What is software licensing? Types, models, & deployment

Software is key to getting work done. It helps run campaigns, enable employee onboarding, and make sales. But managing all that software can be tough. You can end up with duplicate digital tools, surprise costs, and serious legal risks.

Good software licensing helps you control spending, follow the rules, and improve results. It also supports a successful digital adoption process and minimizes employee resistance to new software. 

Getting this wrong is expensive. Recent research shows that every year, more than one out of four companies has to pay between $100,000 and $500,000 in fines from software audits. To avoid these issues and build a better strategy, you need to understand the basics.

This article will explain what software licensing is, how it works, why it matters, and the different licensing types and models.

What is software licensing? 

Software licensing is a legal process that gives a company permission to use a software product. This type of agreement sets clear rules, including how long you can use the software and what it costs. 

Using licensed software is vital for security, as it provides the most up-to-date and legitimate versions. This software utilization practice reduces the risk of malware and other cyber threats.

Proper licensing helps control software budgets and prevents the high costs of legal issues or security breaches. It provides access to valuable tools that improve employee productivity in the long term. Licenses also define how many people can use the software, helping companies manage their assets well. 

For instance, HR teams can use license data to identify who no longer needs a license. This could include an employee who has left the company. Software licensing options also allow organizations to receive customer support and crucial updates.

Why is software licensing important? 

A sound software licensing system helps manage the budget by avoiding extra costs. It also gives a straightforward way to track software inventory, protect intellectual property, and keep strong relationships with vendors.

Here are the reasons why software licensing is vital for your company: 

• Enables legal action for violations: Clear license terms give you the legal right to take action if someone violates the rules. You can send warnings, stop their access, or even take them to court.
• States what users can and cannot do: Licenses remove ambiguity by clearly defining the rules. They specify who can use the software, on how many devices, and for what purposes. They also outline restrictions on copying, modifying, or redistributing the software. 
• Encourages ethical usage: When the rules are clear, it helps teams use the software fairly. This stops people from sharing it without a license or using it in ways they shouldn’t.
• Protects against security threats: License tools, such as activation keys and user logins, help prevent unauthorized copying and detect suspicious activity. Security updates also lower the risk of viruses, fake files, and data theft.

How does software licensing work?

Understanding software licenses helps a company use software legally and avoid piracy. Good license knowledge makes it easier to track and control software use. This type of enterprise application also protects the company’s assets and intellectual property.

So, this is how software licensing works:

Contractual agreement

A software contract is a legal agreement for the use of software. It sets the rules for what you can and cannot do, including how many people can use it. The agreement also outlines the responsibilities of both you and the software owner.

Intellectual property protection

Intellectual property protection involves using tools such as copyright, patents, and trademarks to safeguard a software’s code, ideas, and brand. Copyright protects written code, while patents protect new functions or algorithms. Trademarks protect names and logos.

Usage rights provision

Usage rights are the rules within a software license. They explain exactly what you can and cannot do, such as how many people can use the software. It also includes rules on whether you can copy it or whether it’s for personal or commercial use. This ensures companies use the software legally.

Governance surrounding violations or other terms

Software licenses are legal contracts protected by law, allowing creators to enforce their rules. If you break a license, you can face severe penalties. These include large fines, lawsuits, and criminal charges.

What are the different types of software licenses?

Your organization needs to understand the various software licenses available to stay secure and remain financially efficient. 

For instance, software licensing protects a company from security risks, such as viruses, caused by unauthorized software. This knowledge also helps optimize IT spending by ensuring the company only buys the licenses it truly needs.

Here are the types of software licenses your business can opt for:

Public domain and private/internal licenses

Public domain licenses apply to creative works, such as software or data, that are free for anyone to use, modify, and share. Since they aren’t protected by copyright, businesses can use them without paying licensing fees.

Private licenses keep software and data confidential within a single organization. This model gives a company complete control over its tools, including updates and security. It’s the best choice for protecting sensitive information and maintaining full ownership of your intellectual property.

Free and open-source software (FOSS) licenses

Free and open-source software (FOSS) licenses allow anyone to use, modify, and share software code. There are two main types. Permissive licenses are flexible, allowing the code to be used in nearly any project. Copyleft licenses require that any software you create with the code must also be open source.

For businesses, FOSS can cut costs, speed up development, and offer the freedom to customize software. This helps companies build what they need without being locked into a single vendor’s products.

