Proprietary license defined: Examples + SaaS company tips 

How you license your product directly impacts your revenue, your customer relationships, and your ability to innovate. 

Understanding the nuances of proprietary licensing is crucial for any business looking to maintain control while maximizing its potential. A well-structured license can be a powerful tool, not just a legal formality. 

Read on to learn:

• The core differences between proprietary licenses and the software they govern
• How various proprietary license models work in practice
• Pros and cons of proprietary licensing, and how they compare to open-source options
• Strategic considerations for using proprietary licenses, especially in SaaS environments
• Monetization strategies and how metered billing aligns with proprietary licensing

Let’s start by explaining what a proprietary license is. 

What is a proprietary license?

A proprietary license is a legal agreement that grants users the right to use software while the developer retains ownership and control over the software's intellectual property. 

Essentially, it's a contract that outlines how you can and cannot use a piece of software. Developers use this type of license to maintain authority over their creations, dictating the terms under which their software is accessed and used.  

Proprietary license limitations

A proprietary license typically restricts the user's ability to redistribute, modify, or resell the software. These restrictions are in place to protect the developer's investment and make sure that the software is used as intended. 

When a user acquires a proprietary license, they are basically paying for the right to use the software, not to own it. Proprietary software is often distributed under these licenses, meaning that the source code remains closed, and users are limited to the features provided by the developer.

Note: Making software proprietary is effectively a method of software monetization, as is feature gating to encourage upsells. These are all pricing and packaging strategies for SaaS businesses. You can learn more about them by reading each respective post about these topics in our blog. 

Proprietary license vs. proprietary software

To understand the difference, it's crucial to answer the question: "What is a proprietary software?" Proprietary software refers to computer programs owned by an individual or a company. The owner holds exclusive rights over its usage, modification, and distribution. A proprietary license is the legal instrument that dictates the terms of use for that software.  

In other words, the software is the product, and the license is the permission slip. The license grants users specific rights, while the software itself remains under the owner's control.  

Proprietary software vs. open-source software

A key distinction arises when comparing proprietary to open-source software. Open-source software allows users to access, modify, and distribute the source code. In contrast, proprietary software keeps the source code closed. This closed nature allows companies to keep control over their innovations and provide consistent user experiences.  

Many well-known companies employ the proprietary model. Microsoft Office, with its suite of applications like Word and Excel, is a prime example. Adobe Creative Cloud, offering tools like Photoshop and Premiere Pro, also operates under this model. 

Salesforce, a leading customer relationship management (CRM) platform, similarly relies on proprietary software to deliver its services. These examples underscore how prevalent and influential the proprietary model is in the software industry

How proprietary licenses work

A proprietary license establishes the rules for using software. It's a contract between the software owner and the user, defining what is permissible and what is not. Here's a breakdown of the key elements:

• Terms of use: Specifies how the software can be used, including usage limits, seat counts, and install caps.
• Licensing agreement components: Legal documents, like end-user license agreements (EULAs), outline the user's rights and responsibilities, detailing access rights and restrictions.
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• Technical enforcement: Methods such as license keys, cloud activation, and feature gating are used to secure compliance.

Essentially, these components work together to confirm that the software is used according to the owner's terms, protecting their intellectual property and overseeing the software's distribution.

Common proprietary license models and examples

A proprietary license can take many forms, each tailored to different software and business needs. Understanding these models helps clarify how software ownership and usage rights are structured. Let’s look at some proprietary license models with real-life examples:

Perpetual licenses

A perpetual license grants the user the right to use a specific version of the software indefinitely. Users pay a one-time fee for this ongoing access.  

Example: Older versions of Microsoft Office were often sold under a perpetual license. Users would purchase a license for a specific version, like Office 2016, and could use it indefinitely.  

Subscription licenses

Subscription licenses involve recurring payments, usually monthly or annually, for access to the software. These licenses often include updates and support as part of the subscription.  

Example: Adobe Creative Cloud operates on a subscription model. Users pay a monthly or annual fee to access applications like Photoshop and Illustrator, receiving continuous updates and support.  

Per-seat/per-device licenses

These licenses charge fees based on the number of users or devices that will access the software. They are common in enterprise environments.  

Example: Many enterprise CRM systems like Monday.com use per-seat licenses, where companies pay for each employee who needs access to the software.  

