When software founders first develop their idea, they often overlook one crucial element: how much the software should eventually cost. While this might seem counterintuitive, especially in the early stages of a startup, most founders are primarily focused on:

  • Developing the product

  • Marketing the product

Although pricing is a key aspect of marketing—especially in B2C environments—it’s often treated as something that can be figured out later, once there’s proven demand. In B2B scenarios, the picture is even more complex due to custom pricing requirements.

This article aims to clarify the often-confused concepts of licensing model vs. pricing model. Understanding this distinction is essential for software vendors, especially when implementing a scalable software licensing solution.

WHY THE DISTINCTION MATTERS

Separating the licensing model from the pricing model allows software companies to:

  • Understand what internal systems are required to test and adopt different licensing and pricing strategies.

  • Clearly define which departments (product, engineering, finance) are responsible for each part.

We’ll use a desktop application as our example, though the principles apply to SaaS, mobile, or web applications—across both B2B and B2C markets.

LICENSING MODEL

Your software licensing model defines what is being licensed and how access is controlled. Key elements include:

CLIENTS: USERS AND DEVICES

This is typically the foundation of license management:

  • Device-based licensing: The software is tied to a specific device. Additional devices require separate licenses.

  • User-based licensing: A specific user can access the software on multiple devices.

The term license seat is commonly used to describe a unit of entitlement.

PROVISIONING MODE

In B2B scenarios, where multiple license seats may be involved, you need to decide if entitlements are:

  • Named: the most common provisioning mode, means that n clients (devices or users) require n licenses.
  • Floating (concurrent): In this mode, n license seats allow the simultaneous operation of n clients (users or devices).
    The n+1st client is unable to use the software until the nth client disconnects.

FEATURES AND LIMITATIONS

Another key consideration is to whether and what kind of functional or non-functional limitations need to be enforced (obviously for targeting different market/price segments). This is typically achieved by defining

  • Features (on/off functionality)
  • Limitations (quotas)

SOFTWARE RELEASES & UPDATES

Desktop applications can impose an extra limitation type on software releases (and upgrades). For example, the licensee is allowed to perpetually use software version X, but not Version X+1.

PRICING MODEL

There is no shortage of creativity when it comes to pricing models. Essentially, all components of the licensing model, such as devices, users, features or limitations can be priced separately, collectively (edition) or in some kind of combination. Therefore, pricing models may (but should not) grow quite complex. Without going into too many details, these are 3 areas to consider:

EDITIONS AND ADD-ONS

Editions are an excellent tool to simplify things, for both software vendors and licensees. Defining editions is very straightforward. An edition can contain any components of the licensing model. As soon as a licensee requires a feature that is not included in his/her current edition, an upgrade is necessary (even if the upgrade includes many more elements that are not necessary).

Of course, you do not have to work with editions. In this case, every component of the license model is priced separately, resulting in a completely individual configuration for each customer.

A hybrid approach, is to begin with editions, and price certain features or limitations separately on top of them, commonly referred to as add-ons.

When all (or a subset) of these components are combined, your licensing model may be named user, or floating devices, with or without features, limitations. It is essential to highlight though, that the licensing model does not include any price considerations. Which brings us to our next point.

PRICE STRUCTURE

Examples of pricing strategies might include:

  • Fixed pricing: €30 for 3 users.

  • Tiered pricing: €30 for 3 users, plus €10 per additional user (up to 5).

  • Blended pricing: €30 base + €5 per extra user (max 10 users).

FREQUENCY

Although subscription based pricing is becoming the standard, especially for B2C applications, there are still plenty of (mostly B2B) applications based on a one-time upfront purchase (plus a yearly fee for support and updates).
These two models can coexist, meaning there is a one-time fee in addition to a subscription component.

IMPLICATIONS

Regardless of the language, software vendors must be able to rapidly adapt to shifting market conditions, i.e., provide what the customer requires.

LICENSING SYSTEM

After defining an initial license model, and assuming that software audits is not a viable solution, the model must be technically implemented, i.e., it must be incorporated into your code base. While it might be tempting to let your inhouse developers do this, using a software licensing api instead, does not only simplify the whole process for all departments involved (business, development, engineering), but it is also a much more cost-effective long-term strategy. Such a professional software licensing solution enables you to:

  • define and adapt everything we described as licensing model
  • define and adapt editions and add-ons as described in the pricing model

The most important notion in this context, is the ability to adapt. Yes, your engineers have to indeed implement the initial integration. However, after this one-time step, your product management should be able to change or offer a new edition, within the software licensing solution, in a matter of minutes. Your application’s source code is unaffected, i.e., your engineers do not need to take any action.

PRICE AND INVOICING SYSTEM

Prices and frequency are not handled by the licensing system, but by your payment/invoicing system instead.

DECOUPLING LICENSING AND PRICING FROM YOUR CORE

The ultimate goal is to decouple your software’s core functionality from licensing and invoicing systems. This modular approach:

  • Future-proofs your application

  • Supports growth and experimentation

  • Reduces the burden on engineering teams

By clearly separating your licensing model from your pricing strategy, and implementing them through a dedicated software licensing solution, you’ll gain the agility needed to scale your business—whether you’re serving startups, enterprises, or consumers.