Proprietary/commercial licenses

Proprietary licenses grant you the right to use a software product but not to modify or share it. The source code is kept private, which can enhance security.

When you buy a commercial license, you typically receive dedicated support, regular updates, and a better user experience. These products are often designed as complete suites. This model is ideal for businesses that need reliable, ready-to-use tools. 

What are the types of software licensing models? 

Your business needs to understand how the various software licensing models work. First, they explain the rules. A license tells you what you can and cannot do with the software, such as sharing or changing it. 

Second, they help you save money. By knowing your options, you can choose the most cost-effective option, such as a one-time purchase, and avoid paying for software you don’t need.

These are the types of software licensing models you need to understand: 

Model-by-model breakdown

Understanding different software licensing models is essential to managing your budget, avoiding legal risks, and ensuring your team works efficiently.  But you need to see which model is the most practical for your specific needs. 

A comparison table simplifies this by laying out the description and best uses of each option side by side: 

Model	Description	Pay Method
1. Subscription	Software rented for a defined period; may be cloud-based or on-premises.	Monthly or annual fee.
2. Concurrent (floating)	Shared pool of licenses; limited number of simultaneous users.	Based on number of concurrent users.
3. SaaS	Software delivered and managed by the vendor online.	Monthly or annual fee.
4. Perpetual	One-time purchase with permanent rights to that version.	Single upfront payment; optional maintenance fee.
5. User-based (named/seat)	Each license assigned to a specific individual.	Per named user.
6. Feature/module	Access limited to selected features or modules.	Base fee plus add-ons or tiers.
7. Usage-based (metered)	Cost determined by actual usage.	Per API call, data volume, CPU time, or hours used.
8. Device/node/capacity	License linked to hardware or system capacity.	Per device, node, or capacity unit.
9. Token/elastic	Credit-based system allowing flexible use across tools.	Purchase of a shared token pool.
10. Academic & offline	Academic: discounted or free for educational use. Offline: operates without internet access.	Academic pricing varies; offline often per device or key.
11. Trial & freemium	Trial: full access for a limited time. Freemium: basic version with optional upgrades.	Free to start; paid upgrade for continued or expanded use.
12. Project/outcome-based	Payment tied to specific results or milestones.	Based on project scope or performance outcomes.1

1. SaaS licensing

SaaS (Software as a Service) licensing works like a subscription. Instead of buying software with a large, one-time payment, you pay a regular fee to use it, which makes budgeting simple. This model is flexible, allowing you to add or remove users as your business needs change easily.

The software provider handles all the maintenance, security, and updates, so your IT team doesn’t have to. Because the software is online, your team can access it from anywhere. Everyone always has the latest features without any extra effort, making it easy to manage and use.

2. Subscription/term licensing

Subscription or term licensing means you pay a monthly or yearly fee to use the software for a set time. This is like SaaS in that both use recurring payments. But they are not the same, as a subscription is a payment method, while SaaS is software hosted online. 

You can subscribe to software that is not SaaS. Some SaaS tools also offer pay‑as‑you‑go pricing, but most are subscription-based.

This model helps companies by avoiding a large one-time purchase. Costs are predictable and easier to budget in terms of a software implementation plan. You get ongoing updates and support. It’s also flexible, as you can scale usage up or down as needs change.

3. Perpetual licensing

A perpetual license allows you to buy the software once and use that version forever. This can save money over the long term compared to a subscription. This type of licensing also gives you complete control over when you update. It’s a good choice for businesses that need stability or have strict data rules.

The initial purchase usually includes support and updates for a limited time. After that, you will need to pay extra fees for continued maintenance and access to new features.

4. Concurrent/floating licensing

Concurrent, or floating licensing, involves sharing a pool of licenses across a large team. Instead of buying a license for every single person, you buy a smaller number that can be used by anyone.

This type of model saves a lot of money, especially if not everyone needs the software all day. It’s perfect for companies with shift workers or teams in different time zones, as licenses are always available for those who need them. This ensures your software is not tied to an empty desk.

5. Usage/consumption/metered models

Usage-based (metered) licensing refers to a business paying for what it actually uses. Pricing is tied to a clear metric, such as API calls, data stored, data processed, CPU time, or hours of use.

This model helps businesses by cutting waste, as you don’t pay for idle licenses or capacity. The low upfront cost and pay‑as‑you‑go setup make it easy for startups and small teams to try tools without long commitments. It’s flexible and scales up or down with demand, which is excellent for seasonal needs. Real-time usage tracking also improves cost control and makes spending easier to understand.