Feature-based licenses

Feature-based licenses offer different tiers of software functionality at varying price points. Users pay only for the features they require.  

Example: Some advanced automation tools like Zapier offer basic features at a lower price, with premium features available at a higher cost. This is a good proprietary license example of how software vendors can offer tiers of their product.

Usage-based licenses

Usage-based licenses charge based on the actual usage of the software, such as the number of transactions or the amount of data processed.  

Example: Cloud computing platforms like Cloudera often use usage-based licensing, charging users for the amount of storage or computing power they consume.

Note: Learn more about SaaS billing models, including usage-based pricing, in our blog posts. You’ll even find guides on consumption-based billing and enterprise billing that you’ll find useful as well. 

Pros and cons of proprietary licensing

A proprietary license offers a structured approach to software distribution, but it comes with its own set of advantages and disadvantages. Evaluating these factors helps companies and users make informed decisions. Let’s begin with the pros:

Pros of proprietary licensing

• Reliable support: Developers typically offer dedicated customer support and technical assistance.
• Consistent user experience: Controlled development provides a uniform and predictable user interface.
• Better security: Closed-source code can reduce the risk of vulnerabilities and malicious modifications.
• Regular updates: Companies often provide timely updates and patches to improve performance and security.
• Professional development: Dedicated teams focus on refining features and guaranteeing quality.

Cons of proprietary licensing

• Higher costs: Proprietary software often involves substantial upfront or ongoing fees.
• Limited customization: Users generally cannot modify the software to suit unique needs.
• Vendor lock-in: Dependence on a single vendor can make switching to alternatives difficult.
• Restricted usage: License terms may limit how and where the software can be used.
• Lack of transparency: Closed-source code prevents users from verifying security and functionality.

Proprietary vs. open-source licensing

The choice between a proprietary license and an open-source license significantly impacts how software is developed, distributed, and used. Understanding their differences is crucial for businesses and developers alike. Here’s a comparative chart: 

Choosing the right model

The decision between proprietary and open-source models depends on several factors:

• Business goals: If a company aims to maintain control over its intellectual property and generate revenue through software sales, a proprietary model is usually preferred.
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• Community involvement: For projects that benefit from collaborative development and widespread adoption, open-source is a strong choice.
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• Go-to-market strategy: Proprietary software often comes with dedicated support and a polished user experience, which can be crucial for commercial success. Open-source can leverage community contributions for rapid development and innovation.  

Hybrid models

Hybrid models, like open-core, combine elements of both proprietary and open-source. In an open-core model, a core functionality is offered as open-source, while extra features or services are provided under a proprietary license. 

This approach allows companies to benefit from community contributions while maintaining control over key revenue-generating components.

When to use a proprietary license

A proprietary license is best suited for scenarios where control, support, and commercial viability are paramount. Here are several situations where this licensing model proves ideal:

• Commercial B2B software: When developing software intended for business clients, a proprietary license helps make sure that the company retains control over its product and can offer dedicated support and updates.
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• Heavily customized or enterprise-grade products: For software that requires significant customization or caters to enterprise needs, a proprietary model allows for tailoring the software to specific client requirements while maintaining ownership.
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• Software requiring strict usage controls: In industries where compliance and security are critical, a proprietary license enables the implementation of strict usage controls and restrictions.
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• Software with intellectual property protection: When a company invests heavily in research and development and wants to protect its innovations, a proprietary license safeguards its intellectual property.
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• Software offering premium support: If a company plans to offer premium customer support and maintenance, a proprietary license allows for the financial backing needed to provide those services.

Licensing considerations for SaaS companies

In a cloud-native world, a proprietary license evolves to meet the dynamic needs of SaaS businesses. Licensing models adapt to the unique characteristics of cloud-based delivery, emphasizing access and usage rather than traditional software installation.

Feature gating and user tiers

Feature gating becomes a key licensing element. SaaS platforms often offer tiered access, where specific features are unlocked based on the user's subscription level. 

This allows companies to provide scalable solutions, catering to different customer needs and budgets. User tiers, similarly, delineate access based on user roles or organizational structure. This ensures that employees have the appropriate tools and permissions.

Modular entitlements and hybrid pricing

Modular entitlements further refine licensing, allowing customers to select and pay for specific functionalities. This approach provides greater control and cost-effectiveness, as users only pay for what they need.

