What is a SaaS License? | Legal Requirements & Conditions

When building any kind of SaaS go-to market strategy, the focus is mainly on acquiring paying customers profitably, in the quickest amount of time. But one often overlooked is SaaS license agreements — a play on traditional software licensing.

In this article, we'll reveal an end-to-end framework that covers SaaS agreements, SaaS subscription packages, tiered pricing, and how to protect your company with a software license.

What is a SaaS license?

A SaaS license is a legal agreement between a SaaS provider and a user that outlines the terms and conditions for utilizing the software service. A good SaaS contract defines the rights, limitations, and responsibilities of both parties involved, ensuring a smooth deployment process in both directions.

Typically, a SaaS license will include directives that must be upheld by both the software provider and the customer. For example, it may discuss how usage-based pricing works i.e. how many users a company may have with one license. It can also specify things like service level agreements — where the software provider agrees to guarantee a certain level of uptime.

For buyers, these contracts ensure customers understand their obligations to compliance, usage guidelines, intellectual property, and payments. For developers, the license details agreed-upon commitments to deliver promised updates, technical support, and customer data privacy controls.

The purpose of SaaS licensing

The purpose of a SaaS license for software providers is to establish a legal framework and define the terms and conditions under which their software service is accessed and utilized by customers.

In the broadest sense, a SaaS license is meant to protect businesses from risks inherent to providing proprietary software to customers. It also protects the users who access these services by outlining clear terms of use that customers can rely on.

In truth, SaaS licenses are a tool for both enterprise software legal playbooks and customer experience management. When a software license is created and upheld, both buyer and seller will enjoy a simpler business relationship, clearer expectations, and less risk of complication if those expectations aren’t met.

Types of SaaS licenses

There are four primary types of SaaS licenses: per-user, usage-based, and feature-based. While other variations exist, these three options represent the bulk of SaaS purchases.

Per-user licensing model

Per-user licensing, also known as per-seat or seat licensing, operates on a subscription-based model. Under this licensing model, companies pay a predetermined fee for each user or seat accessing the software. Pricing may vary based on the tiered levels of access, ranging from a few end users to full-enterprise access.

Usage-based licensing model

Usage-based licensing, also referred to as consumption-based licensing, ties the pricing of the SaaS environment to the actual usage of the software. For example, pricing may be based on factors like the number of transactions, reports generated, or data consumed within a defined period.

Feature-based pricing model

A feature based pricing strategy is one that gradually unlocks higher tiers of the SaaS with more fees. In this model, the SaaS apps' fee goes up based on how many features you wish to use. The company pays its subscription fee according to the features it uses.

Perpetual license vs. SaaS license

It’s worth mentioning the distinction between perpetual licenses and SaaS licenses as options for business owners.

Perpetual licenses entail a one-time upfront payment, granting indefinite use of the software. This model is often associated with software like Microsoft Office, where you pay a lump sum for ownership and can install the software on your device.

On the other hand, SaaS subscriptions operate on a pay-as-you-go basis. With a SaaS license, users don't own the software but instead pay for ongoing access and usage. It is a subscription-based model where the software is hosted and maintained by the SaaS provider, and users only pay for the period they use the software.

Each of these strategies will require different details to be included within the SaaS license agreement. Typically, agreements based on ongoing access tend to be more complicated, so for our purposes, we’ll be focusing on SaaS licenses rather than perpetual licensing.

What does a SaaS license include?

Like any type of business documentation, SaaS license agreements must be comprehensive enough to cover any eventuality that a SaaS provider may encounter. At Enzuzo, we recommend the following areas be included at the minimum:

1. Scope of the license

The license must specify usage terms for number of active users, approved devices, and geographical locations.

2. Pricing terms

All charges and fees related to the subscription service must be transparent, including details on payment schedules, methods, and late fee policies.

3. User rights and usage restrictions

The license specifies the rights granted to users, such as accessing and using the SaaS application within defined parameters. It may also outline any limitations or restrictions on usage that may be required.

4. Intellectual property

The license clarifies the ownership of the SaaS provider's intellectual property and typically includes provisions protecting their proprietary rights.

5. Data security and privacy

SaaS licenses address the handling of user data, ensuring compliance with applicable data protection laws and outlining the provider's data security measures.

6. Support and maintenance

The license may detail the level of technical support and maintenance services the SaaS provider will offer during the license period.

7. Termination and renewal

The contract must outline the conditions under which the license can be terminated or renewed, including any notice periods or requirements.

