Using groups for licensing control in Microsoft 365

The mental model

• Licenses become entitlements expressed as “membership in a licensing group.”
• Groups become policy objects: naming, ownership, change control, and review cadence matter.
• Users inherit licenses from groups; exceptions should be rare and intentional.
• Design for change: people move roles; your licensing posture should update automatically.

What “group-based licensing” actually does

With group-based licensing, you assign a product license (SKU) to a group in Microsoft Entra ID, and the platform continuously ensures that each eligible member has the license applied. Membership changes trigger license changes. This works with cloud-only groups, groups synced from on-premises AD via Entra Connect, and dynamic groups where membership is computed from user attributes.

Licensing prerequisites that matter

Group-based licensing isn’t “free admin convenience.” Microsoft requires that each user who benefits from group-based licensing has an eligible license (commonly Microsoft Entra ID P1 or qualifying Microsoft 365/Office 365 plans). Treat this as part of your design constraints when you model entitlements at scale.

Where you do it in the portal (and why this changed)

Historically, admins used the Entra admin center / Azure portal for group-based license assignment UI. Microsoft moved the primary UI workflow to the Microsoft 365 admin center; this matters operationally because your runbooks, delegated roles, and troubleshooting habits might still be stuck in the old portal patterns.

Why groups are the right abstraction for license control

1) You’re managing a system, not a set of people

Microsoft 365 licensing is a live system with joiners/movers/leavers, acquisitions, temporary staff, and automation. The only sustainable approach is to manage licensing as policy, not as a ticket queue.

2) Groups create a stable “contract” between HR/IT and the platform

If HR says “this person is in role X,” IT should be able to translate that into “role X means group Y,” and group Y means “these services are enabled.” Once you get that chain right, the platform can do the repetitive work.

3) Groups unlock governance tooling

Once licensing is group-driven, you can apply lifecycle practices: ownership, approval workflows, periodic access reviews, entitlement packages, and audit-friendly change control. Direct license assignment bypasses most of that.

Design patterns that work in the real world

Pattern A: One group per “SKU bundle” (simple, common)

Create groups like LIC-M365-E3, LIC-M365-BUSINESS-PREMIUM, LIC-EMS-E5. Membership grants the full SKU (or a defined subset of service plans).

• Pros: simple mental model, easy onboarding, easy reporting (“who is consuming E3?”).
• Cons: exceptions can multiply if you don’t control service-plan toggles carefully.

Pattern B: Persona-based bundles (recommended for most orgs)

Model what the business actually buys: “Frontline,” “Knowledge worker,” “Developer,” “Contractor,” “Executive.” Map each persona to one or more licensing groups. Keep the number of personas small and defensible.

• Example: LIC-PERSONA-SALES includes the base SKU + add-on SKU groups.
• Example: LIC-PERSONA-CONTRACTOR intentionally excludes high-risk services.

Pattern C: Base + add-on layering (best for controlling cost)

Use a base licensing group plus targeted add-on groups, so you don’t “over-license by default.” This approach also makes it easier to explain spend: base covers everyone; add-ons are justified by function.

• LIC-BASE (core productivity)
• LIC-ADDON-PBI-PRO (Power BI Pro)
• LIC-ADDON-VISIO (Visio)
• LIC-ADDON-AUDIOCONF (Audio Conferencing)

Pattern D: Dynamic groups for “policy by attribute” (powerful, but treat with respect)

Dynamic groups let you define membership rules like “Department = Finance” or “EmployeeType = FTE,” and licensing becomes an automatic consequence of directory truth. This is compelling—but your attribute hygiene must be excellent.

• Use dynamic groups when attributes are authoritative and consistently maintained.
• Keep rules simple and efficient; dynamic processing delays can happen at scale.
• Prefer dynamic for “broad entitlement” and use manual groups for high-risk or high-cost add-ons.

Important constraints you must design around

No nested group expansion for licensing

A common on-prem AD pattern is “group-of-groups.” For group-based licensing, nested groups aren’t supported for license inheritance. If you rely on nesting for access control, separate your “access groups” from your “license groups.”

Service plan configuration is a group-level decision

Licenses contain service plans (Exchange, Teams, SharePoint, etc.). When you assign a license to a group, the “on/off” choices for service plans must be defined at the group level. If two users need different plan combinations, that’s not a “per-user tweak” problem—it’s a “create another group” problem.

Conflicts and dependencies are real

Some service plans can’t coexist, and some add-ons require prerequisites. Group-based licensing will fail (silently at first) if you assign incompatible plans or omit dependent plans. You need an operational habit of checking for license assignment errors in the group and user state.

Direct assignment vs inherited assignment can create drift

You can still directly assign licenses, but doing so alongside group-based licensing often creates confusion: “Why does this user still have E3 after leaving the group?” Answer: they might have a direct assignment, or another group still grants the SKU. As a best practice, treat direct assignment as an exception with an expiration story.

Implementation: a clean, repeatable workflow

Step 1: Create (or choose) the right group type

For licensing control, security groups are the most common choice (cloud-only or synced). If you already have authoritative on-prem groups for roles/departments and they are well-governed, syncing them can work well too. Just don’t inherit on-prem “messy group culture” into cloud licensing.

Step 2: Assign the license to the group in Microsoft 365 admin center

In the Microsoft 365 admin center, you can assign licenses to supported group types (security groups, mail-enabled groups, and Microsoft 365 groups) from the Licenses area. Once assigned, the platform processes group members and applies the license as needed.

