Choose the Right Licensing Model for Your Business
Discover everything you need to balance customer needs with profitability in your licensing strategy
Unlock the potential of your business with our comprehensive look that explore different software licensing models while answering key questions to help you identify the best option for your business.
A key factor in the success of your software product is how you charge for its use. Not all software licensing models are ideal for every type of software.
What is a Software Licensing Model?
A software licensing model is the method your company uses to charge customers for using your software. It defines the pricing structure, usage rights, and payment terms.
It is essential that you deploy a licensing model that ensures profitability while satisfying your customers’ needs. At the same time, it needs to be practical so that it works seamlessly for your product. Not all software licensing models are optimum for every type of software. For example, it wouldn’t make sense to node-lock a license for a software tool that targets developers, since it is a target group that often works remotely and values flexibility in their tools.
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Perpetual Software License
In the Perpetual software licensing model, the customer only pays once to acquire the software and gain indefinite access. It doesn’t require recurring payments like time-based models and that’s why many customers value the cost-efficiency that it offers over time. For you as the software vendor, it may be an excellent option, as it brings upfront revenue while making it easier to predict future income. Although the subscription model is growing significantly, the perpetual software licensing model is still widely used among software businesses.
Time-Based Software License
The Time-Based software licensing model, also known as subscription licensing, is based on a set period during which the software license remains valid. Once the license expires, users have to renew it to maintain access. This model has gained popularity due to its potential to generate recurring revenue. It is well-suited for businesses that release frequent updates, though it can be more complex to implement compared to other models.
Node-locked License
Node-locking is a software licensing model that binds a software license to a specific device. The product can only be used on a single device unless you allow transfer to other devices. The node-locking model is not as easy to implement as it used to be, as technology and customer demands have shifted significantly. However, there are some best practices you can follow to help you deploy the node-locking licensing model effectively.
Consumption-Based Licenset
The Consumption-Based software licensing model, otherwise referred to as usage-based or metered licensing, allows customers to only pay for what they use, instead of a flat fee or a standard subscription. You can charge your users depending on the actual usage of your application that’s based on specific metrics related to your software. The Consumption-Based licensing model can help you reduce your customer acquisition cost and churn rate, as it offers significant cost efficiency and flexibility for your customers.
Floating License
In the Floating Licensing model, also known as concurrent licensing, a set number of users can use the software concurrently. For instance, if a customer purchases 5 software licenses for 50 users, only 5 of those users can access the software at the same time. When a user logs out, another one can log in. It is a great model for customers who don’t need all of their employees accessing the software at the same time, allowing them to maximize value from their software investment. This flexibility increases customer retention and satisfaction, which are vital to your product’s success.
Feature-Based Licensing
The feature-based software license model lets customers access and pay for specific features or functionality within the software, rather than the entire product. The core software may be available at a base price, with extra, advanced features offered as optional add-ons. The users are provided with the flexibility to customize the software based on their exact needs, eliminating the cost of unnecessary features. It’s frequently used in industries where customers have diverse requirements and need modular solutions, making it perfect for SaaS products and enterprise software. For software vendors, feature-based licensing offers a scalable revenue model, with great upselling potential.
User-Based Licensing
The user-based model grants software access to a specific number of users. Every software license is tied to a specific user, allowing them to use the software on multiple devices, as long as the total number of users doesn’t exceed the licensed count. This model is widespread in business and enterprise software that is distributed across teams or departments, guaranteeing that only authorized users can use the application. It improves cost transparency, as companies pay per user, making it convenient to predict and manage licensing expenses. For software vendors, the user-based model increases customer retention by supporting growth as businesses add more users over time. It usually aligns with the subscription-based model, leading to predictable recurring revenue.
How to choose the ideal Software Licensing Model for your business
The software licensing model that you choose must satisfy your customers’ needs while maximizing the chances of your product’s profitability. You must analyze your target customers extensively, to ensure that the licensing model you choose is ideal for the solution that you are offering.
Here are some questions to answer before implementing a specific model:
Who are your customers?
If they are large companies, flexible and scalable licensing models, like floating or consumption-based licensing may be the appropriate options. Perpetual might also work as well, in mission-critical applications. If you are selling to individuals or smaller businesses, subscription or user-based licensing could be the answer.
How will your software licenses be used?
If your software is intended to be used across different teams and departments, floating licensing would be a great option. For cases where it is only used on specific devices, node-locking would be ideal. A feature-based model would work perfectly for software that offers highly specialized features, enabling users to choose the ones they prefer.
Do you offer frequent software updates?
In that case, the subscription model consists of a great option, as it ensures that your customers gain value from updates, while you generate recurring revenue that supports ongoing development.
Are there distinct tiers of functionality?
A feature-based model would be great in this instance. It would facilitate the creation of a tiered pricing model that fits the users’ distinct needs.
What is your business strategy?
Is your goal to foster strong, lasting relationships with your customers? If so, subscription and usage-based models will allow you to do so. On the other hand, if you need to quickly recoup your initial investments, the perpetual licensing model will help you achieve that through higher one-time sales. If you are just starting out and your goal is to get many users, fast, the freemium model will be ideal.
Keep in mind that one software license model doesn’t exclude the other. By combining different software licensing models you can implement a mixed business model that fits your needs. For example, the feature-based model usually works in combination with subscription licensing, while user-based licensing might be combined with the perpetual model. You need to take your time and answer the above questions thoughtfully, so that you deploy the perfect software licensing model for your software business.
The decision regarding the ideal software licensing model shouldn’t make you anxious. With a flexible licensing solution, you can seamlessly test and implement different licensing models with ease and see which works best for your software product. Licensing by VerusTrust allows you to use all licensing models and their combinations, even with our free plan, ensuring that you protect your product from unauthorized usage and preventing revenue leakage. Start monetizing your software today with our full-feature free plan.