Software Licensing Models Explained: From SaaS to Open Source

Software is rarely sold outright; it is licensed. The licence is where the commercial and legal reality of a software business lives — defining what customers can do, how you earn revenue, and where risk sits. Choosing and drafting the right licensing model is one of the most consequential decisions a software company makes.

The main models

Several licensing approaches dominate the market, each with distinct implications:

• Software as a Service (SaaS). The software is hosted and accessed over the internet under a subscription. The provider retains control of the code; the customer gets a right to use the service on the agreed terms.
• On-premise licences. The customer installs and runs the software in their own environment, under a perpetual or term licence.
• Open-source licences. The source code is made available under terms that permit use, modification and distribution — subject to conditions that vary significantly between licences.

Open source deserves special care

Open-source software is invaluable, but its licences are not all alike. Some are permissive, imposing few conditions; others are "copyleft", requiring that derivative works be released under the same terms. Using open-source components without understanding their licences can create obligations you did not intend — a real risk when code is incorporated into a commercial product.

Every serious software business should know exactly which open-source components it uses and what those licences require.

Match the licence to the model

A SaaS agreement, a reseller arrangement and an enterprise deployment each call for different terms around usage rights, support, liability and data. Reusing a generic licence across all of them invites gaps and disputes. The licence should reflect how the software is actually delivered and monetised.

Key terms to get right

• Scope of the licence — who may use it, and how;
• Fees and renewal terms;
• Support, updates and service levels;
• Liability, warranties and data handling;
• What happens on termination.

Understanding licensing models — and drafting them deliberately — lets a software company protect its value while giving customers clarity and confidence.