Choosing an appropriate licensing scheme is crucial for the success of a software product. When choosing the wrong licensing scheme, potential customers don’t even bother licensing your software, even if your product is superior to competitive solutions. Furthermore, an appropriate licensing scheme can pave the way for interesting and successful marketing strategies. So, one can say that the success of a software business rises and falls with the decision of how to license its software.
When we thought about the licensing scheme for SmartInspect, we naturally decided to license it per developer, as SmartInspect is a software development tool. But as we thought about it, we had an idea about an alternative license that now proofs to be quite successful. But more about that in a minute.
Why You Should Care
Although the decision of which licensing scheme to use is only one aspect of many when selling software, it can greatly influence other parts. Tasks like marketing or choosing your market are not independent from the choice of your license. They affect each other.
As an example, depending on your licensing scheme, your software product might be either attractive or completely useless for an entire market. And in the latter case, if this market is the one you wanted to reach in the first place, then your software product probably won’t have a bright future and you might have a serious problem.
Additionally, you should be aware of the fact that you need to choose your licensing scheme early in the development process. You need to know all the technical consequences of your license. For example, you need to know exactly if and how you want to enforce your license when you plan the application.
Common Licensing Schemes
There are several well-established licensing schemes for software. Most of them depend on the software’s architecture and the intended market. This chapter presents the most common schemes including a short description.
- Licensed per named user
Licensing per named user means that the license is tied to a particular person. This license is popular for web applications and also for many shrinked-wrapped desktop applications. For desktop applications, it is usually allowed to install the software on multiple computers at once, as long as the software will only be used by one person.
- Licensed per installation/computer
This license allows the installation and usage on one computer. You need multiple licenses if a person is using the software on more than one computer. On the other hand, it is usually allowed that multiple persons use the software as long as they use it on the same computer.
- Licensed per client
This concept is usually used in client/server architectures. You normally need to acquire a license for each client (called Client Access License or CAL in short) and in most cases the server requires an additional server license. This licensing scheme can be used with the Microsoft SQL Server, for example. If I understand it correctly, you need an access license not only for each client connecting directly to the SQL Server, you need one for each client you store data about.
- No license fees at all
This is the often case when dealing with open-source or freeware software. It is also increasingly popular when selling support for a particular software application is far more profitable than selling the software itself.
Free software applications can be very useful for marketing. For example, it is one part of the marketing strategy for SmartInspect and this is the idea I just talked about. We decided to offer a feature-reduced Personal edition of SmartInspect and it’s already a success.
We hope that the Personal edition will have two effects: On the one hand, we hope that we get a bit more buzz about SmartInspect and that the word of mouth effect makes it more popular. We hope that users who like the Personal edition and need the more advanced features will upgrade to SmartInspect Professional. I can say that we are already seeing that effect and that it pays off.
The other desired effect is that we hope that the Personal edition will reduce piracy of the Professional edition. We cannot say if this really works, but if people can get a working version without pirating, they might be more inclined to just use the Personal edition. We will see if this works in the long run.
- Licensed per developer
Licensing per developer makes sense if you are selling development tools or components/libraries. You need to acquire a license for each developer using the tool or component. When you deploy your application that uses the component, end-users normally do not need a license. This is also called royalty-free.
We decided to use this licensing scheme for the Professional edition of SmartInspect. This makes it very easy and affordable to license for small and big software vendors alike.
- Site license
A site license means that a software product can be used by all persons on the same ‘site’. A site can mean all persons in the same building, the same physical address or all persons in the company. This license scheme is often not used because of possible discounts like many people would think, it is used to make the licensing and license control easier for the purchasing party.
Imagine you have a software product that is licensed per user. You now need to license all the sales staff in your big corporation. It can be quite hard to find out exactly how many licenses you need to get and how this number changes over time. One way to make sure that you licensed all your users is by using some sort of license management software, just buy more licenses than you need or simply get a site license.
- Floating license
A floating license means that you are free to use the software on multiple computers by multiple users. You just have to make sure that only one user uses the license at the same time. A floating license can make sense if you have a very expensive software product that the users only need from time to time. Floating licenses are usually offered in addition to other licenses and are more expensive in most cases.
- Royalties per item sold
This license scheme is only appropriate for software products that are part of other software applications or are sold as a part of a package. The licensee has to pay royalties to the license issuer for each end-user. For example, take the embedded market. Imagine a robot for the automobile industry that has a micro controller and a special software application. When the vendor sells one of these robots, he has to pay a royalty to the original software vendor.
In these special cases it can make sense to license software with royalties, because there are only a limited amount of items sold which are highly specialized and expensive. For more general software components, this might not work so well.
Finding an Appropriate Scheme
As already mentioned, the licensing scheme of software partially depends on its architecture. For example, in the client/server architecture it feels natural to demand a license for each client. But there are more aspects to pay attention to:
Your target market should influence your decision on how to license your software. At first, understand the licensing of your competitors. Is it something you already thought of? Do you think their licensing is fair – not only for them but also for their customers? Which parts can be improved? Did you find any similarities between the different licensing schemes of your competitors? Are there other, better ways to license software in this market?
More important than your competitors are your potential customers, of course. So, try to create a licensing scheme which is fair for you and your customers. Always keep in mind that the licensing scheme greatly influences the purchase decision. As already mentioned, you can have the greatest software product on the planet, but when having an inappropriate license, potential customers are not willing to or simply cannot buy your software.
For example, if you collect royalties for your software development component, many software shops simply won’t buy it. They do not want to pay you money for each license they sell. On the other hand, there are some areas where royalties are accepted and work (embedded market, highly specialized and expensive components etc).
It makes sense to think about possible marketing strategies when designing a licensing scheme. In the shrinked-wrapped software market it is not too uncommon to offer a feature-reduced version of your application or an edition without support for free to generate word of mouth marketing. You may want to consider this for your own software product.
Another possible marketing strategy mainly concerns software applications which are based on a client/server architecture. Depending on the targeted market, it might be a good marketing strategy to offer the server and maybe one or two client licenses for free. Small businesses, which initially use your software for free, are then likely to continue using your software when they grow and buy additional client access licenses.
I hope I could explain the different licensing schemes and their pros and cons in this article and made it clear that the decision of your license strategy is a very important one. There is much more to say about software licensing than I can explain in this article. But it should be good starting point to get you started on licensing questions. If you have any comments or questions, do not hesitate to contact me at email@example.com.