overview: Microsoft 365 admin center activity reports.

E3 vs E1 vs F3: which users can move to a cheaper plan?

The main difference between Office 365 E1 and Microsoft 365 E3 is the desktop Office apps; Microsoft 365 F3 also cuts the mailbox and OneDrive to 2 GB. An E3 user is a candidate for E1 when they haven’t used any desktop Office app in 180 days and their mailbox is under 50 GB. They’re a candidate for F3 when their mailbox and OneDrive are each under 2 GB, they have no archive or hold, and they work mainly on mobile or shared devices.

Check the limits of the target plan before you move anyone. A mailbox over the new quota stops sending mail.

The editing limit catches people out. An E1 or F3 user on a 12.9″ tablet can read documents but can’t edit them in the mobile apps.

How to build the E1 and F3 list

1. Pull getM365AppUserDetail for 180 days. Keep users with no Windows or Mac use in any app.
2. Join the activations report. Drop anyone with a recent desktop activation they still rely on.
3. Join mailbox and OneDrive sizes. Sort candidates into E1 (mailbox under 50 GB) and F3 (both under 2 GB, no archive).
4. Remove anyone on litigation hold or with an archive in use.
5. Send the list to managers to confirm the role. A finance analyst who opens Excel on the web twice a month may still need desktop Excel at quarter end.

Microsoft’s limits: Exchange Online limits.

Microsoft 365 E3 vs E5: which users actually need E5?

Microsoft 365 E5 adds Teams Phone, Audio Conferencing, Power BI Pro, Entra ID P2 and the top tiers of Defender and Purview on top of E3. At list price the difference is $21 per user per month. A user needs E5 when they use one of those features, or when Microsoft’s licensing rules say they benefit from one.

Start with E5 users who use none of the features E5 adds. You can check these per user:

• Teams Phone: a phone number assigned (Get-CsPhoneNumberAssignment) and calls in the PSTN or Direct Routing call logs.
• Power BI Pro: create, edit, share or publish events in the Power BI activity log. Users with only view events on F64 or larger capacity can use a free license.
• Privileged Identity Management: an eligible admin role (roleEligibilityScheduleInstances in Graph). These users need Entra ID P2.
• eDiscovery Premium: named as a custodian in an active case.

A user who passes all four checks is a candidate. Before you move them, check the licensing rule for users who benefit from a service.

Which users must keep E5 even when they look inactive?

Microsoft licenses several E5 security and compliance services by who benefits from them, whatever that person does day to day. A downgrade can leave someone who still benefits without the license Microsoft requires.

If your tenant runs Defender for Identity or E5-level DLP for everyone, E5 to E3 becomes a tenant-wide decision about your security stack. The usual answer is E3 plus the Microsoft Defender Suite or Purview Suite add-on (the new names for E5 Security and E5 Compliance since October 2025) for the people in scope.

Microsoft’s rules: Microsoft Entra licensing and the Microsoft Defender service description.

How to find idle Microsoft 365 Copilot licenses

Use the Microsoft 365 Copilot usage report. It shows each licensed user’s last Copilot activity in Teams, Outlook, Word, Excel, PowerPoint, Copilot Chat and other apps. Its newer version adds prompt counts and active days. Flag seats with no activity in 60 to 90 days, then reassign them to people who already use the free Copilot Chat heavily.

If you call the API, note two changes. The path is /copilot/reports/, not /reports/. And the default version rejects a 30-day period; use D28.

For a walk-through of Microsoft’s report, see our guide to the Microsoft 365 Copilot usage report. To see idle seats priced and usage by department, see Copilot usage analytics.

Add-ons and edge cases to check

• Power BI Pro bought separately for E5 users. E5 already includes it, so the standalone license is paid twice.
• Defender for Office 365 Plan 1 bought for E3 users. E3 now includes Plan 1.
• Teams Phone and Audio Conferencing. A number assigned with no calls in 90 days is a candidate for removal. Collect the call logs monthly, because each query covers at most 90 days.
• Visio and Project. Microsoft only records when the app was activated, not when it was opened. Ask the user.
• Project Online. Microsoft retired it on 30 September 2026. Any Project Online plan still assigned is pure cost.
• Shared mailboxes. A shared mailbox under 50 GB with no archive and no hold needs no license. One that needs more storage, an archive or a hold needs Exchange Online Plan 2, or Plan 1 with the Exchange Online Archiving add-on.
• Leavers. Put a retention policy or litigation hold on the mailbox before you delete the account, and it becomes an inactive mailbox that needs no license.

When can you actually cut licenses?

On Microsoft’s New Commerce Experience, a downgrade only saves money once your agreement lets you reduce. Plan the list around your renewal date.

On an annual NCE term, an E5 to E3 change means reducing E5 and buying E3 at renewal. You can set quantity changes in advance in the subscription’s renewal settings. Until renewal, move people between licenses you already own: reassign an idle Copilot seat, or give a freed E3 to a new starter instead of buying one.

Microsoft’s policy: Partner Center new commerce cancellation policy.

What usage data can’t tell you

Activity data shows what someone has used. It doesn’t show everything they need. These gaps are worth knowing before you defend a list to managers:

• Seasonal work. Year-end finance, audits and exam periods. Use 180 days of data, not 30. Microsoft’s own guidance on inactive accounts suggests a 90 to 180 day window.
• Desktop Visio and Project. You only get activation dates.
• Power BI. The activity log keeps 28 days. Collect it continuously if you want a longer view.
• Audit history. Audit Standard keeps 180 days. Pull and store it yourself to see trends.
• Insider Risk and Communication Compliance. Microsoft documents no API that lists the users a policy covers, so confirm scope with your compliance team.

A Microsoft 365 right-sizing checklist

1. Agree the basis. Write down what data you’ll use and why. In the UK, the ICO’s guidance on monitoring workers expects a data protection impact assessment and clear notice to staff.
2. Show names in reports, or match the hidden IDs yourself.
3. Pull 180 days of app usage, activations, mailbox, OneDrive, Copilot and sign-in data.
4. Build E1 and F3 candidates from desktop use and storage.
5. Build E5 to E3 candidates from Teams Phone, Power BI, PIM and eDiscovery use.
6. Apply the benefit rule. Keep E5 or add the security suites wherever Microsoft says users who benefit must be licensed.
7. Remove exceptions: legal holds, executives, break-glass accounts and people on leave.
8. Price each change at your own prices.
9. Confirm with managers, then change the licenses through the groups that assign them.
10. Time the reduction to the 7-day window or your renewal date.

How 365TUNE finds downgrade candidates

365TUNE reads each user’s activity in the audit logs app by app, alongside Microsoft’s usage reports, and flags licenses on a higher tier than the person’s activity calls for. Each recommendation shows its monthly and annual saving at Microsoft list price, or at your own price, and the users it affects.

It also:

• recommends a Power BI tier for each user: Premium Per User, Pro, Free or none
• prices idle Copilot seats and lists the heavy Copilot Chat users who could take them
• flags paid licenses on shared mailboxes
• keeps users on legal hold off removal lists

When you’re ready to act, 365TUNE sends each change to the user’s manager or HR for approval before it reclaims the license. That step needs its own write consent; the scan itself is read-only. See Microsoft 365 license optimization recommendations, or compare plans side by side in the Microsoft 365 license comparison.