Exchange Online, On Premise for Small, Midsized Businesses – The Costs

Exchange Online is of course part of Office 365 and people are migrating to it in droves. The attractions from a feature perspective are obvious, for a mere £8 a month small businesses (under 300 users) can get all of the following

  • Exchange Online
  • SharePoint Online
  • OneDrive
  • Skype for Business
  • Exchange Online Protection
  • Office 2016 (Word, Excel, Outlook, Access)
  • Delve
  • Sway
  • Guaranteed 99.9% SLA
  • End to backups
  • End to server upgrades
  • All accessible from anywhere

However I’ve often wondered about what if all you need is Exchange, how do the costs compare then? I think for larger businesses using only Exchange the cost argument is massively in favour of on premise, but of course you don’t get any of the additional features, and there won’t be many larger businesses that do not need/want OneDrive, SharePoint and Skype for Business. So the discussion there is typically more around modern working, additional applications, predictable spend, etc.

Anyway let’s concentrate on smaller businesses, and let’s start with 50, 100, 500 and 1000 users as four scenarios. For each of these we’ll try to compare apples with apples, however that’s not straight forward either since the cloud offering has some additional appeal/features/capacity.

Let’s assume these businesses

  • want some level of resilience or backup (the cost of these are not that dissimilar)
  • are ok to live with Exchange’s built in Anti-Spam/Malware detection (I know, unthinkable for larger organisations or most Exchange admins)
  • are all in one location/building (so only one WAN connection)
  • allow users to work remote as well
  • have a hardware refresh policy of 5 years and won’t do any major software upgrades (OS or Exchange) before that time
  • already have Office 2016 licences (or a version that they are happy to run for the next 5 years)
  • 10GB mailbox size is sufficient, who needs 50GB :o)
  • are heavy email users with 100 messages sent/received per user per day, averaging 75KB in size
  • are happy for any OST download to complete within a day
  • use server hardware based on HP DL380 rack mount servers with cabinet space already available for the additional hardware
  • already have adequately spec’d domain controllers
  • will install AAD Connect on one of the domain controllers
  • will retain an administrator to support email whether it is on premise kit or Office 365

Right so let’s look at what we need in each of the two cases

Cloud Service

1. Exchange Online Plan 1 licenses

Exchange Online Plan 1 retails for £2.50 per user per month. It scales linearly and has no user caps in terms of business size

2. WAN Connectivity

Using the Exchange Client Network Bandwidth Calculator we see that the using the above assumptions we get the following bandwidth requirements

50 users 0.82Mbps
100 users 1.07Mbps
500 users 3.08Mbps
1000 users 5.59Mbps

When you consider that moving Exchange from on premise to cloud you will move the SMTP workload, and since you just have on premise Exchange servers with no message hygiene there is a significant amount of spam as well. So the assumption is that while there will be an uplift of some sort, it actually won’t be as significant as you might think. Furthermore, once you have good access to email and Internet from home then there is a greater tendency to want to work from home anyway, which would of course take more Internet bandwidth off the Office WAN.

Given the fact that most people have access to an Internet connection from home and that smaller business are not going to want HA on their WAN connection, we’re assuming that a single WAN link is sufficient.  In the case of an emergency people can always work from home when your systems are in the cloud

3. Firewall

The firewall needs to be able to sustain a couple of thousand connections for the largest use case. Most decent firewalls will manage this without blinking, and give we’re only looking at 1000 users maximum we won’t have to be concerned about TCP port exhaustion, which would require additional external IP addresses

4. Migration

It is all very well getting a new tenant stood up, but then the data needs to be migrated!  Business over 150 users can use the FastTrack Center for free (although beware that FTC have stringent requirements around pre-reqs and velocity) also Nero Blanco will happily migrate you for free regardless of size and without the stringent requirements.  More information can be found in our blog ‘Free Office 365 setup, migration and support’

5. Support

Right so you’re on the cloud and something goes wrong.  Not to worry you just ring Microsoft, right?  Not that simple.  As most hardened professionals will know it can be arduous and frustrating talking to MS support.  Their priority often seems to be to close the ticket, which isn’t the same as help you sometimes.  Nero Blanco will gladly be your escalation point for any issues, and we will escalate to Microsoft on your behalf if needed.  As Gold Partners we have good routes into support and can often get to a root cause more quickly and get it resolved.  Again please read our blog ‘Free Office 365 setup, migration and support’

On Premise Service

1. Server Hardware

Using the Exchange Server Role Requirements Calculator, we get the following server hardware requirements, incorporating a level of HA (although you could remove a server and add backup which wouldn’t be that dissimilar in cost) For simplicity let’s work on HA with Exchange Native Protection.