6. User-based (named/seat) licensing

With user-based licensing, a software license is assigned to a specific person, not a device. This individual can then access the software from any computer or phone using their login details.

This model makes it easy for IT teams to manage and track licenses from a single location. It improves security because access is tied to a person and can be quickly revoked. This model also provides predictable costs and flexibility for remote work.

7. Feature/module licensing

Feature licensing lets you buy access to specific parts of an application rather than the entire package. This means you only pay for the functions you actually need, creating a custom software experience.

For companies, this model is flexible. They can choose from pricing tiers such as basic or premium and upgrade to add additional features. This approach also improves security by ensuring that only paying customers can use specific functions.

8. Academic and offline licensing

Academic software licensing offers free or discounted software to students and schools for educational use. The goal is to build familiarity, so students continue using the software in their professional careers.

Offline licensing allows software to run on computers without an internet connection. This practice is ideal for secure or remote environments. Instead of checking online, the software is activated using a special license file or a manually entered key. So, this model lets this license work anywhere without requiring a server connection.

9. Device/node/capacity-based

Instead of licensing per person, you can license software based on the hardware it runs on. For example, you can attach a device-based license to a single computer. Anyone can use the software, but only on that specific machine, making it ideal for shared workstations. Node-based is similar. It limits use to a specific computer, server, or Internet of Things (IoT) device.

Another model is capacity-based, in which costs depend on resources such as storage space or processing power. This approach ties the license directly to your infrastructure rather than to individual user accounts.

10. Trial, freemium, and on-demand

A trial license gives you full access to the software for a limited time, such as 30 days. This is done to help you decide whether to buy it.

Alternatively, a freemium model offers a basic version for free forever. This type of model encourages you to upgrade to a paid plan for more advanced features.

On-demand, or SaaS, licensing is a subscription model in which you pay a recurring fee for cloud access. This model is popular because it lowers upfront costs and includes all updates and maintenance.

11. Token/elastic models

Imagine buying a bucket of software credits, or tokens, from a single vendor. Instead of purchasing fixed licenses for each product, your teams can use these shared tokens to access any tool they need.

This flexible, pay-as-you-go model reduces waste from unused software. You only pay for what you use, which cuts costs and simplifies IT budget management. It also makes it easy for teams to try new products without a lengthy purchase process.

12. Project or outcome-based

With outcome-based licensing, you pay for software based on the actual results it delivers for your business. Instead of a flat fee, the cost is linked to specific, measurable goals you achieve.

This approach means the software vendor is invested in your success; if you don’t get value, they don’t get paid as much. It reduces your risk, as you only pay for what works. This builds a trusting relationship with the vendor, making costs predictable.

What are the deployment methods of software licensing? 

Your team should know how to deploy software licenses to stay compliant, control costs, and improve efficiency. It also prevents overspending on unused licenses and improves employee productivity.

Here are the different deployment methods you can use in relation to software licensing:

On-premise

With on-premise deployment, you buy software and install it on your own servers. This gives you complete control over the software and your data. It’s usually a one-time purchase, but you are responsible for all maintenance and security. It’s ideal for companies with strict data privacy needs.

Cloud

Cloud deployment lets you use software online via a subscription, so there’s no local installation required. You get automatic updates and can access it from anywhere. This model is flexible, often based on usage or the number of users. This element makes it easy for vendors to manage licenses remotely.

Hybrid

Hybrid licensing deployment combines on-premises and cloud deployments for maximum flexibility. You can run software on your own servers, in the cloud, or both simultaneously. This approach allows you to combine one-time purchases with subscription plans to fit your strategy.

Understanding software licensing requirements 

A software license functions as managed permission, not outright ownership of the product. Clear distinctions between your license types and commercial pricing models create a solid, understandable foundation. 

The chosen model should always reflect real usage, whether in seats, transactions, or capacity measures. A standardized governance process is important, with named owners, defined approvals, and scheduled reviews to ensure consistency.

Automated provisioning and removals, paired with usage-versus-entitlement tracking, also improve accuracy. Spend control comes from strategies such as co-term renewals, budget caps, and showback/chargeback to drive accountability. 

Your compliance position depends on maintaining proof of purchase, conducting regular internal audits, and managing open-source governance. This approach results in a repeatable process that reduces risk, improves data visibility, and advances operational excellence.