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Learn the basics of SaaS licensing and pricing models

SaaS licensing can be tricky to navigate, and a wrong choice could cost you. To get it right, examine the different types of licenses and the main pricing models.

As more software vendors transition to a service model over traditional product sales, the growth of software as a service has exploded. For some vendors, it's the only way they sell their products.

Software as a service, commonly known as SaaS, follows a traditional subscription model where customers typically pay monthly for access to a specific software package that a vendor or cloud provider hosts centrally. This lets the customer avoid an expensive one-time software purchase.

The raw numbers will often appear as though you will pay more in SaaS costs compared to a one-time purchase, but those numbers only tell part of the story. You'll need to learn the different SaaS licensing models and pricing options to assess which option best suits your business.

Licensing and subscriptions

For the vendor, a monthly subscription is better than trying to sell upgrades every few years. The SaaS model also lets that vendor simplify its support structure. If everyone uses a central application, the software company no longer needs to support hundreds or thousands of local installations. This can greatly reduce the vendor's overhead. If your vendor is pushing you to the subscription model, be aware of the benefits this can bring your organization.

Usage vs. user license

With the usage license model, the vendor can license a product based on the number of resources an organization uses. Alternatively, a user license model can be based on the number of named users you choose to license or give access to. Keep in mind that sometimes a vendor will only offer one of these two options. Either option will have limits or possible additional charges if you go beyond certain levels.

For example, a per-user license for an email application may also come with a storage limit. For a usage license, the vendor may impose additional fees if the customer goes beyond a certain usage. The two different models can easily exist at the same company with two different SaaS offerings.

Enterprise vs. end-user license

When a company chooses an enterprise license over an end-user model, it's because it has committed to spend a significant amount of money with a vendor. Since the cost is often an estimate -- considering that a company may add more users than initially intended -- vendors perform a true-up process at the end of the billing cycle in which they conduct an inventory of users and other resources, which can affect the price they charge. This process enables a larger company to grow without worrying about the paperwork or micromanaging licenses. An enterprise or site license is ideal for this hands-off approach, but be mindful of renewal contracts -- fees often change with little notice.

Subscription vs. perpetual license

The subscription model is more popular because oftentimes a company will not want to commit to a larger or longer purchase, such as a perpetual license. If circumstances change, a business may not want to find itself locked into that level for a certain length of time. With a subscription, a customer can arrange or pay for greater flexibility. Try to determine if you will have enough lead time to make an adjustment and still take advantage of the cost savings that a perpetual license provides. Keep in mind that perpetual licenses often renew automatically. 

Budget for application portability

Even with different licensing models, application portability is a benefit. Enterprises can often have multiple installations of the application as long as a single person is accessing it. This can be ideal for remote staff, workers that travel or those with multiple devices. There may be a restriction on the number of installations, but often you can remove the software from one device and add it to another. This flexibility is ideal for the modern workforce. Enterprises can even have a perpetual subscription that can align with the business year so they don't have to budget for it.

SaaS pricing models

When choosing a pricing model, be aware that there are some possible challenges. For example, selecting too high of a tier to start will result in overspending.

The following are some common SaaS pricing models:

  • Flat-rate pricing. This is the simplest model, consisting of the product with a base set of features at a fixed price. This could be ideal if you know what all of your users' needs are; you won't pay for tools you don't need. One drawback to a flat rate is that you typically don't have the ability to move beyond the base set of features without shifting to a more expensive plan.
  • Usage-based pricing. This is a consumption-based model in which you pay as you go. While it is a popular cloud billing option, it can be tricky with SaaS. It is economical if you don't need all the bells and whistles; however, power users that take advantage of bigger features can cause costs to balloon. Because this model can have some wide swings in terms of billing, companies may find it difficult to plan and budget around usage-based pricing.
  • Feature-based pricing. With this consumption-based model, the more features you add, the more you'll pay. The challenge is that not all users will need extra features, so an organization will need to identify which users get feature-based pricing over flat-rate users. This will really depend on the SaaS vendor and what it allows.
  • Tiered pricing. With tiered pricing, a customer will be able to select from multiple pricing options. Think of it as a scale ranging from flat pricing to different feature-rich offerings. Flexibility is one of the biggest draws to this model, as it enables a customer to upgrade to a different plan as needs grow.

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