Understanding the Basics of SaaS Licensing Models

Feb 27, 2024

In the past seven years, the SaaS industry has grown an estimated 500%. It’s no surprise that organizations with more than 1,000 employees use an average of 177 SaaS applications. Today, SaaS applications account for 70% of total company software use and that number is expected to grow as many IT vendors phase out on-premise software offerings.

Costs are rising as well. On average, SaaS platform fees have increased 12% over the past year with some vendors publishing higher price hikes. As a result, greater emphasis is being placed on how IT procurement practitioners negotiate, manage, and optimize SaaS spend.

REGISTER NOW for our free “Eliminating SaaS Toxic Spend” webinar to spot hidden waste and keep your licensing costs in check.

SaaS licensing refers to the terms, conditions, and fees agreed to between a SaaS provider and customer to access and utilize cloud-based software. Rather than owning perpetual software installed on-premises, SaaS tools are subscribed to as online services.

A SaaS license agreement details the subscriber’s rights to leverage the software functionalities throughout the term of the contract. The agreement also covers restrictions, compliance terms, service commitments from the provider, and payment structure.

SaaS Licensing Model vs Perpetual License Model

SaaS licensing operates on a subscription basis, where businesses pay a recurring fee for access to software. This model offers flexibility, scalability, and automatic updates, making it ideal for businesses looking for a cost-efficient and dynamic solution. On the other hand, perpetual licensing involves a one-time upfront payment for software, but this can lead to additional costs over time for maintenance, upgrades, and support. While perpetual licenses may appeal to businesses that prefer one-time costs and long-term ownership, SaaS licensing is often more adaptable and offers more predictable ongoing costs.

What Does a SaaS License Agreement Include?

While specific sections vary across providers, SaaS contracts typically cover:

Software access permissions
Usage definitions and metrics
Service commitment assurances
Data ownership, security, and privacy
Fees, billing, and payment
Contract duration, renewal, and termination

Understanding these components at a granular and transparent level allows consumers to accurately compare offerings, negotiate better pricing and contractual business terms, and select the best fit SaaS solution.

Subscription-Based SaaS Licensing Models

Unlike traditional software that is purchased outright with perpetual rights, SaaS is offered through subscription-based licensing. The subscription model comes in several pricing structures. Examples include:

Freemium offers limited functionality at no charge to attract user sign-ups. Revenue is generated from premium add-ons or by converting a percentage of users to paid plans.

Flat-rate plans charge a fixed recurring fee to access the full software suite. Simple and predictable, fixed pricing works for basic SaaS needs.

With usage-based pricing, recurring fees scale up/down based on utilization metrics like storage consumed, compute hours leveraged, data transferred, etc. Pay only for what you use.

In feature-based plans, rates are tiered based on the capabilities unlocked. Entry-level subscribers get core features while premium plans enable advanced tools.

Tiered pricing bases rates on attributes like the number of users, transaction volumes, bandwidth amounts, or other thresholds. For example, per-user pricing is common for collaboration platforms.

While SaaS price transparency is improving, it’s historically been awful for enterprise-scale SaaS purchases and renewals. Custom quotes can vary greatly even for the same products. Buyers should be aware that it’s a myth that the SaaS subscription price is not negotiable. Armed with the right market information, it is possible to negotiate lower pricing for enterprises.

Performing price benchmark analysis to determine if you’re paying a fair, competitive price for your SaaS purchase or renewal typically uncovers significant savings targets. If you’re wondering how effective this tactic is, consider this: 89% of the deals NPI analyzes are priced above fair market value.

What to Consider When Choosing a SaaS License

Choosing the right SaaS products, negotiating a fair agreement, and optimizing your SaaS licensing can be complex. It’s easy to overspend and miss opportunities to save money.

Compare the capabilities of SaaS offerings to address:

Current business requirements
Future roadmap and growth
Supported integrations

Validate that the solution can deliver on both present and upcoming needs.