Compatibility with hybrid pricing models is also essential. SaaS companies frequently combine a base license with usage-based billing. 

For instance, a basic subscription might include core features, while additional usage, such as data storage or API calls, incurs extra charges. This hybrid approach balances predictable revenue with flexible pricing.

Monetizing proprietary software effectively

A proprietary license provides a framework for monetizing software, but choosing the right pricing model is vital for success. Effective monetization balances revenue generation with customer value and adheres to sound financial practices.

Choosing the right pricing model

Selecting a pricing model requires careful consideration. Perpetual licenses, with their one-time fees, appeal to users seeking long-term ownership. 

Subscription models offer recurring revenue and continuous updates, ideal for SaaS firms. Usage-based pricing, charging based on consumption, aligns costs with actual use. Each model has its strengths and weaknesses.

Building flexibility and revenue recognition

Building flexibility into pricing and licensing over time is critical. Businesses must adapt to changing market conditions and customer needs. This may involve offering tiered pricing, add-on features, or usage-based components. A flexible approach ensures long-term revenue growth and accurate revenue recognition.

Revenue recognition, especially in subscription models, requires careful consideration. Accounting standards often dictate that revenue be recognized over the subscription period, not all at once. 

Metered billing for proprietary licensing

Proprietary licensing works best with a metered billing infrastructure. Metered billing tracks usage and charges customers accordingly. This model is particularly effective for SaaS and cloud-based applications, where usage can fluctuate. It allows for precise billing, ensuring that customers pay only for the resources they consume, and facilitates accurate revenue recognition based on actual usage.

FAQs

Can you modify proprietary software?

No, you cannot modify proprietary software, as its source code is closed and only the owner has the right to make changes.

Why do companies choose proprietary licenses?

Companies choose proprietary licenses to maintain control over their software, protect their intellectual property, and provide a consistent user experience.

How do you monetize proprietary software?

Proprietary software is monetized through various licensing models like subscriptions, perpetual licenses, or usage-based fees, allowing companies to generate revenue.

What should be included in a proprietary license agreement?

A proprietary license agreement should include terms of use, restrictions on modification and distribution, and the rights granted to the user.

Can proprietary licenses be used for SaaS enterprises?

Yes, proprietary licenses are used for SaaS businesses, often incorporating flexible models like feature gating and usage-based billing to suit cloud-based delivery.

Improve your SaaS offerings with the help of Orb’s flexible billing

Managing licenses and pricing can be a complex endeavor, but it doesn’t need to be like that. Orb, the done-for-you billing platform, helps you transform your proprietary licensing into a strategic advantage. Orb's capabilities enable you to:

• Experiment with pricing agility: Move beyond rigid licensing structures. Orb RevGraph, combined with the Orb SQL Editor, gives you the power to rapidly test and refine pricing models and make pricing changes, adapting to market changes and customer needs without engineering bottlenecks.
  
  This agility allows you to fine-tune your proprietary licensing tiers, feature gating, and usage-based components, improving revenue generation.

• Provide billing precision: Eliminate revenue leakage and build customer trust with precise, error-free billing. Orb's architecture, built on the robust Orb RevGraph, helps make sure that your proprietary license calculations are accurate and auditable.
  
  Precision is crucial for maintaining compliance and providing transparent billing to your customers, especially when dealing with complex licensing agreements.

• Scale with extensibility: Integrate Orb with your existing financial stack. Orb's extensible API and modular platform, including Orb Billing, Invoicing, and Reporting, provide a unified system for managing your proprietary licenses.
  
  This extensibility allows you to scale your licensing operations as your business grows, confirming that your billing infrastructure can handle increasing data volumes and evolving requirements.

• Partner for strategic guidance: Navigate the complexities of proprietary licensing with confidence. Orb provides expert guidance and support, helping you improve your monetization strategies and avoid common pitfalls.
  
  As a thought leader in usage-based pricing, Orb acts as a trusted partner, ensuring that your transition to dynamic licensing is smooth and successful.

• Gain deep customer insights: Orb allows you to extract deep customer usage data, so that you can better understand how your customers are using the features that your proprietary licenses unlock. This data allows for better customer retention and allows for more accurate reporting.

Ready to transform your proprietary licensing from a constraint to a growth driver? Explore our flexible pricing options and unlock the full potential of your SaaS monetization.