Licensing as a Service (LaaS)


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What is Licensing as a Service (LaaS)?

Licensing as a Service (LaaS) often combines subscription and pay-as-you-go agreements in which customers commit to a certain level of software access, but can scale capacity upon demand.

This modern approach to software licensing can benefit solutions that have variable usage trends, as subscribers have the ability to ramp up volume as needed, ensuring ad hoc project requirements or seasonal peaks can be met without delay.

Typical use cases include software suppliers allowing flexible access to multiple products within the same portfolio – or to different features within the same solution – usually applying different fees to each one. Additionally, many HPC (High Performance Computing) platforms now operate in this manner, empowering customers to expand and retract their ‘elastic capacity’ whenever necessary.

A visual representation of how Licensing as a Service allows customers to expand capacity on demand.

In essence, Licensing as a Service reflects a shift towards a more dynamic, service-oriented approach to technology whereby buyers can proactively control access and manage costs more effectively.

How does Licensing as a Service work?

Subscriptions cover the base level of usage rights, but clients have the option to buy additional credits that can be traded for increased access at the point of need.

For example, if a company has a monthly subscription for 30 users, they could also purchase 20 credits that may be exchanged as required.

Rate tables outline the charge for each item, and credits diminish correspondingly. Items may be configured as any resource, capability, feature, or application the supplier offers. 

In this example, Item B costs eight credits for every hour in use, and customers are charged this amount until it’s returned, or their credits expire and the account needs topping up.

Example rate table illustrating how Licensing as a Service works.

What are the advantages of Software Licensing as a Service?

Token-based models offer multiple benefits for software producers and end customers, including:

  • Adaptability: Users can immediately access whatever resources are required, matching capacity to demand or obtaining specific items for occasional use. This helps ensure a positive customer experience with easy connectivity to avoid project delays.
  • Cost efficiency: Licensing as a Service mitigates the risk of unused products, as payment equates to actual usage. This prevents waste while enabling Operational Expense (OpEx) financial reporting, which many organizations prefer to upfront Capital Expense (CapEx) investments. Additionally, LaaS frameworks allow customers to allocate costs to individual business units for more accurate internal accounting.
  • Usage reports: By monitoring usage patterns and which items are most frequently utilized, buyers have greater insights to manage base-level subscriptions and adjust accordingly. Automatic threshold and expiry notifications also help maintain service continuity and avoid billing surprises. Furthermore, software suppliers can review usage analytics to better understand how features deliver value, and where potential upsell and cross-sell opportunities exist.
  • Less friction: Licensing as a Service enables much faster procurement than conventional software licensing methods, empowering customers with instant access to the tools they need. Barriers are also eliminated for small companies and individual users, with the ability to pay-per-use rather than committing to a strict level of expenditure from the outset.
  • Reduced risk: Usage-based pricing typically cuts instances of noncompliance, as easy access lowers the potential chances for misuse, overuse and software piracy. As such, producers have a greater chance of growing topline revenue, while buyers stay within the law.
  • Fast updates: Dynamic rate tables and cloud centralization enable producers to rapidly change pricing, packaging, and product SKUs. Promptly reacting to customer demands and deploying releases at speed helps maintain user satisfaction, while also providing a competitive edge.

Essentially, Software Licensing as a Service provides a flexible solution that establishes better alignment between price and value, making customer retention more likely as access can be tailored to specific needs.

Core requirements for LaaS

Software suppliers wanting to introduce Licensing as a Service should ensure their provisioning system is built with:

  • Customizable rate tables for pricing and packaging changes
  • LaaS usage analytics that facilitate detailed insights
  • Identity linked to consumption for visibility into who uses credits for which items
  • Precise charging for full or fractional tokens according to the exact duration of usage 
  • Budgetary management so license administrators can handle allocations 

Licensing as a Service in action

IBM introduced the notion of Licensing as a Service with their FlexPoints currency, which allows credits to be allocated to specific IBM Cloud services based on usage requirements.

This evolution enables flexibility for customers who need to access various resources at different times, while also reducing the risk of over-provisioning with greater visibility into usage data across multiple services. 

As the latest Monetization Monitor survey of 450 product executives indicates consumption models are set for 59% growth by 2025, Software Licensing as a Service is gaining traction as a user-friendly way for producers to meet changing market demands by providing frictionless access in a manner that many customers prefer to buy. 

For practical advice on boosting your revenue, check out this on-demand webinar:
Future-Proofing Your Software Monetization Strategy