How to write a SaaS license agreement

With all of the above in mind, creating a SaaS license agreement might seem overwhelming. How can a business ensure that its policies will adequately protect them from risk while ensuring that customers receive the best possible user experience?

We recommend the following steps to begin, though note that as legal agreements can get complicated, the following are just the beginning. Use this as a research tool but be aware that your policies may need to be reviewed by legal experts before proceeding.

1.  Understand applicable regulations that govern software licensing across data protection, privacy, and any other areas where the software is offered. For example, the EU’s General Data Protection Regulation (GDPR) and the US’s California Consumer Privacy Act (CCPA) both include region-specific mandates governing user privacy that must be accounted for.

2. Define the parties involved and specify the scope of the license, including all rights granted to the user.

3. Address intellectual property rights, including any restrictions on reproducing, modifying, or distributing the software.

4. Outline the responsibilities and obligations of the user, including compliance with terms of use, restrictions on unauthorized use or distribution, and any other relevant obligations.

5. Include provisions that address data protection and privacy, outlining how user data will be handled, stored, and protected. Specify any limitations on the use or sharing of user data.

6. Detail the level of support and maintenance services the software provider will provide during the license term. Specify the response times, channels of communication, and any additional support offerings.

7. Include disclaimers and limitations of liability to protect the software provider from certain risks and potential damages arising from the use of the software.

8. Specify the governing law and jurisdiction that will apply to the agreement. Determine the dispute resolution mechanism, such as arbitration or mediation, to resolve any disputes between the parties.

9. Review the draft agreement and consult with legal professionals who can provide expertise for software licensing and contracts, help obtain signatures, and ensure all aspects of the license can stand up to legal scrutiny.

Alternatively, you can use Enzuzo’s pre-built Subscription Services Agreement generator to create a personalized license agreement in as little as 15 minutes. This is an easy way to ensure that your SaaS licensing covers all the bases without spending undue time and money on in-depth reviews.

👉 Start Building Your SaaS License Agreement 

SaaS license management tips

Did you know that the typical business uses 80 SaaS applications on average? Even with a structured license creation strategy in place, this many contracts can get overwhelming to manage. In response, companies develop focused SaaS license management (SLM) strategies.

These strategies represent an  ongoing process wherein SaaS providers can effectively document, monitor, and update their license agreements with customers. While small businesses may handle license management manually, larger enterprises dealing with numerous licenses can benefit from automation tools to assist their managers.

SaaS license management offers several advantages for software development companies, including:

• Efficiently organize and handle large volumes of license-related data

• Reduce margin of error by automating and streamlining data management and updates

• Assist customers in account management by reviewing usage patterns and suggesting potential improvements to enhance their experience

• Ensure software security and compliance by tracking usage and guaranteeing that only authorized users are accessing resources

• Mitigate legal pitfalls by taking an organized, structured approach to license management

By maintaining effective SaaS license management practices, software development companies can provide customers with a consistent and reliable SaaS application they can depend on, leading to enhanced customer satisfaction and long-term success. Our solutions at Enzuzo were designed for just that purpose, giving businesses an easy way to generate and update privacy documentation as needed.

The risks of poor SaaS license management

With the above established, it stands to reason that proper licensing is necessary for any company entering the SaaS domain. Neglecting to establish a robust SaaS license agreement can yield significant repercussions for both SaaS providers and users.

Consider that SaaS providers may face legal liabilities and financial burdens when users violate the terms of use or misuse the software. Some unscrupulous customers may attempt to reverse engineer proprietary code or provide unauthorized distribution of the services outside of the SaaS provider’s purview. License agreements may not be able to prevent these actions directly, but they provide clear guidelines that a provider can use to maintain control of their operations and pursue additional legal recourse if necessary.

Beyond the direct legal implications, the absence of a well-defined agreement can give rise to misunderstandings, conflicts, and time wasted on unnecessary communications. For both legal protection and internal efficiency, every SaaS provider should make their licensing a priority.

Simplify your legal and privacy policy management

A recurring theme in SaaS license management is that companies must balance license policy creation with their other business goals. It’s vital to ensure that each SaaS license covers the appropriate bases, but at the same time, few companies have the extra time and resources to hire expensive legal counsel for every SaaS application on offer. That’s where solutions like Enzuzo come in.

We’ve spent years building proprietary tools to help companies achieve their privacy and legal compliance goals. Our subscription services agreement generator is the perfect solution for companies interested in protecting their business with validated templates professionally drafted by lawyers. For quick and comprehensive deployment of SaaS licensing contracts, there’s nothing better. Contact Enzuzo to learn more.