What is a software license?

Every piece of commercial software you use in your organization – from the operating system on your laptop to the ERP platform running your supply chain – is governed by a software license. Yet despite its central role in how businesses acquire and consume technology, the concept is widely misunderstood. Many people assume that buying software means owning it outright, much like purchasing a physical product. In practice, that is rarely the case. In this blog post we answer the question of what is a software license?

What is a software license?

A software license is the legal instrument that grants you, the customer, the right to use a piece of software under specific conditions defined by the vendor. It establishes what you can do with the software, how many people or devices can use it, for how long, and what happens if you breach those terms.

Licenses come in multiple forms that define length, update rights and ownership/usage terms, encompassing perpetual, term, appliance-based and open-source models, among others. Crucially, a software license agreement does not transfer ownership. Indeed, Gartner^® states in Avoid Unexpected M&A Software Costs With IT Due Diligence¹, that: “In an M&A deal, software used by the target in the course of its day-to-day activities can create some unique problems for the buyer. Commercial software is almost never owned, but rather is licensed from a supplier – normally, a software vendor.”

Understanding this distinction matters because it affects everything from your annual IT budget to your compliance posture during audits, mergers and acquisitions.

How do software licenses work? The core components of an agreement

Once you understand what a software license is, the next question is how it works in practice. A license becomes meaningful when its legal terms translate into everyday rules  – what your people can install, access, and do, and what your organization must pay and manage to stay compliant.

At its core, a software license agreement defines how the software can be used and at what scale. This includes how many times it can be downloaded or installed, whether usage is tied to a device or an individual, and whether access extends to contractors or affiliates. It also sets how long the software can be used, distinguishing between perpetual rights to a specific version and subscription-based access that expires if payments stop.

The agreement also determines how the software is priced and measured. Some vendors charge per user or device, while others base costs on usage such as transactions or compute. Clear definitions of what is included  – licenses, support, updates – are essential to avoid unexpected costs or renewal issues.

Finally, it defines access to the underlying technology, particularly whether users can view or modify source code. Proprietary licenses typically restrict this entirely, while open-source licenses allow it under specific conditions that organizations must still manage carefully.

Together, these elements explain how a software license operates in practice, shaping how software is deployed, governed, and optimized across the business.

Types of software licenses

The software licensing landscape has grown considerably over the past decade. What was once a choice between buying a boxed product or not has evolved into a broad spectrum of licensing models, each suited to different commercial and technical needs. Here is an overview of the most common types of software licenses.

• Proprietary and commercial licenses are the most widespread type of software licenses in enterprise environments. Under a proprietary license, the vendor retains full ownership of the source code and grants the user a limited right to run the compiled software. Modification, reverse engineering and redistribution are typically prohibited. Most commercial desktop and enterprise applications – think Microsoft 365, Adobe Creative Cloud or SAP – fall into this category, and the specific terms are usually spelled out in an end user license agreement (EULA). The EULA is the contract you accept (often by clicking “I agree”) before you can install or use the software, and it defines the boundaries of permitted use.
• Perpetual licenses represent the traditional model of software acquisition. So, what is a perpetual license for software? In simple terms, you pay a one-time upfront fee and receive the right to use that version of the software indefinitely. Perpetual licenses work well in stable environments – air-gapped networks, industrial control systems, or situations where a specific software version must remain unchanged for regulatory reasons. The trade-off is that staying current with patches, security updates and new features usually means paying an annual maintenance fee on top of the original purchase.
• Subscription and term licenses are a type of software license that have become the dominant model across the industry. Rather than a large capital expenditure upfront, you pay a recurring fee – monthly or annually – for ongoing access to the software, typically including updates and a defined level of technical support. SaaS (software as a service) platforms such as Microsoft 365 and Salesforce are built entirely around this model. The advantage is predictable operational expenditure and the ability to scale licenses up or down with headcount. The disadvantage is that access ends when payments stop – you never truly “own” anything.
• Consumption-based licensing is a newer software licensing model that charges based on actual usage – transactions processed, data stored, compute hours consumed, or API calls made. This model is where charges are metered to actual usage (transactions, data, compute, tokens), billed periodically, enabling scale-up/ scale-down without renegotiation. It aligns cost closely with value but can make budgeting unpredictable if usage spikes.
• Concurrent user licenses (sometimes called floating licenses) cap the number of people who can use the software simultaneously rather than tying a license to a named individual. This model is common for specialized engineering and design applications where not everyone needs access at the same time.
• Volume and enterprise licensing programs, such as Microsoft volume licensing, are designed for organizations that need to deploy software at scale. These agreements typically offer discounted pricing, simplified administration, centralized license management and flexible terms tailored to the size and needs of the buyer. They are a staple of enterprise procurement and often bundle software, cloud services and support into a single contractual framework.
• Open-source licenses take a fundamentally different approach by granting access to the source code and permitting use, modification and redistribution under defined terms. Permissive licenses (MIT, BSD, Apache 2.0) impose few restrictions, while copyleft licenses (GPL, AGPL) require that derivative works remain open under similar terms. As Gartner³ notes in the 2026 Innovation Insight: Open-Source Low-Code Development Technologies report, that, “Some restrictive open-source licenses such as GPL and AGPL impose limits on distribution in certain cases.”

Beyond these primary categories of software license, you may also encounter freeware (free to use but not open source), shareware and trialware (free for a limited period or with limited functionality), OEM licenses (bundled with hardware from the original equipment manufacturer), academic licenses (discounted or free for educational institutions), and dual licenses where the same software is offered under both an open-source and a commercial license depending on the use case.

What are software licensing agreements used for?

Software licensing agreements serve several critical functions for both vendors and customers. At their core, they protect intellectual property, define usage rights and establish the legal relationship between the parties. But their practical applications extend well beyond the legal framework:

• Compliance and audit defense. A well-managed software license position ensures your organization is not over-deployed (which creates legal and financial risk) or over-licensed (which wastes budget).
• Cost control and optimization. Understanding the terms of your software license agreements allows you to right-size your estate, consolidate redundant tools and negotiate better renewal terms.
• Mergers, acquisitions and divestitures. Note that rights to use certain software do not necessarily automatically transfer from one owner to another. Gartner² cautions that “Organizations considering the purchase of an acquisition target (aka buyers) may incur substantial and unexpected costs if a target’s software contracts are not acquisition-ready. The need to negotiate new software licenses post acquisition can significantly impact the overall deal value and integration timeline.”
• Security and operational continuity. Properly licensed software ensures access to patches, updates and vendor support – all essential to maintaining a secure and resilient IT environment.

How much does a software license cost?

There is no single answer. Costs for software licenses range from zero for open-source and freeware products to millions of dollars annually for enterprise-wide deployments of major platforms. The price depends on the software licensing model (perpetual, subscription, consumption-based), the number of users or devices, the level of support included, and the vendor’s pricing structure. It is worth noting that Gartner¹ analysts carefully analyze and review software vendor public statements and filings to understand and reconcile the different usage of terminology and reporting practices between vendors. A total cost of ownership analysis over at least three years is the most reliable way to compare software licensing models and avoid surprises.