Key Takeaways:
- One part of SaaS contracts that often gets overlooked, but is always one of the more interesting aspects to negotiate, is customer usage rights.
- There four different usage models and many reasons why companies will choose one model over another.
- With technology advancing rapidly, we need to understand how SaaS companies will innovate their licensing models.
One part of SaaS contracts that often gets overlooked by legal teams, but is always one of the more interesting aspects to negotiate, is customer usage rights. This part of the contract is less about legalities and more about understanding business metrics, pricing, product functionality and technical limitations.
In traditional software licenses, usage rights are known as license rights or license models. For SaaS, no “license” to the software is provided, so they are termed usage rights. But for the purposes of this article (and my sanity), I have used them interchangeably. This article outlines common usage right models and the impact AI will have on future SaaS usage models.
Learn More: Download a free guide from this author on 10 SaaS Contract Basics You Must Know!
Common Usage Right Models
Each model has its pros and cons and SaaS providers will consider several factors when choosing a model, including profitability, customer expectations, market standards and commercial reality.
For example, most SaaS companies would prefer to charge its customers on a named user basis because it is the least flexible for the customer. If two employees use the platform at different times, it would make more sense for them to purchase a single concurrent license, instead of having to purchase two separate named user licenses.
For large organizations, they may find it too costly to buy separate named user licenses for every employee. They might prefer concurrent licenses for flexibility, however, the vendor may object to selling fewer concurrent licenses. So given the volume, an enterprise license may make sense for both parties. Plus, from the vendor’s perspective, it will be less of a headache to monitor compliance.
There are many reasons why companies will choose one licensing model over another.
Primary Usage Rights Models
For B2B SaaS companies, the primary usage rights models are as follows:
1. Usage-Based
Charge customers based on their actual use of the software. For example, customers purchase a specific amount of usage. An example is purchasing “X” number of “Zaps” on the Zapier platform, or purchasing a bundle of email “sends “on an email marketing platform. This model offers flexibility, as companies pay for what they consume or anticipate consuming.
2. Named User or Seats
Each individual in the organization is allocated a specific seat or user access to the SaaS. Each person has their own login and password, and access cannot be transferred to another individual. In some cases, if that person leaves or another team member needs access, an additional license must be purchased. For example, a SaaS CRM might charge per salesperson using the platform.
3. Concurrent or Floating
A set number of licenses is shared among a pool of users. If a company has five concurrent licenses, any five individuals can access the software at any one time, up to a maximum of five simultaneously.
4. Enterprise Licensing
A flat-fee model where an organization purchases a license that covers all employees or a specific division. For example, a large company may purchase an enterprise license for their project management tool, granting unlimited access to all employees. This model simplifies management and budgeting for large organizations.
Usage Rights in the Context of Reports
What if the SaaS generates a report? For example, business intelligence and data analytics platforms help organizations analyze data and generate reports. Companies in that space often use licensing models where reports consume a license as the value of the software is tied directly to the insights and analysis provided through the reports.
In many cases, reports are consumed by someone other than the person operating the SaaS. How can companies monitor this usage?
And what about sharing the reports with third parties, like auditors or government authorities, for non-commercial compliance purposes?
These questions highlight the complexity of defining “use”, leading cautious customers to ask pointed questions in negotiations about how the usage model is calculated in different and sometimes quite unique use cases. As attorneys, we will be asked to brainstorm and draft creative solutions and rules around the various use cases, and consider how our clients can audit and enforce them, especially on activities or output that lie outside of the SaaS.
The Impact of Artificial Intelligence (AI) on Usage Rights
SaaS licensing has become increasingly complex with the rise of AI. AI now handles tasks previously performed by humans, raising questions about how these AI agents should be licensed.
For example, if an AI performs the tasks of multiple people continuously, should it consume a single standard human license? Would the speed and volume at which AI operates overwhelm SaaS resources?
SaaS companies might need to introduce specialized, more expensive licenses tailored for AI agents.
APIs and Third-Party Integrations
A precursor to AI has been the integration of SaaS applications into customer systems or third-party software, triggering automatic usage without direct human action. For example, a SaaS product integrated into a company’s CRM or ERP may automatically perform actions through APIs. How should this usage be measured if the vendor’s usage metric is named users?
In these cases, traditional licensing models based on user count or concurrent access no longer apply. Instead, consumption-based or event-triggered licenses are becoming more relevant. But it is not so easy for SaaS companies to change their licensing models for each customer as it can have an impact on revenue recognition and ARR (in short, it will drive the CFO crazy)!
Evolving Licensing Models
With technology advancing rapidly, especially with AI, SaaS companies must innovate. Licensing models must evolve to ensure SaaS providers are fairly compensated for the increased value they deliver while technically supporting customer usage and adoption of new technologies.
And as SaaS attorneys, we will be at the forefront of these discussions, ensuring that company agreements and policies are not left behind.
Learn More: Download a free guide10 SaaS Contract Basics You Must Know by David Cohen!
