Software Licenses used by software buyers are broadly of two types: Commercial and Open Source. Commercial licenses are more common for full applications like Outlook, or infrastructure software like database server. Open source licenses are commonly used for operating systems like Linux, and application servers like Apache, Tomcat, as well as database servers like MySQL, Postgresql etc.

Open source licenses for applications do not constrain the number of seats, no of connections or users etc. However, they may constrain the user of license in other ways. This article discusses commercial licenses in more detail below with regards to their benefits, maintenance, and selection of appropriate license.

Per seat license: These licenses are bound to each PC, desktop, laptop, server on which they are installed. These are typically used for productivity applications like word-processing, spreadsheet etc, and the full application resides on the machine. So there is no need to connect to another server, and the application can run on its own.

Per connection license: These licenses are useful where there is a shared access to an enterprise resource, e.g. many users accessing a database server on the network. The client package may be installed on users' machines, and the server is accessed over the network. Usually a license server controls the number of users, which can access the network at any time.

Per CPU license: This is again applicable for server applications, where the vendor charges license fee based on no of CPUs in the machine. With dual or multi-core CPUs becoming more common, the licensing policies of major vendors have diverged, with some charging same as single CPU (notably Microsoft), while others having more fees for multi core CPUs.

Feature based licenses: Many applications are these days hosted or licensed on a semi-license and semi service model. Also, with modularity being built into software as well as licensing mechanism, buyers can choose and pay only for features/modules they are interested in. So the license server checks and enables only the required features for the customer.

Transaction based license: Another licensing innovation is constraining the no of requests, transactions per period of time. E.g. a software license may allow a user to do only N no of operations say in a 24-hour period. This kind of licensing especially makes economic sense where hosted service is provided on the internet. It enables the service provider to charge based on transactions, bandwidth or load on the servers, and still be able to guarantee service levels to customers based on their purchase commitments.

Software as service: This is a twist on the economics of software licenses. The traditional software license enables one to purchase a software license, which enabled the user to use the software forever (theoretically), and be entitled to support, and possibly upgrades for a period. Most vendors support their software for several years after which they may discontinue the support. The buyer was forced to pay for upgraded version, or continue with the version for which support is discontinued.

Software as service is another concept made popular and successful by examples of the like of Salesforce.com. In this model, there is no upfront cost of license, but ongoing payment based on no of transactions. So for the buyer, the cost becomes an operational expense rather than capital expense. It also allows some amount of flexibility and possibility of no vendor lock in. However, it is debatable if the data can be migrated easily, and if users can be trained to work productively on another system without associated costs.