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As per a report, the global SaaS market size is projected to grow from $273.55 billion in 2023 to $908.21 billion by 2030. SaaS adoption has significantly increased over the years.
However, did you know that most SaaS buyers overlook SaaS licensing models and choose the wrong plan, resulting in wasted spend and poor ROI?
Understanding SaaS licensing models is essential when evaluating SaaS solutions for your tech stack. It will help you select the right pricing plan suitable for your team, ensuring a positive ROI.
SaaS vendors typically use six different types of SaaS pricing models. Each model has pros and cons and varies in its billing structure and offering.
In this article, we will discuss these six software licensing models to help you select the right one. Always enter negotiations knowing the intricacies of the vendor’s pricing model to negotiate confidently.
What is a SaaS license?
A SaaS license refers to the terms the SaaS provider offers under which you can access a cloud-based software application for a specific period.
Like traditional on-premises software, SaaS vendors must establish legal conditions for customers to access their intellectual property or services hosted in the cloud.
SaaS licenses contain critical information and details, including:
- Name of users or devices permitted to software access
- Subscription duration commitments
- Functional capabilities are unlocked for the subscriber
- Service levels expected and restrictions
- Usage volume allowances
- Support availability and resources
- Renewal mechanisms
- Penalties for contract breach or early termination
- Data rights and security provisions.
When you understand the different types of SaaS licenses, it becomes easier to negotiate terms with vendors while keeping the do’s and don’ts in mind.
Alright, now let’s get into the topic.
What is software license management?
It is a systematic process that involves tracking, managing, and safeguarding acquired licenses within an organization. Critical aspects of license management include having complete visibility over purchased licenses, granular usage insights, users provisioned to licenses, license reclamation workflows, etc.
Most organizations manage SaaS licenses using spreadsheets, which is counterproductive. You need to adopt SaaS license management software to keep track of your licenses and manage them effectively.
Overlooking license management will lead to unused licenses, auto-renewals, etc. You might end up paying for licenses that aren't properly utilized, leading to a negative ROI.
The Different Types of SaaS Licensing Models
Major perpetual license frameworks differentiate themselves in how they tie payments to factors like the number of users, features, software usage, and other contractual commitments.
Knowing them helps you understand what you are dealing with and better negotiate your terms with the vendor. We’ll begin by breaking down exactly what a usage license is.
Usage-based licensing
One of the popular SaaS licensing models that most SaaS buyers opt for is usage-based pricing. It calculates your billing amount based on your actual usage. You are only charged for the amount of service you use.
This is a common licensing model used by SaaS vendors and a buyer favorite. The pricing of these services depends on many factors. These factors include data consumption during a specific time frame, total storage, the number of transaction processes, etc.
Pros
Cost Aligns With Value: You only pay for what you use. So, if your organization has less usage, you do not have to worry about paying a higher, fixed cost.
Easily scalable: You can increase usage during busy periods and decrease during slower times without upgrading or downgrading licenses.
No large upfront license fees: Usage-based models allow you to start without a major one-time payment.
Cons
Unexpected price spikes: Risk of unpredictable price spikes if usage increases rapidly. No upper limits on usage can lead to much higher than expected bills for peak usage periods.
Difficult to predict total costs: Usage volumes and associated costs can fluctuate monthly, making budgets and forecasts more challenging.
No volume discounts: There are no volume discounts for larger workloads like the ones given with traditional licenses. Each usage increment comes at the same price.
Flat-rate Licensing
It is a straightforward pricing structure.
In a flat-rate licensing model, you pay a fixed subscription fee, monthly or yearly, for access to the SaaS application or service of your choice.
With flat-rate licensing, the pricing remains the same regardless of the usage. The cost stays the same based on how heavily the software is utilized month-to-month.
Pros
Predictable pricing: A flat monthly or annual rate is charged, making it easy to budget and forecast software costs. There are no surprise overcharges.
The Ease of Scaling: Flat-rate pricing makes it easy for you to scale. Adding more users has minimal extra costs since pricing does not vary based on usage volume
Volume-based discounts: Flat rates in SaaS products often have tiered levels, offering discounted rates on solutions for heavier usage or more users.
Access to full product functionality: Generally, flat-rate pricing solutions provide access to a product's capabilities for the duration of the SaaS license agreement you have signed up for.
Cons
Pay for unused capacity: Flat monthly fees mean you pay regardless of whether full use of features or users occurs. This also means you could be spending more money relative to actual usage.
Difficult to scale: Switching a flat-rate SaaS plan tiers isn't easy. It is a cumbersome process as it requires modifying the contractual license agreement with the vendor.
Tiered Licensing
In tiered pricing, you choose from the various levels of pricing available. The organization's size and needs usually categorize the levels. They may vary in contract duration, features, licenses, and more.
