TapRun Consulting

Software Licensing Models

Not to be confused with pricing methods or business models

There are many licensing methods that can be used for software systems. This document will explore the most popular and explain the pros and cons of each.

If you don't sell software, don't despair! Many of the licensing methods contained herein can also be applied to other types of intellectual property including video courses, ebooks and even databases of information.

Licensing Methods

Concurrent Licensing

This strategy focuses on raw numbers of users rather than the identities of specific individuals.

Under this licensing scheme, organizations purchase licenses with an upper limit on the number of people who can use the system at the same time.

The mechanics for enforcing this scheme have changed over the years. Modern SAAS applications simply check each login against stored access limits. Desktop applications have traditionally used network license servers, or specialty hardware (often in the form of proprietary dongles or USB keys).

Sometimes this approach is referred to as floating licensing or network licensing.

Pros

Cons

Examples

Device Licensing

Some systems are restricted to only run on a specific hardware device.

These systems often perform scans to verify the system by unique hardware or software characteristics. Common hardware system checks include the ID of the CPU, and the ethernet MAC address. Software verification efforts are typically focused upon various characteristics of the operating system.

Pros

Cons

Examples

Free

This strategy provides software at no cost.

Many in the technology field subdivide free licenses into the following two categories:

The plethora of free licenses occasionally blurs the lines between the two, but the differentiation can be a useful means of categorizing the various free licenses.

It is important to note that although software may be released for free without any profit motive, several business models utilize free software in order to earn profit. For instance, the freemium model provides software at no charge, with the intent of convincing a portion of the user base to upgrade to paid plans.

Free software systems typically use pre-defined licenses that vary in restrictions. Some of the most well-known are the Apache, GPL, BSD, and MIT licenses.

Pros

Cons

Examples

Full Ownership

While most licenses merely grant permission to use a software system, the vast majority of software is not licensed in this manner.

Most software is never sold on the open market but is instead built in-house or under contract.

In these cases, a given system generally becomes the property of the party that commissioned the work.

Buyers in the United States should go to great lengths to ensure that any custom software development is considered "work for hire." Doing so will provide full legal ownership, rather than a license to use the system.

Pros

Cons

Examples

Pay per Use

This license scheme is just what it sounds like. Users are required to pay based upon some metric of usage.

Potential metrics include:

The selection of the appropriate metric is vital to success using this licensing scheme. The ideal is to charge proportionally to the value provided for the users.

Several variations of this method are commonly seen in the marketplace.

Pros

Cons

Examples

Perpetual Licensing

This methodology is one of the oldest and most well-understood licensing systems in use for software and other goods.

It involves a single, up-front payment in exchange for a non-revocable right to use a software system.

Pros

Cons

Examples

Restricted Licensing

One of the most well-known examples is the licensing for academic versions of software systems. In exchange for a significantly reduced price, customers agree to limit their usage of a given product. For instance, they may agree not to use the systems for any profit-making endeavor.

Pros

Cons

Examples

Site Licensing

This license allows an organization to provide access to a software system without restriction.

Sometimes access is limited to a single physical location or administrative subdivision.

Nevertheless, the software is made available for a fixed price, irrespective of the number of potential users in the organization.

Pros

Cons

Examples

System Capacity Licensing

Some systems are priced differently depending upon the characteristics of the hardware upon which they run.

This strategy is often used so as to allow vendors to earn higher prices when the software runs more quickly on faster hardware.

Common characteristics include:

This method is often used for enterprise analysis software, as well as for operating systems.

Pros

Cons

Examples

Time-Based Licensing

This is the traditional go-to method for SAAS. It has proven so popular that many forget that other licenses even exist.

Under this scheme, software systems are made available for a set length of time. The most popular increments are by month or year, though large enterprise agreements will often span multiple years.

Pricing is often permanently fixed and grandfathered in for as long as the customer continues to pay. That said, enterprise contracts often specify an escalating pricing structure over the course of the contract.

In order to increase the immediacy of revenue, many firms operating under such a license offer discounts to consumers who prepay for extended periods. Many vendors wave two months worth of billing when users sign up for a year of service.

Pros

Cons

Examples

User Licensing

Under this licensing scheme, only specific and named individuals are allowed to use the software system.

This method has proven to be a very common component of SAAS licensing schemes.

Pros

Cons

Examples

Combined License Schemes

It is almost unheard of for firms to use a single licensing scheme to the exclusion of all others.

In almost all cases, companies will create licenses that contain elements of multiple "pure" licensing schemes.

This practice allows vendors to offer licenses that best fit the needs of both vendor and customer.

Pros

Cons

Examples

Multi-Licensing

This system offers software under multiple, mutually independent licensing schemes.

Multi-licensing is typically best suited for vendors selling in highly segmented marketplaces. For instance, a software firm may offer one license to individual buyers, but a different one to firms that wish to bundle the product into another offering.

This method is especially common for sales of software libraries and operating systems.

This type of licensing is often referred to as dual-licensing even when more than two types of licenses are offered.

Pros

Cons

Examples

Questions? Comments?

If you have any questions or comments, please don't hesitate to contact me.