What Is a SaaS License?

Updated November 6, 2025 – This guide has been revised to include up-to-date information on SaaS licensing and best practices for managing software licenses and agreements.

Companies are buying SaaS (software-as-a-service) like never before. According to Gartner’s predictions, the SaaS market is projected to grow by 19.2% to a total of $299B in 2025, up from $247B in 2024.

What’s most notable, however, isn’t the growth of the SaaS space—it’s how quickly companies accumulate new applications, subscriptions, and licenses. According to the 2025 SaaS Management Index, on average, organizations have 275 apps in their portfolio and add 7 new apps per month (33% annual growth).

What often gets lost in the shuffle of hundreds of applications: SaaS licenses and the sometimes-confusing “legalese” involved with managing enterprise software. In this blog, we’ll break down what goes into a SaaS license and why understanding licensing agreements matters.

What Is a SaaS License?

A SaaS license is the formal agreement that defines: 

• Who can use a SaaS application
• How it can be used
• What it costs

Managing these licenses is critical for controlling SaaS costs and ensuring compliance. Here’s what you need to know:

• SaaS licenses are typically subscription-based (monthly or annual)
• Different pricing tiers reflect user roles or usage limits
• Licenses are often over-purchased or underutilized
• Unused licenses contribute significantly to wasted SaaS spend

The Basics of SaaS Licensing

A SaaS license provides access to a cloud-based application. Unlike traditional software licensing, SaaS licenses are usually based on a subscription model (monthly or annually) and are assigned to individual users or groups within a company.

Each license includes terms and conditions that govern:

• The number of users
• Types of usage allowed
• Included features
• Cost per user or per tier

SaaS vendors may offer different license tiers based on feature sets, usage volume, or user types (e.g., admin vs. read-only access). This variability means companies must pay close attention to what they’re buying and how it’s used.

Why SaaS Licenses Matter

Without proper software license management, companies often:

• Overbuy licenses for future growth that never materializes
• Underspend on critical features due to lack of insight into usage needs
• Lose track of ownership or user assignment, especially in large orgs
• Overlook auto-renewals, leading to unintentional costs

Understanding SaaS licenses matter due to:

• The looming risk of shadow IT
• Wasted money on lost discounts and redundant tools
• Security and compliance issues
• License go unused

The Looming Risk of Shadow IT

Zylo’s 2025 SaaS Management Index shows that employees are responsible for 33.6% of apps and 3.8% of total SaaS spend.

These tools are often purchased without IT’s knowledge or approval, leading to:

• No visibility into ownership or terms
• Lack of security review or standard access controls
• Redundant purchases and unmonitored usage

When departments operate independently, shadow IT proliferates. Over time, the risks of unmanaged apps compound across the organization.

Wasted Money on Lost Discounts and Redundant Tools

The average enterprise spends $49M annually on SaaS, yet many teams continue to buy duplicate tools or miss opportunities to consolidate vendors.

According to Gartner, organizations without centralized visibility into their SaaS portfolio will overspend by at least 25% through 2028.

This happens when:

• Renewals occur without usage insights
• Teams purchase their own versions of similar tools
• Volume discounts and enterprise agreements are left untapped

Redundant tools increase both costs and complexity, weakening your negotiating position at renewal.

Security and Compliance Issues

Zylo’s data shows that 73% of expensed apps carry a “Poor” or “Low” risk score, meaning they may lack basic controls like SSO, encryption, or audit logging.

Without application-level oversight:

• Employees may adopt tools that don’t meet corporate security standards
• Offboarded users can retain access to sensitive data
• IT and InfoSec teams lose visibility into where data lives and who can access it

When apps are added outside of normal review processes, it’s difficult to enforce identity, access, and compliance policies. This increases your exposure to data loss, regulatory noncompliance, and vendor-related risk.

A complete view of your SaaS environment — including app inventory, license assignments, and usage — is critical to reducing these risks.

