How SaaS License Management Works

Modern organizations face increasing complexity in managing software licenses as pricing models evolve beyond traditional subscription approaches. Businesses spend an average of $7,900 per employee annually on SaaS tools, marking a 27% increase over the last two years. With 38% of SaaS companies billing based on actual software usage, effective license management has become critical for controlling escalating costs while ensuring operational efficiency.

Understanding Modern SaaS License Management

SaaS license management encompasses the strategic oversight of software subscriptions, usage tracking, and billing optimization across an organization's technology stack. Unlike traditional perpetual licenses, modern SaaS licenses operate on sophisticated pricing models that combine subscription elements with usage-based components, requiring advanced management capabilities.

Contemporary license management involves three core operational areas:

• Subscription Oversight: Managing recurring fees, renewal cycles, and user allocations across multiple vendors
• Usage Monitoring: Real-time tracking of consumption metrics for metered billing components
• Cost Optimization: Analyzing utilization patterns to eliminate waste and right-size licenses

As of January 2025, SaaS pricing was up by 11.4% compared to the same time in 2024, a stark difference from the 2.7% average market inflation rate of G7 countries, making proactive license management essential for controlling escalating costs.

SaaS Pricing Models Transforming License Management

Usage-Based Billing Systems

Usage-based billing (UBB), also known as consumption-based billing and metered billing, is a billing system that charges customers for services based on their actual usage or consumption. This consumption-based pricing model creates direct alignment between software value and costs incurred.

Modern usage-based billing systems track multiple consumption dimensions:

• API calls and transaction volumes processed
• Data storage capacity and bandwidth utilization
• Computing resources and processing time consumed
• Feature-specific usage metrics and interaction rates

Metered billing is a billing model in which businesses charge customers based on how much of a product or service they use. It's the same principle that governs how most utilities are billed, providing transparency and cost control for organizations with variable usage patterns.

Metered Billing for SaaS Applications

Metered billing is a pricing model where the customer is charged based on their consumption level of the product or service. Typically, under metered billing, the customers subscribe to the product plan that will include a base price for a specific usage limit.

Key metered billing components include:

1. Defined Usage Metrics: Specific measurements like API requests, data processed, or storage utilized
2. Tracking Systems: Infrastructure to record consumption accurately in real-time
3. Rate Structures: Pricing tiers that may include graduated or volume-based pricing models
4. Billing Reconciliation: Processes to aggregate usage and generate accurate invoices

Organizations implementing metered billing must establish robust tracking mechanisms to ensure accurate consumption measurement and fair billing practices.

Pay-As-You-Go Pricing Models

Usage-based pricing is a consumption-based pricing model in which customers are charged only when they use a product or service. Pay-as-you-go models represent the most flexible consumption-based approach, where customers pay exclusively for actual resource utilization without minimum commitments.

These models are particularly prevalent in:

• Cloud infrastructure services charging for compute time, storage, and data transfer
• AI applications billing based on tokens, API calls, or processing time
• Development platforms pricing according to build minutes, deployments, or resource usage
• Analytics services charging per query, data processed, or report generated

Pay-as-you-go pricing is a consumption-based model (also known as metering or metered usage or usage based) used by software companies to charge customers based on how much a customer uses a product each month.

Hybrid Pricing Models

As BCG's IT Spending Pulse surveys from 2018 to 2023 show, IT buyers have started to shift toward hybrid (combination of subscription and usage pricing) and pure usage-based pricing models. This evolution reflects the growing complexity of modern software consumption patterns.

Hybrid pricing models typically combine:

• Base subscription fees providing platform access and core features
• Usage-based components for variable consumption beyond included allocations
• Commitment tiers offering volume discounts for guaranteed usage levels
• Overage billing for consumption exceeding pre-paid or included limits

Microsoft's Copilot: Priced at 60%-70% of the base product fee, Copilot reflects AI's productivity enhancements while combining predictable subscription revenue with a variable usage fee that scales with the value delivered.

Advanced License Management Challenges

AI-Driven Pricing Complexity

This aligns with Zylo's 2025 SaaS Management Index, which notes that businesses are increasingly facing unexpected charges due to AI pricing structures. As vendors refine their models, many are moving toward usage-based billing, where costs scale based on real-time demand rather than fixed rates.

