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.
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. The agreement may also contain information relating to pricing or fees – although this is more likely to be covered by a separate document. For software sold over the Internet, many of these legal agreements are published and accepted online.
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 is a permanent key, which 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.
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 solution 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 solution you deploy. Unfortunately, many software businesses still use 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 (SVoD) that initially offered video content acquired from third parties, although more recently has included original work. 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 records and transcribes speech when the microphone button on the app home screen is pressed. 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 metered 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?
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 solution 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 solutions 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.
Use a Specialist
The other option is to outsource software licensing to a specialist. 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 Go-To Software Licensing Solution
10Duke provides a state-of-the-art software licensing solution that works very differently from traditional, key-based systems offered by other vendors. It’s cloud-based, integrates out-of-the-box with CRM and Ecommerce, and has a built-in customer identity management solution.
The 10Duke licensing engine is used by some of the fastest-growing software businesses in the world. Click here to learn more about 10Duke or watch the video below to get you up to speed with the basics.
Are you a software developer looking to sell more? Learn more from our guides:
Should You Build Your Own Licensing System or Buy It From a Specialist?
Software Monetization Guide – How to Monetize Software?
Software Licensing Guide – Why is it so important?
Why Software Companies Should Consider the Subscription Business Model
What is a Software License Manager? [Guide]
Software Licensing Solutions – Guide
Software Licensing Models – Ultimate Guide to Software License Types
Customer Identity and Access Management – What should a good CIAM solution provide?