Licenses Go Unused

Zylo’s 2025 Index reports that only 42% of SaaS licenses are used in the average enterprise, resulting in $21M in wasted spend annually.

Common causes include:

• Overprovisioning during onboarding
• Premium licenses assigned to low-need users
• Failure to reclaim seats when employees leave

Unused licenses represent one of the most preventable forms of waste. With accurate usage data and automated reclamation workflows, this value can be recovered quickly.

Types of SaaS License Models

Your SaaS licensing model determines how you’re charged, how access is managed, and how easily your organization can scale. Each model has its own tradeoffs. Understanding them is key to managing cost, controlling access, and planning renewals effectively.

Here’s a breakdown of the most common SaaS license models:

• Subscription: Recurring, predictable pricing
• Per-user: Fixed cost per individual
• Usage-based: Tied directly to consumption
• Tiered: Multiple pricing levels based on features
• Flat-rate: One price for all users
• Freemium: Free entry point with paid upgrades
• Per-feature: Feature-specific pricing
• Pay-per-feature: Add-ons priced individually

Subscription Licensing

This is the standard model for most SaaS platforms. You pay a recurring fee (typically monthly or annually) for access to the product.

• Predictable, recurring pricing
• Commonly used across both B2B and B2C SaaS
• Often includes access to all baseline features

Subscription pricing can be paired with other models, such as per-user or tiered pricing.

Per User License

A license is tied to each named user. Examples include Adobe’s Creative Cloud and Microsoft 365. It’s one of the most common models used in business SaaS.

• Easy to track and allocate
• Scales with headcount
• Requires careful seat management to avoid overspending

This model can lead to waste if licenses are over-provisioned and not reclaimed after role changes or departures.

Usage-Based Licensing (Consumption-Based)

Also known as pay-as-you-go or consumption-based pricing. You’re billed based on how much of a resource you consume.

• Common metrics: API calls, storage, compute time, emails sent
• Often used for developer tools, infrastructure platforms, or AI services
• Costs scale directly with product usage

While flexible, this model makes budgeting difficult and often results in unexpected overages if usage isn’t closely monitored.

Tiered Pricing Licensing

SaaS vendors offer multiple pricing levels or “tiers” with increasing functionality.

• Lower tiers offer essential features at a low price
• Mid and upper tiers unlock more advanced features or usage limits
• Used by most modern SaaS vendors to accommodate varying customer needs

Tiered pricing is flexible but can result in overpaying if your teams don’t fully use the capabilities included in higher tiers.

Flat-Rate Licensing

Flat-rate pricing charges a single fixed fee for unlimited access to the product.

• Simple, predictable pricing regardless of user count
• Best suited for organizations with many users or consistent usage
• Less common in growth-stage SaaS companies

Flat-rate licenses can be efficient, but without usage data, it’s difficult to know if the flat fee truly delivers value.

Freemium Licensing

Freemium pricing offers a limited version of the product at no cost, with optional paid upgrades.

• No barrier to entry; easy for users to start using the tool
• Premium tiers unlock more advanced features or increased limits
• Common for productivity, collaboration, and design tools

Freemium licenses can bypass traditional procurement, increasing the risk of shadow IT if not tracked.

Per-Feature Licensing

With per-feature pricing, users pay for access to specific functionalities, often within a base tier or per-user license.

• Helps customize spend based on actual needs
• Requires deep understanding of who needs which features
• Adds complexity to license and role management

Organizations using this model must monitor adoption and usage to avoid paying for unused capabilities.

Pay-Per-Feature Licensing

Similar to per-feature pricing but more granular, with specific features priced individually as add-ons.

• Often seen with AI tools, analytics platforms, or integrations
• Enables à la carte flexibility
• May result in cost sprawl across teams if unmanaged

Without oversight, costs can scale quickly as teams activate more capabilities over time.