AI applications introduce unique licensing considerations:

• Token-based billing with variable computational costs per interaction
• Model-specific pricing tied to AI capability levels and processing complexity
• Real-time usage monitoring requirements for cost control and budget management
• Prepaid credit systems to manage consumption risk and spending limits

Pricing Inflation and Cost Management

91.2% of IT leaders recognize software optimization as a way to reduce costs, 66.5% of IT leaders have experienced unexpected SaaS charges due to AI-based or usage-based pricing models, Companies underestimate their SaaS spend by 304% on average. Organizations face multiple cost pressures:

• Annual price increases frequently exceeding general market inflation rates
• Complex pricing structures that obscure true total cost of ownership
• Shadow IT adoption creating unmanaged subscription sprawl
• Usage volatility making budget forecasting increasingly difficult

Consumption-Based Pricing Model Management

Consumption-based pricing is a pricing model where customers are billed based on their actual usage or consumption of services. Consumption-based pricing (also called "pay-as-you-go," "metered billing," or "usage-based pricing") refers to a pricing model in which the cost of a product or service is determined based on the usage or consumption of that product or service.

Managing consumption-based pricing requires:

1. Real-Time Usage Tracking: Infrastructure to monitor consumption across multiple dimensions
2. Automated Billing Reconciliation: Systems to aggregate usage data and generate accurate invoices
3. Budget Controls: Mechanisms to prevent unexpected overage charges and spending spikes
4. Vendor Relationship Management: Negotiations focused on usage commitments and rate optimization

Implementing Effective License Management Strategies

Technology Infrastructure Requirements

Modern license management demands sophisticated technical capabilities:

• Event-Based Architecture: Processing high-volume usage events for accurate metering
• Real-Time Analytics: Providing immediate visibility into consumption patterns and costs
• API Integration: Connecting disparate systems for unified license oversight
• Automated Reconciliation: Streamlining billing processes and reducing manual errors

Organizations requiring advanced billing infrastructure can leverage platforms like Lago's comprehensive metering and billing solution, which processes up to 15,000 billing events per second and supports all pricing models including subscriptions, usage-based billing, and hybrid structures.

Cost Optimization and Financial Controls

Effective license management requires implementing robust financial controls:

• Usage-Based Optimization: Right-sizing licenses based on actual consumption analytics
• Commitment Planning: Leveraging volume agreements for favorable pricing terms
• Budget Monitoring: Real-time tracking of spending against allocated budgets
• Performance Analytics: Measuring key metrics like cost per user and utilization efficiency

Strategic Vendor Management

Organizations must develop sophisticated vendor management approaches addressing:

• Contract Negotiation: Securing favorable terms for usage-based components and overages
• Performance Monitoring: Tracking service level agreements and billing accuracy
• Renewal Planning: Optimizing contracts based on historical usage patterns
• Risk Management: Establishing usage caps and budget controls to prevent cost overruns

The Future of SaaS License Management

Perhaps the most transformative trend is the emergence of true outcome-based pricing, where vendors share risk and reward with customers based on measurable business outcomes. While only 9% of companies have fully implemented such models, 47% are actively exploring or piloting these approaches.

Organizations must prepare for increasing pricing model sophistication by:

• Investing in Advanced Analytics: Implementing tools for predictive cost modeling and optimization
• Developing FinOps Capabilities: Applying cloud cost management principles to SaaS spending
• Building Cross-Functional Teams: Aligning procurement, finance, and IT for coordinated license management
• Implementing Automated Controls: Deploying systems for real-time usage monitoring and cost optimization

In 2025, we anticipate SaaS Management and FinOps will begin to converge, catalyzed by AI and consumption-based apps. This convergence will require organizations to adopt more sophisticated approaches to software cost management, combining traditional license oversight with dynamic consumption monitoring and optimization practices.

For organizations seeking to modernize their billing infrastructure and license management capabilities, Lago's open-source metering and billing platform provides the architectural flexibility needed to handle complex SaaS pricing models, including consumption-based pricing, hybrid models, and usage-based billing systems. The platform offers both cloud-hosted solutions and self-hosted deployment options while supporting advanced features like entitlements and real-time usage tracking to accommodate diverse organizational requirements.

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