Last updated: 6th July 2026
Introduction to Software Licensing
If you develop or sell software of any kind, unless you protect it with a robust licensing engine, you could be giving away your businesses most valuable assets for free. If you are a software vendor looking to grow, find out why a modern software licensing solution is essential for your business.
Understand software licensing and its role in unlocking revenue.
What is Software Licensing?
Software licensing is a way for end-users to gain access to software, whilst ownership rights remain with the software publisher. Software is creative work that contains a lot of intellectual property, and unless it is in the public domain or non-distributable, all formally developed code is copyrighted. End-users must accept a software licensing agreement otherwise they will not be entitled to use the software.
A software licensing agreement, (also known as an End-User License Agreement or EULA), is a legal document that sets out the requirements that must be adhered to in order for an end-user to be granted permission to use specific software. The licensing agreement usually contains instructions regarding how software can be used, such as the number of installations allowed or any restrictions to modification or redistribution of the source code.
How Does Software Licensing Work?
A software licensing framework is a bit like renting a car. In order to run a rental car, you need permission from the owner and a key. The same is true for proprietary software. Software is locked and will not run without a key or the correct permissions being in place first. Permission is usually granted by paying the appropriate fee.
Numerous types of software licensing models are available to unlock software for users, varying from simple perpetual licenses and subscription licenses to more advanced models such as floating licensing.
A perpetual license allows indefinite access – usually to a named user. A subscription license means the user pays a smaller fee, usually every month for continued access to the software application. A floating license means a limited number of licenses are shared by a larger number of users on a first come, first served basis.
Other, more advanced licensing options also exist, such as the consumption-based license, where access to a software application is limited by time or some other factor or action which can be measured.
Click here for a full guide on all license models.
However, to implement and enforce a license model, you need a licensing system of mechanism of some kind.
What Is a Software Licensing System?
A software licensing system is the technical infrastructure that enforces the rules defined in a software license agreement.
While a software license is a legal document that defines how software can be used, a licensing system ensures that these rules are actually applied when the software runs.
In practice, a software licensing system connects several components that work together to control how users access a software product.
Typical components of a modern licensing system include:
License validation
The application checks whether a user or device has a valid license before allowing access.
Entitlement management
The system defines what each user is allowed to do, such as which features they can access or how many devices can run the application. Learn more about software entitlement management.
Usage tracking
Some licensing models require monitoring how often or how long software is used.
License enforcement
The licensing system automatically prevents unauthorized access when license conditions are not met. Learn more about software license enforcement.
Historically, software licensing systems were implemented using hardware license dongles, license keys, or license servers. Today, many software vendors rely on cloud-based licensing platforms that provide greater flexibility and automation.
A modern licensing system enables software vendors to control access to their products while also supporting a wide range of licensing models and software monetization strategies.
Benefits of Software Licensing
When done correctly, software licensing allows you to effectively monetize the software you’ve developed, as only the users who have paid for a valid license can access your application. One of the goals of software licensing is to reduce revenue leakage to zero.
With a modern software licensing system in place, you can automate the licensing process to a large extent, so that your end users can self-serve and start using your application immediately.
Similarly, with a modern solution there is less manual license admin for you as the software vendor. Software licensing should aim to reduce friction in your business process, not increase it!
But it all comes down to the licensing system you have in place. Unfortunately, many software businesses still rely on legacy methods like license dongles, license keys and license servers. Some combination of these has been the dominant method for implementing software licensing, but these days we are in the age of cloud-based licensing solutions, which overcome most or all of the friction points included in legacy licensing methods.
Click here to learn why cloud-based software licensing is the superior method.
Examples of the Software
Licensing Process
Example 1. Floating licensing – Netflix
Netflix is a subscription-based video-on-demand service that uses the floating license model. Users can choose from various subscription packages, however, to keep things simple, let’s focus on just the standard plan for now.
Subscribers to the Netflix standard plan are permitted to playback Netflix content on up to 2 devices at once – i.e. they have two licenses available in their license pool. Anyone with access to valid login details can access the service on a compatible device (almost anywhere in the world) and start streaming content. When the app starts streaming, a license is checked out of the license pool and attached to the device that is currently being used to playback content.
If another user accesses the same Netflix account and starts streaming content at the same time, a second license is checked out of the license pool. If a third person attempts to stream content to a third device they will be unable to – the playback limit has been exceeded and no more licenses are available. The Netflix licensing engine conveniently and seamlessly ‘floats’ available licenses between groups of users, whilst maintaining strict control over Netflix intellectual property.
Example 2. Metered licensing – Otter
Otter is a very useful (and surprisingly accurate) speech to text transcription software that uses the consumption-based license model. Paid plans are available, however, any registered user can transcribe up to 600 minutes of recorded speech every month for free. A countdown timer is triggered when a user starts recording and when the stop button is pushed, the app stops recording and the meter stops running. This means that users are only ‘charged’ for what they use.
The app home screen shows account holders how many minutes they have left each month, as well as the number of days before the timer resets. After the 600 minutes have been used up, account holders can still log in and access existing transcription projects, however, new transcriptions are not possible until the minutes reset (or a premium license is acquired). The Otter App is a great example of convenient, yet tightly controlled consumption licensing, which showcases the basic features of a product in order to convince sales.
These are just two examples from the thousands of use cases that we encounter every day. However, even these relatively simple use cases highlight the diverse and complex needs of software publishers in today’s digital environment.
How to License Your Software?
1. Develop Licensing In-house
There are two ways you as a software business can license your software product: by developing a licensing engine in-house or by using a specialist to take care of your licensing requirements.
If you’re a skilled developer, you might be tempted to develop your own licensing engine, after all you’d own it. And if you’re a very small business you might even manage with a spreadsheet of character strings combined with a delivery mechanism (like email) to give your customers access to your product.
But what about free trials, revoking access rights, upselling new features, transferring licenses between devices, tracking license usage data and all the other requirements of effective software licensing?
Building your own licensing system may be manageable at first, but when you grow as a business this will become increasingly more difficult and you will be spending a lot of your time and money maintaining it. You may not even be happy with the end result, because your requirements may have changed as your products have evolved and you’ve grown as a business.
Software licensing systems that require lots of ‘touch-points’ in a deployment don’t scale.
Click here to learn more about the drawbacks of developing your own licensing system.
2. Use a Specialist Licensing Provider
The other option is to outsource software licensing to a specialist such as 10Duke. This is usually a good option for software businesses that have found Product-Market fit and are looking to scale.
However, you shouldn’t assume that a 3rd party licensing solution will automatically help you achieve the flexibility that is essential in today’s fast-paced, data-driven digital environment.
Unfortunately, many software licensing specialists are still in the mindset of traditional key-based systems. If you’re not careful, you may find yourself in a situation where a 3rd party, key-based solution introduces as much friction and manual admin into your business as developing a licensing tool yourself.
10Duke is the provider of market-leading software licensing technology, which is modern, flexible, battle-tested and enterprise-ready. Learn more about the 10Duke licensing solution.
Unlock 15-35% more license revenue from existing customers
10Duke is a best-in-class, cloud-based software licensing solution for fast-growing software businesses.
Improve how you license and monetize your software products.