To keep the calculations easy we will use the same server hardware for all in terms of RAM and CPU. We chose a DL380 with 2 x 10core Intel Xeon E5-2650V3 / 2.3 GHz, 32GB RAM and 2 x 300GB SAS in RAID 1 for the OS, retailing at £5,055 plus £1,573 for 5 year next business day support. The 1TB drives are £80 each, 2TB drives £140 each, and 4TB £250 each.

50 Users requires 2 servers each with 2 x 1TB RAID 1 volumes for data. Total cost £13,896
100 Users requires 2 servers each with 2 x 1TB RAID 1 volumes for data. Total cost £13,896
500 Users requires 3 servers each with 4 x 2TB RAID 1 volumes for data. Total cost £23,244
1000 Users requires 4 servers each with 4 x 4TB RAID 1 volumes for data. Total cost £34,512

2. OS Licenses

Windows 2012 R2 licence (£600 each) is required for each server, Enterprise Edition would work fine

3. Exchange Server Licenses

We can get away with Standard Edition Exchange, although for 1000 users we’d have to go to non symmetrical database layout to stay within the 5 databases per server limit.

4. Exchange CALs

Each user needs an Exchange CAL. We will opt for the standard CAL which costs £40 per user

5. Exchange Public Certificate

Exchange requires a trusted certificate, and we’ll assume that you don’t have an on premise PKI.  So looking at various providers a SAN cert goes for around £60 per annum

6. WAN Connectivity

Users will still need WAN connectivity, both for email coming into the org (including all the SPAM), Internet browsing and some users wanting to access email from outside of the office. Of course it is hard to predict how much bandwidth an office might already have to the Internet, however even a 30Mbps consumer broadband connection is likely to be of sufficient capacity to manage with the throughput required.

7. Firewall

A firewall is also still needed even with on premise Exchange, and while the load on the firewall is less, any half decent firewall will cope with this load equally amicably as the cloud load.

8. Power Consumption

Using the HP Power Advisor we can work out that the servers use from 2168 kWh per annum to 2616 kWh per annum. Let’s assume that we can get power at 8.68p per kWh which is the best commercial pricing I could see.

9. Migration

Building a new Exchange infrastructure on its own isn’t enough, we do need to migrate the data too.  You can do this yourself using Native PowerShell, or you may opt to use a tool such as Binary Tree E2E Complete.  Nero Blanco will happily help you get migrated to the new platform, and ensure you have complete coexistence throughout the process.

Adding it all up

The firewall and WAN Connectivity requirements are not that different, and can be cancelled off against the amount of time it will take to build the solution (On Prem of course taking much more effort that cloud).  The migration costs are going to be similar (or could be free for cloud if you get Nero Blanco to assist) The table below shows the components for each of the use cases we are looking at.

Cost Summary Exchange Cloud vs On-Premise

Cost Summary Exchange Cloud vs On-Premise

So for 100 users or less it is a no brainer from a cost perspective, after that it becomes more difficult to make the decision purely on cost. There are of course cases where Office 365 cloud is just not (yet) an option, data sovereignty, very large emails over smallish WAN, etc. So even for a small company it might not be a simple answer.

For companies larger than 100 users there are other benefits to consider aside from straight out cost, which may still sway you toward the cloud

  • Anti-Virus/Spam is much more solid with Office 365
  • Disaster Recovery across 4 data centers
  • Unlimited number of shared mailboxes at no extra cost
  • Unlimited number of rooms/resources mailboxes at no extra cost
  • Unlimited number of people on litigation hold (indefinite data retention)
  • Always modern, updates monthly with new features
  • No requirement to rebuild servers and Exchange every 5 years
  • Integration with SharePoint, Skype for Business, OneDrive
  • Ability to grow to use Azure AD, Multi Factor Authentication, Rights Management Services, Azure Cloud, InTune, EMS, etc.
  • Ability to add integration for over 2200 3rd party SaaS applications including LinkedIn, Facebook, Twitter, Salesforce, etc, etc.
  • Puts you on the road to allow Bring Your Own Device while retaining security
  • Flexibility to mix and match services for different users
  • Easy and predictable scalability (up or down) as users join or leave

As you can see as a more holistic question of should we go to Office 365, the answer can be a lot more complex. For a simple Exchange Online versus On Premise discussion the answer based on cost gets more difficult once you scale past 100 users.

Please note that every business will need to do their own cost/benefit since the nuances are so plentiful and varied, but I hope the above gives some insight in what to look at if you are interested in making a case based on cost.

Twan van Beers

Twan is a senior consultant with over 20 years of experience. He has a wide range of skills including Messaging, Active Directory, SQL, Networking and Firewalls. Twan loves to write scripts and get deep and dirty into debugging code, in order to understand and resolve the most complex of problems.