Perpetual License vs. SaaS License

Choosing between perpetual and SaaS licenses impacts how you pay for software, manage risk, and support long-term growth. Each model comes with tradeoffs in cost, control, and operational overhead. Here’s how they compare across five key dimensions:

• Upfront investment vs. recurring fees: CapEx vs. OpEx spending models
• Maintenance and support: Manual contracts vs. built-in, automated updates
• Scalability and flexibility: Fixed user count vs. easy expansion or reduction
• Total cost of ownership: Long-term infrastructure and labor vs. ongoing subscriptions
• Compliance and governance: Decentralized software vs. centralized visibility and control

Upfront Investment vs. Recurring Fees

Perpetual licenses require a one-time, upfront payment for indefinite use. This is treated as a capital expenditure (CapEx) and can place significant strain on budgets, especially for enterprise deployments.

SaaS licenses follow a recurring subscription model, typically billed monthly or annually. This shifts spending to operational expenses (OpEx) and allows organizations to align cost with actual usage over time.

Maintenance and Support

Perpetual software often requires separate support contracts and manual upgrades, which can be costly and resource-intensive to manage.

SaaS licenses typically include updates, maintenance, and support in the subscription price. New features, security patches, and bug fixes are delivered automatically, reducing IT overhead and improving agility.

Scalability and Flexibility

Perpetual licenses are difficult to scale. Adding new users or features often involves renegotiating contracts or purchasing new licenses—and implementation can be slow.

SaaS models are built for dynamic scaling. You can add or remove users, adjust license tiers, or shift functionality with minimal friction. This flexibility is especially valuable in fast-changing environments or during periods of growth or contraction.

Total Cost of Ownership

While perpetual licenses may appear cost-effective long term, they come with hidden costs: infrastructure, IT labor, support contracts, and delayed upgrades.

SaaS licenses distribute costs over time and often reduce total ownership costs through:

• Automatic updates
• Lower infrastructure requirements
• Faster onboarding
• Built-in support and security

The tradeoff is that costs continue as long as you use the software — but you’re always working with the latest version.

Compliance and Governance

Perpetual software often lives outside of centralized visibility, especially when deployed across multiple environments. This makes license tracking and compliance reporting harder.

SaaS platforms can be integrated into centralized SaaS management systems, giving IT and procurement teams:

• Real-time usage and license visibility
• Built-in audit trails
• Easier policy enforcement

The governance benefits of SaaS are especially important in organizations managing hundreds of applications.

Enterprise Licenses vs. End-User Licenses

SaaS vendors offer different types of licenses depending on the buyer and scope of use. Knowing the difference helps reduce risk, optimize cost, and maintain control.

At a glance:

• Enterprise licenses are negotiated centrally and cover broad usage
• End-user licenses are purchased individually or at the team level
• Enterprise models offer flexibility, control, and support
• End-user licenses are governed by click-through agreements or EULAs, often with no IT involvement

Enterprise Licenses

Enterprise licenses are designed for wide-scale deployment across departments or the entire organization. They are typically governed by a custom-negotiated Master Service Agreement (MSA) and offer significant flexibility.

Key characteristics:

• Bundled access across users, often with tiered pricing
• Central ownership by IT, Procurement, or Software Asset Management
• Includes contractual terms around support, security, and data handling
• Often accompanied by SLAs, custom data privacy terms, and vendor accountability

This model ensures better visibility and governance, especially when managing business-critical platforms.

Benefits:

• Volume-based discounts and consolidation
• Strategic renewals tied to usage data
• Better alignment with internal compliance policies

End-User Licenses

End-user licenses are typically purchased and activated at the individual or team level — often without going through IT or Procurement. These licenses are governed by click-through agreements or End-User License Agreements (EULAs), which are accepted by users without negotiation.

