SAAS vs. Licensing: The Right Model for Your Software Startup
Written By Ethan King
If you’re building a software product, one of the most important early decisions you’ll make is how to deliver it to your customers: Do you go with a SAAS (Software as a Service) model, or do you offer traditional licensing?
This choice isn’t just technical. It shapes your business model, cash flow, support structure, scalability, and valuation.
Let’s dive into the key differences between these two options and consider the reasons you may want to choose one over the other.
Defined:
a. SAAS: A service where multiple customers gain access to and use the same software over the internet. The service is deployed via servers provided by the supplier of the service.
b. Licensing: The supplier of the software provides the right to use the software to customers under specified terms of conditions.
Delivery & Infrastructure:
a. SAAS: The company hosts the software in the cloud, customers access it via a browser or app, and the company is responsible for security and up time.
b. Licensing: Customers install and run the software on their own infrastructure (on-premises or private cloud). The supplier then only provides support as needed.
Question to ask yourself: Do you want full control over the product experience (SaaS), or are you okay handing over part of it (licensing)?
Revenue Model
a. SAAS: Usually provided on a subscription basis, allowing companies to have a constant stable cash flow from month to month.
b. Licensing: Usually requires an upfront payment. Over time, there will be periodic updates and maintenance to the software to provide customers an enhanced experience.
Questions to ask yourself: Do you need money right now, or do you want stable cashflow for the long term?
Product Maintenance & Updates
a. SAAS: The company determines when and how updates happen. However, this also means you need a dedicated customer service team that can take feedback and provide constant bug fixes and updates so the software runs smoothly.
b. Licensing: The software is stagnant unless the customer chooses to update the software, which usually occurs by paying the company an additional fee.
Questions to ask yourself: Questions to ask yourself: Are you ready to run 24-hour support? Or, are you able to support multiple versions of the software?
Scalability & Growth Potential
a. SAAS: Scales easily across markets and geographies. You manage infrastructure centrally and serve thousands of users on the same platform.
b. Licensing: Each new customer may require a separate deployment or environment. Scaling can require significantly more support and services.
Question to ask yourself: Are you focused on tailored sales to a specific customer base, or are you hoping to cast a wide net to scale across multiple markets?
Security & Compliance
a. SAAS: The company owns the data security and privacy infrastructure and thus takes on the liability for keeping that infrastructure up and running. The company will need to invest and ensure it meets privacy compliance requirements such as the General Data Protection Regulation (GDPR), or the California Consumer Protection Act, and additional requirements such as Security Operations Compliance (SOC).
b. Licensing: The customer manages the data infrastructure and needs to provide its own security compliance protocols.
Questions to ask yourself: Do you have the capability or does the industry you are appealing to offering both models?
Hybrid Models: Best of Both?
Some startups do both:
The company offers a SaaS product as the default; and
The company provides a licensed version for customers, where the model fits their needs better.
This gives you the benefits of SaaS, while keeping the door open for larger deals or regulated industries. Companies that are operating in highly regulated industries; finance, healthcare, energy may opt to provide a license, or a hybrid model SAAS/licensing agreement. Most companies, in regulated industries will still want a firm understanding of your data collection and security protocols.
Final Thoughts
As a startup, the way you deliver services is key. SaaS offers speed, recurring revenue, scalability, and user insights that are great for fast-moving teams aiming to grow quickly. Licensing is great for regulated industries and leads to large upfront payments that may be
Ethan King is a business lawyer experienced working with start-ups, nonprofits, consulting firms, and mid-large size businesses in a variety of transactional matters. His experience working in-house provides him with a unique perspective to analyze risk, consider the regulatory environment, understand business strategies, and break down complex legal issues into simple terms.
Ethan has negotiated numerous types of agreements, including, but not limited to consulting agreements, products, software, engineering services, influencer agreements, profit sharing, and more. His office can be reached at (303) 736-9634