This type of licensing model is suitable for organizations of all sizes. If you’re a startup, you can opt for a Basic plan and increase the tier as you grow.
Common tiers offered by organizations are basic/standard/premium offers or usage volume allowances.
Pros
Allows cost levels to match feature needs: Tiers will enable you to right-size licenses based on your specific feature needs. You only pay for the capabilities your company needs.
Upgrade flexibility as usage grows: Tiers allow you to start at a lower level and then upgrade to higher tiers with more functions as usage and needs evolve.
Cost predictability: In tiered plans, the price for the level is fixed, providing cost predictability. Once a specific tier is selected, you can reliably forecast software costs based on the flat rate for that particular tier.
Cons
Paying for unused features: Overpaying for unused capabilities on higher tiers. Not all features may be used, even within licensed tiers.
Wrongly estimated needs: Underestimating needs could limit growth velocity if lower tiers are chosen just to save money.
Switching between tiers can be complex: Transitioning tiers often requires the modification of contracts with vendors. This leads to administration friction and delays in right-sizing.
Per-user licensing
A popular SaaS licensing model in which the final amount payable is derived based on the number of users. Per-user licensing is based on the number of user accounts, seats, or other well-defined units of individual consumption.
In this SaaS licensing model, you purchase monthly or annual subscriptions as seats. The number of seats you purchase will only be the number of people able to use the solution.
Slack is an excellent example of per-user licensing.
Pros
Pay only for an actual number of users: Aligns costs dynamically to the specific number of people actively using the software.
Flexibility to add/remove user licenses: You may quickly remove or add user licenses based on workforce needs. There is no need to stick to rigid tiers.
Cost control: It's easier to manage the spending as the cost grows gradually based on your growth.
Cons
Costs increase with users: As the number of users in your organization grows, pricing also increases linearly, as pricing is directly proportional to the size of the user base.
Variable month-to-month costs: Every month, the software cost may differ if the user count fluctuates. This makes spend forecasting and budgeting more challenging.
Administrative overhead: Tracking logins and usage to verify and approve billing can be challenging. You must confirm if the billing amount aligns with the actual adoption.
Per-feature Licensing for SaaS
The per-feature licensing model is based on charging by enabling specific functional modules or features within a broader SaaS platform.
Per-feature pricing allows you to pay only for the features and capabilities you need at a subscription rate tied to those activated components.
Pros
Pay only for the features you need: You only pay for the capabilities your company needs. You will only spend on those features you use rather than overspending on unused functionality. Preventing wasted spend or poor ROI.
Flexibility to enable or disable features: As your needs change, you can scale up and down quickly without changing the entire product license.
Scalability: Acquire just a small subset of a solution, like a few key features, to limit the initial investment required to start. If you like those features, you can invest in more features from the same solution.
Cons
Variation in total cost: You might face difficulty forecasting total costs with variable components. When you enable new features, it brings additional recurring costs, making budgeting less predictable and reliable.
Training and enablement: When new features are added, the employees might require training end users. Need to plan enablement every time capabilities are added or removed, which can be frustrating.
Freemium Licensing for SaaS
Freemium licensing is another popular SaaS licensing model. It offers a limited entry-level service for free to attract and onboard new users.
In this model, revenue comes from selling the premium version. You can use the product for free until the end of the trial period. The premium version unlocks advanced functionality, which requires an upgrade.
Pros
Try before buying: You can take your time to test key software capabilities for free without paying anything.
No strict approvals required before purchasing: You can easily access the free version without having to justify and go through the sign-off process required for paid commitments upfront.
Cons
Limited feature scope: Critical functionality may only be available in paid tiers, so the free version has usage constraints.
Constant need to re-assess requirements: You must re-evaluate if and when to convert to paid tiers as adoption progresses.
API requires advanced integrations: Certain integrations may require paid tiers with premium API access. This makes integration complex, puts data accuracy under scrutiny, and can cause compliance issues.
Conclusion
You must be familiar with these six subscription-based models before entering negotiations. Understanding these pricing strategies and their pros and cons will guide you in choosing the most suitable option for your organization.
SaaS buyers commonly opt for per-user licensing, usage-based licensing, and freemium licensing. But remember, not all software vendors and service providers will have transparent pricing. Some vendors keep it hidden. We advise dealing with transparent vendors and their competitors rather than shady ones.
You can head to negotiations once you familiarize yourself with the pricing models. This will help with effective SaaS license management. However, if you and your team lack the bandwidth to negotiate, you can seek assistance from CloudEagle's SaaS buyers.
Our experienced negotiators meticulously analyze your business requirements and choose the best vendor with the best pricing plans. Book a demo now to get help with software management, negotiations, usage patterns, and cost optimization insights.