Key characteristics:

• Tied to an individual user or email address
• Activated through self-service signups or expense reimbursement
• Outside legal or IT review in most cases

This creates compliance and security challenges:

• IT teams have no visibility into the terms of the agreement
• Click-through agreements may conflict with corporate policies
• No guarantee that the app meets security or data handling requirements

These licenses increase the risk of shadow IT and uncontrolled software sprawl. License management tools that surface these agreements and flag unapproved apps are essential to maintaining governance.

Legal Considerations in SaaS License Agreements

SaaS license agreements establish the legal framework governing the use of cloud-based software. These agreements define the rights and responsibilities of both the provider and the customer. Below are key legal considerations organizations should review before agreeing to SaaS terms.

• Intellectual property
• Liability and indemnification
• Confidentiality and data protection
• Dispute resolution

Intellectual Property

• SaaS agreements do not transfer software ownership to the customer. Instead, they grant limited rights to use the provider’s platform.
• The software provider retains intellectual property (IP) rights, including proprietary code, designs, and innovations.
• Restrictions often prohibit modification, reverse engineering, or redistribution of the software.
• Organizations should verify whether they retain ownership of any data, content, or customizations created within the SaaS platform.

Liability and Indemnification

• Liability limitations protect SaaS providers from excessive financial claims in the event of service failures, security breaches, or lost data.
• Indemnification clauses outline who is responsible for legal costs if a third-party claim arises due to software use.
• Customers should review these terms to understand how much risk they assume, especially regarding system downtime, security incidents, or contractual breaches.
• Some agreements allow customers to negotiate indemnity protections to ensure the provider assumes responsibility for certain types of failures.

Confidentiality and Data Protection

• SaaS agreements should clearly state how customer data is collected, stored, processed, and shared.
• Encryption policies should be defined for data at rest and in transit to prevent unauthorized access.
• Compliance with data privacy laws such as GDPR, CCPA, or HIPAA should be explicitly stated.
• Customers should confirm whether they can retrieve or delete their data if they terminate the agreement.
• Access control policies should outline who—both internally and externally—can view sensitive data.

Dispute Resolution

• SaaS agreements typically define how legal disputes will be handled if conflicts arise.
• Arbitration clauses may require disputes to be resolved privately rather than through litigation.
• Mediation options may encourage both parties to negotiate a settlement before escalating legal action.
• Governing law and jurisdiction clauses specify which country or state’s laws will apply to the agreement.
• Customers should assess these provisions to ensure they align with their business’s legal and operational needs.

Negotiating SaaS License Agreements

Effective SaaS license negotiations reduce costs, improve terms, and increase flexibility over time. Procurement and IT teams that come prepared with data — not just vendor quotes — are in a much stronger position to influence outcomes.

Here’s how to approach negotiations more strategically:

• Use benchmarks to anchor pricing and license quantities
• Customize contract terms to align with your renewal, usage, and compliance needs
• Consider third-party SaaS negotiators to supplement internal expertise

Benchmarking for Smarter Negotiations

Entering a SaaS renewal conversation without market benchmarks puts your team at a disadvantage. Vendor-provided pricing is rarely the lowest available.

Using internal and external benchmarks allows you to:

• Compare current pricing with similar companies, contract sizes, or license tiers
• Validate if you’re overpaying based on actual usage vs. license count
• Identify opportunities for license tier reduction or consolidation

Zylo customers, for example, gain access to real-time market pricing benchmarks, enabling them to negotiate with confidence and reduce license costs by eliminating waste.

Pro tip: Run benchmarks 90+ days ahead of renewal so you can influence terms before you’re locked in

Tailoring Terms to Fit Business Needs

Too many SaaS agreements are one-size-fits-all, built for the vendor’s convenience, not yours. Negotiating smarter means pushing for flexibility, accountability, and business alignment.

Terms to review and tailor:

• True-up clauses (avoid penalties for growth)
• Usage-based price protections (so you’re not penalized for variable demand)
• Renewal terms and opt-out windows (prevent auto-renewal surprises)
• SSO and security add-ons (negotiate these into base license costs)

Customizing license agreements ensures your software contracts reflect actual business needs, not just vendor defaults.