This Post Has 9 Comments

  1. Hi Twan

    We are monitoring traffic on WAN and we are notice that the additional cloud base apps and storage add traffic to the network, and this traffic is subject to network performance issues. They usually manifest as packet loss, causing applications to slow or stall. That causes productivity loss for users plus there can be significant user frustration.

    Have you considered the cost of productivity lost with cloud based apps and data?


    1. Hi Peter,

      Thanks for commenting. Great point about loss of productivity. It is very hard to quantify though since both on prem and cloud have potential for this

      I’m interested in learning more about your situation though. How may users, what is the Internet connection, what are typical file sizes, and which cloud apps do users use? Do they go through any proxy servers or a firewall? A lot of the time we do see issues when the Internet connection is not sufficiently sized (or firewalls/proxy)

      I see that you are from Sinefa which looks to be a network probing and shaping appliance? So perhaps you don’t have a specific case in mind?

      You are 100% right that the Internet connectivity becomes paramount with cloud apps where the workforce is all it mostly behind that wan connection and not working from home or roaming.

      Email me at Twan.vanbeers (at) if you want to avoid putting that sort of detail here.

      Thanks again!!!

    2. Is that cause or effect though?
      Was your network already saturated & now that you are relying on more for collaboration you can see the effect?

      Cloud apps are 100% of the time attributed to additional productivity, not less.
      Consider your connectivity now part of the minimum requirements for a solution – in the same way you used to consider RAM or IOPS.

  2. I think that one area you did not include that is significant is the cost of FTE’s in the calculation. There is still the need for experienced engineers in a cloud scenario but less of them or the existing engineers can be more productive in other areas of the business.

    1. Hi Dean,

      I did consider FTEs as part of the cost comparison, however for a smallish company 1000 users or less I’d argue that you won’t see any change in headcount, however the tasks undertaken will of course be different.


  3. This is a very interesting comparison, however I think that your average mail size is a bit low. I know that is the default in the Storage Calculator, however in my experience over the last 15 years or so of working with Exchange, that number is probably closer to double that if not higher. My most recent customer has an average mail size of almost 250K which will significantly change your numbers. Also, only using two servers with 4 copies of the data does not really represent a full HA environment. Having the four copies of the data spread across two servers, especially since the drives are mirrored actually is no better than having two copies of the data. To follow the Exchange 2016 preferred architecture from Microsoft, you would need four servers in each of these scenarios to properly enable Exchange Native Data protection. With two servers, your fault domains are not isolated enough. Lose a server and/or a RAID pair and all of those users are down. Also, if you are using JBOD instead of RAID (which is also a recommendation of the Preferred Architecture) you can leverage the capacity of the drives much better, using bigger drives with four databases per volume.

    These two factors (additional servers and increased average mailbox size) will impact the final numbers, particularly in the scenarios where you have less than four servers. At the top end where you already have four servers, by using larger drives, you could probably provision larger mailboxes for around the same cost (the new DL380s support 8TB drives).

    1. Hi Dave,

      Thanks for reading and commenting on the blog. I agree that the email size is probably on the low side, but I wanted to err on the side of lower cost for on premise. Similarly the preferred architecture is just not suitable for small businesses in terms of cost effectiveness. I disagree that a server or RAID pair outage would cause an email outage though since the surviving server would take on the full load, and for a company with 50 or 100 users that is likely to be sufficient. JBOD is only suitable once you do have 4 copies of the data or more, so for the 2 server scenarios JBOD is not an option. Note that I wasn’t trying to compare Office 365 to the preferred architecture (and yes I’ve been in the Microsoft sphere for over 25 years myself) I was trying to compare it to what is reasonable for a small business to invest in on premise.

      Agreed that you could use larger disks to support larger mailboxes, really the permutations are endless, but for this size of business having 50GB mailboxes is typically excessive compared to their actual requirements, especially when you consider the need to replace the hardware in 5 years (in our example) so having a bunch of disks with multiTB of space sitting unused for 5 years before replacing them with new drives just doesn’t make sense.

      Thanks again for commenting, it highlights the need for each business to do its own due diligence, however cost saving is not generally a factor for an Exchange only replacement with Office 365 in my opinion

    1. Hi John,

      300,000 for a single IT Admin? If that’s in UK Pounds then I’ll take that job 🙂 Seriously though I’ve not ever come across a migration where at the end of it the headcount got reduced. People are generally retained but do cloud based work/improvements instead of Exchange admin backend work. You’re right though that larger organisations will see efficiencies once they automate things like provisioning and de-provisioning, group management, etc. However that’s then no longer comparing just Exchange On-Premises with Exchange Online 🙂

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