Is Open Source right for your business?

This is the first part of a series.

When you start a company, you need to think about thousands of things. The most important ones are product-market-fit and your go-to-market strategy.  The former determines if you offer a product for which a market exists.  The latter defines what your market is, what resonates with it, and how do you sell to it.

I plan to do a series of posts in which I will discuss a well-proven decision process for or against using an open source license.  I will do this under the light of your go-to-market strategy.  In this first post, we will see some of the advantages of an open source license.  Which leads many companies to decide for it to get access to those advantages right away. We will see, however, that this process often is somewhat flawed.  In later posts, we will introduce a framework how you should make this decision instead and what your options for open source models are.

Why open source?

The first thing you should define is your business strategy.  What is the market position you want to be in?  And in order to achieve this position: what are you doing and what are you not doing?  Finally you need to think about how you can align the company behind this approach.  This is the basis for everything else and it can make or break your company to get this right.

After your business strategy is defined, you can work on your go-to-market strategy. And only then – and as part of your considerations – you should decide if an open source license is the right move for your product. Most companies do it exactly the other way round. They first decide for an open source license and then try to build a business around it. The reason is that “open source” offers a lot of great advantages as we will see below.

As a user, we are always happy to get software under an open source license.  It means less vendor lock-in and less license costs.  Let’s face it: most people care about “free” as in “free beer”, not as in “freedom of speech”.

As a software developer, the decision for open source also makes sense. Developers benefit so much from open source libraries created by other developers.  Some of the leading programming languages (e.g. Python or Java) as well as our favorite IDEs are open source as well (e.g. Eclipse).

There is also recognition and fame.  If you make your product open source, it will be more attractive to other developers and used by many.  This is a nice perk after all those nights of hard work to create the stuff in the first place.

But all those points above actually miss the point.  Which is that open source products have a bigger chance to create a user community around the product. This is what makes this licensing model attractive in most cases.

User communities around your software product offer a lot of value:

  • Market presence (social lift, bigger user numbers, impact on analyst relations, brand awareness)
  • Quality assurance
  • Potential extension of your R&D team (if there is a developer community around your product as well or if your users are developers)
  • Potentially this community can add to top of your sales funnel
  • Asset for investors
  • Adds product credibility
  • Being part of something big is generating trust and emotional “me too” triggers

RapidMiner found another great value of our community with its “Wisdom of Crowds” feature. The product analyzes the behavior of its users in the background.  It then makes recommendations for good analytical functions to other users. In a complex field like data science this form of guided analytics can be extremely useful.

There is one more huge value of open source, and it might be the biggest value of them all.  Open source also gives users the freedom to innovate.  People can extend and embed the software and are creating new innovations by doing so.

All those values sound great – so what is the catch?

Open Source is NOT a business model!

The problem is that “open source” on its own is not a business model. It is a software license which accelerates innovation.  It allows for the embedding of your software into other products which generates new products.  And this often leads to a developer community around your original product.

As a side-effect, it also supports the widespread adoption because of the free price. But this is also true for freemium offers like they are used by every SaaS-software vendor in the market. Most users of Dropbox never pay a dollar and only use the free version of the product. Dropbox is not open source though and it would not have made any difference if they would have been. The free offer alone was doing the trick.

We can see that open source brings a lot of advantages.  However, sometimes those might not be necessary or sometimes this type of license can even be negative for reaching your business goals.  Which brings us back to the question of the go-to-market strategy.  In the next post, we will discuss this and how this strategy can relate to open source license models.

7 thoughts on “Is Open Source right for your business?

  1. Pingback: Your go-to-market strategy should drive the decision for open source | 5 Minutes with Ingo

  2. Ingo,

    Interesting article. However, open source software and “freemium” software are not the same:

    (1) Successful open source projects draw communities of contributors. A large contributor base, in turn, leads to rapid development and enhancement.

    (2) Open source software is transparent. It is open to inspection, and easier to integrate than “black box” software.

    It seems like a bit of hair-splitting to argue that open source licensing is not a business model. Open source licensing implies one of two business models — open core (e.g. Cloudera) or services-based (e.g. Hortonworks.) Few open source software distributors have succeeded on a pure services-based business model, so most people understand “open source business model” to mean an open core model.

    Regards,

    Thomas

    Like

  3. Hey Thomas,

    Thanks for your comment. I agree that “open source” and “freemium” are not the same. I tried to highlight the value of the user community and its contributions with this paragraph:

    “There is one more huge value of open source, and it might be the biggest value of them all. Open source also gives users the freedom to innovate. People can extend and embed the software and are creating new innovations by doing so.”

    On the business model side I have my own view though (which might become clearer in the next two posts of this little series). As a software developer, open source licenses have tons of advantages with community contributions and innovations probably being the most important ones.

    From a business perspective, however, business models around open source licenses have a lot of challenges. A services-only-model is not very attractive from a margin perspective which turns off many investors. Open-core-models have a lot of parallels with “freemium” models in my opinion. Both require excellent packaging & pricing and a paradigm change in sales models. This is all doable, but my main point is that you should figure out first how you want to sell and then decide if an open source license supports you with this or not. And then there is a “mixed” model like the one done by Atlassian which offers very open APIs and a developer-centric sales model mainly driven by product-qualified leads as often seen in SaaS businesses.

    Bear with me, I hope the next post on the different business models (coming this week) will make this a bit clearer 😉

    Thanks again for your comment,
    Ingo

    Liked by 1 person

  4. Ingo,

    Open source contributor communities and user communities are not the same, although the two communities overlap. H2O.ai, for example, has a large user community, but most of the contributors are H2O.ai employees. That has a fundamental impact on the economics of the project — or, in your terms, the business model.

    Projects with a large contributor community develop much faster than “captive” open source projects. TensorFlow and Apache Spark are excellent examples.

    My point is that the choice of open source versus commercial licensing is not simply a sales and marketing decision. It’s also about the kind of contributor community you want to build, and the degree of control you want to exercise over project development.

    Regards,

    Thomas

    Liked by 1 person

    • Well said! In these posts I am indeed trying to discuss this decision from a sales / marketing perspective. But you are right that there are other – potentially even more important! – factors which need to be considered. I in particular agree with your statement “It’s also about the kind of contributor community you want to build, and the degree of control you want to exercise over project development.”

      I am currently working on a table summarizing the different models with the pros and cons and will try to incorporate this (and cite you of course for giving me this idea).

      Best,
      Ingo

      Liked by 1 person

  5. Pingback: Which is the right open source business model for you? | 5 Minutes with Ingo

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