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Software Licenses Explained

Software vendors love to charge customers license fees.

Why do they do it? Why do they penalize their customers when the customer's business is growing? What gives them the right to jack up their fees when the value of the software does not increase as the volume grows? How can they justify charging more and more just because more people are using the software?

Licensing software is a challenging business. The software firm is in business to make money. The software developer invests a large sum of time and money to get a software product to the market. So how is the software vendor to obtain a reasonable return on the investment made?

There are only a few ways a software company can recover the cost of the development of their products. One way is to license their software to the users of their software. A "user" is someone who "uses" the software. A "license"" is a legal contract between the software vendor and the customer that provides the customer with a "license to use" the software - much like a driver's license is a legal permit to drive ("use") an automobile. A license to use software, like a driver's license has a cost associated with it. Some licenses are for a period of time, while others are perpetual - meaning for life.

There is a finite number of ways to license and therefore charge for software. The following list represents the more popular methods:

  • License by Concurrent user: this methodology uses a system utility to keep track of the number of users logged into the software system. A concurrent user means a user that is logged in to the system and when the user logs out, the user license becomes available to the next user to log in. This method may be the most cost effective depending on the number of concurrent users required at peak usage times - month end for example.
  • License by Named user: this user licensing method assigns a license to a user log in profile and is a one to one relationship to the number of users who access the system. This user license is active whether or not the user is logged on or not. The downside to this type of license is that the license is paid for and may only be used ten percent of the time the system is available. This user license is typically less expensive than a concurrent user.
  • License by Role: this type of license is similar to a Named user license, but it goes further in terms of limiting or allowing a certain set of functions that can be performed by the user. The license can also be similar to a Concurrent user, again with a limit on the amount of functionality inherent in the license. Examples of this type of license are a "super user", an "administrator" user or an "inquiry user". The types of functions performed by the end user are typically categorized into "Roles". A Role is more or less a job function such as Accounting Clerk or Sales Representative, or Dispatcher etc. Essentially the customer purchases the appropriate number of Role licenses to match the number of Roles and users requiring the Roles in the organization. Administrating this type of a license environment can get quite costly and time consuming.
  • License by number of transactions: this type of license typically allows for an unlimited number of users with no restriction on what the user can do. The cost for this type of licensing scenario is most often based on ranges of transaction volumes, for example, 1-100 orders may be X dollars while 101-300 transactions will be Y dollars. The cost of this type of license can grow or shrink depending on the volume of business the customer is doing. One of the challenges with this type of license is that it is somewhat hard to budget for. The main issue related to this type of license is that the software firm stands to get the most benefit from the business relationship - not the customer.
  • Unlimited or Enterprise license: this scenario comes into play when a company has multiple users and multiple types of users and typically wishes to pay for the software all up front and not have ongoing licensing costs to deal with. If the customer's business is growing rapidly and the forecast indicates a fairly rapid growth in the user base, an Enterprise License makes a lot of sense.
  • Machine or platform based license: some software vendors sell their software for fees based on the size and/or type of computer running the system. The more "horsepower" the hardware has, the more expensive the software is. The theory behind this type of licensing method is that the more power the hardware has the greater the number of users the machine will support. A big downside to this type of license is that if the customer upgrades the hardware to increase performance for the end user, the software vendor typically charges more money for their software even though there may be no additional users added to the system. Another challenge with this type of license is that if the customer wishes to operate other software on the same platform and therefore wishes to size the hardware for all software environments, the vendor that charges by the machine size gets more money than they really deserve or can justify.

In summary, one should read very carefully the user license associated with the software being considered. Depending on your situation, one license versus the other will make the most sense. It is our opinion that the most economical and value-based licensing method is the Concurrent user based license.

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