Working as a commercial photographer, I constantly bump into the same problem. Explaining to clients why image licensing is necessary and probably even the best way to do things without boring them to tears. So, here is quick and dirty attempt to break it down as quickly as I can.
According to United States copyright law, when an artist creates a work they automatically own the copyright. One reason for this is that it insures that the image cannot be used by another individual for their personal gain without the consent of the artist. For example, an image cannot simply be grabbed from a website and used in a national advertising campaign or resold as posters. The artist has created an intellectual property and that is protected by law from being used without payment.
Another thing that copyright law guarantees is that the artist can control the way his or her work is used. When an artist allows a work to be used for advertising, the artist still holds the copyright. What is being sold, is the right to use the image. There is no transfer of ownership. The artist then charges based specifically how the image is to be used. And since there is no transfer of ownership the image(s) are non-transferable, once purchased, they cannot be shared with other businesses, or be re-sold by anyone but the creator of the image.
When an image is needed for advertising, a license for use is drawn up between the photographer and client that establishes how the image can be used and for how long. Pricing is established by determining how useful the image is. For example, imagine a photographer is commissioned to make an image of a hamburger for a national burger chain. The image might be the centerpiece of a national advertising that will increase sales by millions, or might be barely used for a test run of a new product in a limited release. Rather than charge the same for both, the client can purchase a license for use that covers exactly what they need. A business is able to commission works of different scope and scale and pay only for what they use.
Now imagine the same photographer shoots a burger much like the one used in the national campaign for a local business. The image is to be used for social network and blog posts. Of course the price will be less because the usage and potential for profit is much smaller. Without the protection of copyright law and the guarantee that the artist controls the use of their image(s) the work could be resold by the local business to the national chain at great profit. This would make it impossible for photographers to price their work, because they would never know the end usage. The inevitable conclusion would be that, either, prices would be driven so low that it would no longer be possible to get quality work, or, every job would be priced as though it were for a massive campaign.
There are a couple of exceptions. Sometimes a brand will want complete control of the images produced for their campaign, they might ask for exclusive rights. In this case they would pay more for licensing because exclusive rights would cut some of the profit potential for the artist. In rare instances the copyright can be "bought out" where the copyright is transferred to the client but typically the price is quite a bit higher because the potential that the images will be used in a large campaign is always possible. The last exception is "work for hire" when an artist is employed full-time by the client. In this case, all of the creative output of that employee as well as copyright becomes property of the employer. This does not apply to freelancers who retain all rights to the images they produce.
Well, that's it, my fast and loose, lay-mans explanation, which is in no way intended to be an exhaustive look into licensing. It can take a little time to get your head around the idea, but it is difficult to imagine a better solution. As confusing as it can be, licensing allows photographers to work for clients of all sizes, it gives small businesses access to high-quality reasonably priced images, and it allows larger clients to pay only for what they need.
Thanks for visiting and reading, if you have any questions I will be happy to try and answer them. And if you get a moment and want to see my architectural or food photography stop by and take a look at my portfolio. I have a new shorter version of this same topic called Understanding Image Licensing in Two Minutes Flat, be sure to check it out.