Step 3: Decide your service plan toggles like a product owner

Don’t click through service plans casually. Document why a plan is disabled. Some orgs disable self-service features or apps by default and enable them only in add-on groups. Others enable broadly and rely on controls elsewhere. Either can work—what fails is inconsistency without rationale.

Step 4: Migrate users from direct licensing to group licensing

Migration is usually about removing direct assignments after the group assignment is in place and verified. Do it in controlled batches, and watch for users with unusual plan combinations. Those “weird users” are often revealing hidden business requirements or legacy entitlements.

Operations: monitoring, troubleshooting, and “day 2” realities

Know what “good” looks like

• Every licensed user is licensed by group, not directly (except documented exceptions).
• Every licensing group has an owner and a purpose statement.
• License consumption maps cleanly to persona/SKU groups.
• Errors are reviewed as a routine task, not a crisis reaction.

Common failure modes and how to think about them

• Not enough licenses available: the group assignment can’t satisfy all members.
• Conflicting service plans: two assigned SKUs/plans can’t coexist for a user.
• Missing dependent plans: an add-on requires a prerequisite plan that isn’t present.
• Dynamic membership delays: attribute updates take time to materialize as membership.

Where to find errors

Group-based licensing errors can occur “in the background.” Review licensing errors on affected users and use audit logs when you need deeper detail (especially for recent failures). Build a habit: investigate the first few failures, determine whether the issue is capacity, plan conflicts, or dependency, then correct at the group design level.

When you need to “nudge” processing

After you resolve conflicts or add capacity, you may need to trigger reprocessing for a user so their license state converges with the desired policy state. Treat this as a controlled remediation step, not a default daily routine.

Automation: make membership the only lever you pull

The safest automation pattern is: (1) assign licenses to groups once, (2) automate adding/removing users to/from those groups. This keeps your scripts simple and reduces the blast radius of mistakes.

Example: Add a user to a licensing group with Microsoft Graph PowerShell

# Requires Microsoft Graph PowerShell SDK
# Connect with sufficient scopes/roles to manage groups and directory objects.
Connect-MgGraph -Scopes "Group.ReadWrite.All","User.Read.All"

# Find the licensing group (example naming convention)
$group = Get-MgGroup -Filter "displayName eq 'LIC-M365-E3'" -ConsistencyLevel eventual -CountVariable c

# Find the user
$user  = Get-MgUser -Filter "userPrincipalName eq 'alice@contoso.com'" -ConsistencyLevel eventual -CountVariable c

# Add user to group (license assignment will follow from group policy)
New-MgGroupMemberByRef -GroupId $group.Id -BodyParameter @{
  "@odata.id" = "https://graph.microsoft.com/v1.0/directoryObjects/$($user.Id)"
}

Example: Remove a user from a licensing group

Connect-MgGraph -Scopes "Group.ReadWrite.All","User.Read.All"

$group = Get-MgGroup -Filter "displayName eq 'LIC-M365-E3'" -ConsistencyLevel eventual
$user  = Get-MgUser  -Filter "userPrincipalName eq 'alice@contoso.com'" -ConsistencyLevel eventual

Remove-MgGroupMemberByRef -GroupId $group.Id -DirectoryObjectId $user.Id

If you need “license swap” workflows (move users between SKUs), treat it as a controlled state transition: add to the destination group, verify, then remove from the source group. This avoids gaps that break mailboxes or Teams.

Governance best practices for licensing groups

Naming and structure

• Prefix consistently: LIC- for licensing groups, APP- for app access groups, etc.
• Keep licensing groups purpose-built. Don’t reuse “department groups” unless governance is strong.
• Document each group with: owner, rationale, included SKUs, plan toggles, and who is eligible.

Ownership and change control

• Every licensing group must have an accountable owner (not “IT Helpdesk”).
• Use approval workflows for high-cost add-ons.
• Log changes and review unexpected spikes in membership.

Access reviews and lifecycle management

Licensing groups are excellent candidates for periodic access reviews. For add-ons especially, ask “Does the user still need this?” rather than letting entitlements accumulate. Consider entitlement management patterns when you want formal request/approval and time-bounded access for license-bearing groups.

Hybrid realities: sync, attributes, and OU thinking

In hybrid environments, you’ll be tempted to mirror OU structure or legacy AD groups into cloud licensing. Resist that urge unless your on-prem taxonomy is already clean. Licensing groups are policy objects—design them around how the business buys and uses services, not around where an account lives in AD.

A practical blueprint you can copy

1. Define 5–10 personas max (Frontline, Standard, Power User, Developer, Executive, Contractor).
2. Create one base group per persona and keep it stable.
3. Create add-on groups for expensive or sensitive SKUs (Power BI, Project, Visio, Phone System).
4. Use dynamic groups only where attributes are authoritative (e.g., EmployeeType, Department).
5. Eliminate direct licenses except for break-glass and documented temporary exceptions.
6. Operationalize errors: review group/user licensing errors weekly (or daily for large tenants).

FAQ

Can I assign licenses to Microsoft 365 groups, or only security groups?

Group-based licensing supports multiple group types in the Microsoft 365 admin center, including security groups, mail-enabled groups, and Microsoft 365 groups. In practice, many orgs standardize on security groups for clarity and separation of concerns.

What happens when a user is in two licensing groups?

The user receives the union of what those groups assign, but conflicts can occur at the service plan level. If you intentionally layer base + add-ons, this is expected. If you accidentally overlap SKUs with different plan toggles, you can create hard-to-debug outcomes.

What’s the biggest mistake teams make?

Treating licensing groups like “just another group.” Licensing groups are a core control plane: define ownership, review cadence, and change control upfront. The second biggest mistake is allowing exceptions to become the norm.