The Role of SaaS Negotiator Services

Specialized SaaS negotiator services give internal teams an edge, especially when dealing with top-tier vendors or complex renewals.

These services typically offer:

• Deep vendor-specific pricing intelligence
• Negotiation playbooks based on deal history
• Support drafting counterproposals and redlines
• Insights on usage trends and optimization strategies

If your team lacks the time or experience to handle complex software negotiations, a SaaS negotiator can uncover hidden savings and reduce vendor lock-in risk.

Zylo’s Managed Services offering provides this capability in-house, combining real-time benchmarks, usage data, and negotiation execution.

Tips for Managing SaaS Licenses and Agreements

Programmatic SaaS license and agreement management reduces spend, minimizes risk, and increases operational efficiency. Whether you manage 50 tools or 500, success comes down to consistent, systematized workflows.

Start with these four high-impact practices:

• Run regular SaaS audits to maintain visibility
• Align licenses to actual usage and reassign where needed
• Eliminate app overlap to reduce redundancy
• Use SSO to simplify access control and tighten security

Conduct Regular SaaS Audits

SaaS audits create a complete, current view of the apps in your environment and the licenses tied to them. Audits should be conducted quarterly or ahead of renewal cycles to surface waste and risk.

Focus on:

• Identifying all IT-managed and employee-purchased tools
• Mapping licenses to individual users and departments
• Finding inactive, unassigned, or orphaned licenses
• Validating contract ownership and renewal timelines

A SaaS Management Platform like Zylo automates this process by pulling data from financial systems, SSO, and app integrations, creating a centralized system of record that IT and Procurement can rely on.

Optimize License Utilization

In most organizations, a significant percentage of SaaS licenses go unused or underused.

Improving utilization requires:

• Monitoring login activity and user engagement
• Reclaiming unused licenses and redistributing them where needed
• Aligning license tiers to real usage patterns
• Making renewal decisions based on actual adoption

With Zylo, teams can surface usage patterns across their entire SaaS environment, making it easy to rightsize licenses before renewals — or before waste becomes embedded in the budget.

For example, ModMed used automated deprovision workflows to reclaim 2,800 unused licenses, resulting in $1.4 million in cost avoidance.

Rationalize Redundant Applications

Redundant tools create duplicate spend, reduce adoption, and introduce governance risk.

Reduce your redundant apps, following these steps:

• Categorize apps by use case (e.g., project management, design)
• Identify overlap in functionality or user base
• Evaluate business-critical vs. low-use tools
• Consolidate to preferred platforms where possible

Zylo enables data-driven rationalization by grouping apps by category, highlighting redundant functionality, and showing which tools are fully adopted — and which aren’t worth the cost.

Secure Applications Behind Single Sign-On (SSO)

Every SaaS app is a potential access point. Without centralized identity enforcement, access risk grows quickly, especially in high-churn teams.

SSO helps by:

• Centralizing access control across apps
• Supporting automated provisioning and deprovisioning
• Enabling detailed usage tracking tied to verified user identities
• Reducing reliance on manual offboarding and individual app logins

Zylo surfaces SSO coverage gaps across your stack, helping IT prioritize which applications should be secured first and where risks are most urgent.

How Does Your Company Manage SaaS Licenses?

SaaS licenses define how your organization accesses, uses, and pays for cloud applications—and they directly impact cost, security, and operational efficiency. Managing them at scale requires more than manual tracking or last-minute renewal reviews.

Zylo provides the visibility, automation, and insights to manage SaaS licenses and agreements with precision—all in a platform built specifically for SaaS Management.

Ready to take control of your SaaS licenses and agreements? Learn more about Zylo’s SaaS License Management solution or book time with our team for a demo.

Frequently Asked Questions About SaaS Licenses