Select a subscription model aligning to expected volumes for:

Bandwidth
Storage
Number of users
Transactions
Compute resources

Proper allocation avoids over/under-provisioning.

Assess Data Control and Security

Validate a provider’s ability to meet:

Data ownership rights
Physical and logical security
Access controls
Encryption protocols
Compliance standards
Breach notification policies

Evaluate how well a SaaS platform integrates with:

Existing SaaS solutions
On-premises legacy systems
Required third-party applications

Hybrid environment support expands possibilities.

Calculate Total Cost of Ownership

Consider all direct and indirect expenses:

Subscription licensing fees
Onboarding/implementation costs
Training and adoption programs
Ongoing administrative overhead
Change management requirements

Full TCO analysis prevents surprise expenses and, depending on the SaaS vendor, can also uncover areas of negotiation flexibility (e.g. training and implementation credits). At the same time, however, organizations should be very conscious of overspending. SaaS spend management and analysis are crucial to maximize SaaS licenses and control spending.

Evaluate License Management Capabilities

Seek SaaS solutions that enable you to:

Track subscriptions enterprise-wide
Optimize license allotments
Govern usage to meet targets
Automate management actions

The Importance of SaaS License Management and Optimization

As organizations adopt more SaaS applications, they accumulate multiple subscriptions carrying distinct terms governed by individual contracts. Scaling usage while maintaining compliance and costs depends on capabilities to automate license management.

Look for integrated solutions that deliver:

Centralized view of subscriptions
Configurable permissions and role-based access
Subscription optimization recommendations
Usage metrics monitoring and anomaly detection
Proactive subscription renewals and contract management

With comprehensive visibility and control over multi-SaaS environments, consumers can maximize value. This avoids toxic SaaS spend waste. While the simplicity and flexibility of SaaS solutions are attractive, overspending is rampant. Research shows that 30% or more of fees paid for major SaaS platforms are attributed to unused or underutilized licenses. This excess spend adds up quickly. For example, a 500-seat Microsoft 365 E5 enterprise agreement with a $38 monthly license fee totals $228,000 per year. An estimated 30% waste factor represents $68,400 in unnecessary spending. For a 10,000-employee organization, the annual wasted spend soars to more than $1.3 million.

What drives this epidemic of SaaS cost waste? A few key factors come into play:

Lack of Visibility into Usage/Subscription Alignment: Too often, enterprises pay for too many SaaS subscriptions/licenses or for more functionality than they actually need. SaaS sprawl is a sure way to sink the enterprise IT budget.
Absence of Controls: Without checks and guards in place, unused licenses go unnoticed while new subscriptions spin out of control. Regular SaaS license optimization assessment on key SaaS estates (e.g. Salesforce, Microsoft, etc.) is critical.
IT Procurement Resource Constraints: IT procurement and software asset management practitioners have their hands full as the business requires more mission-critical IT purchases and renewals at a faster speed. Without outside vendor-specific licensing and pricing expertise, it’s impossible for most teams to determine if they’re paying a fair price for the license/subscription options best suited to meet their requirements.
Complacency: Given the flexibility of the cloud (and the dearth of internal cost management resources in most enterprises), there is less urgency to monitor spending. But just as the cloud provides ease of access, lack of governance invites waste.

Unlocking Savings and Minimizing Risk with NPI

Addressing toxic SaaS spend requires attacking all these fronts through rigorous SaaS cost and license optimization as well as deep pricing and license/subscription expertise.

Optimizing your SaaS cost and license management is a core capability at NPI. We are experts who are 100% focused on helping you optimize costs and minimize risk in your enterprise SaaS licensing agreements. NPI performs turnkey SaaS license optimization assessments for Microsoft 365, Salesforce, SAP, Adobe Creative Cloud, Workday, and more.

Rightsizing your license agreements optimizes your SaaS licenses and saves you money. Contact NPI today to get started.