Which is the Right Open Source Business Model for You?

This is the third and last part of a series.

Summary: When should you consider to use an open source license

Here is the essence of the two previous posts:

  • Open source licenses support the creation of communities and accelerate innovation.  They do this by allowing people to change or even embed your intellectual property,
  • Your go-to-market strategy should match the decision for your license.  If communities and innovation are vital, open source is a good option.  If only fast market penetration is important, a freemium model might be better.  If none of this matters, traditional enterprise sales might be the better way to go.
  • Open-source-based strategies can work very well when you plan to bring a new business model into an established market.  Good examples for this are MySQL or Red Hat.  Here a “good enough”-product-strategy with a lower TCO can win the race.
  • Open-source-based strategies also lean themselves to platform products in a complex ecosystem.  A good example here is the Hadoop / Spark landscape.  A fast land grab is of benefit here as well.
  • Finally, open-source based strategies also work better for very developer-centric fields (like Hadoop again, or Atlassian etc.).  Open APIs, large communities, and marketplaces are winning strategies here.  But Atlassian (see below) is also a good example where a hybrid model can work very well.

Open-Source-Based Business Models

Let me start this blog post by saying that I am a big believer in open-source-models.  If the go-to-market strategy calls for it that is. Otherwise, there are likely better options for creating a business around your software.

The last question now is how to turn the decisions you made into a working business model. For this purpose, I won’t dive into the fine differences between “free software” and “open source.” But I would like to discuss the most important business models around open-source-software. The table below shows a quick overview over the most successful approaches:

Business Model What is open? What do you sell? Pros Cons
Open Source (e.g. Red Hat) All your software Services only, like training, support, and guarantees Supports the original ideas of open source in the strongest way. Very hard to create a scalable business. Most companies fail.
Business Source (e.g. Jedox) Older software versions Latest version of the software, support, and services Ultimately everyone gets access to everything Majority of users does not benefit from innovation, maintenance of multiple versions.
Open Core (e.g. MySQL, Talend, Pentaho) The core of the software Additional software features, support, and services Clear feature-based differentiation, a good balance between open source concepts and commercialization. Some features will never be available to the general community.

A pure open source model has seldom been a successful commercial business model. Maybe the only successful example is Red Hat. Not a surprise since it’s an operating system and if it breaks down, everything running on the machine breaks. So, selling support and guarantees can be enough of a value proposition in this case. But for business applications this is generally not a sustainable business model.  In general you can say that the only thing you can really sell is services and guarantees – which also does not scale as well as selling software.

The other two models, open core and business source, try to find a balance between community benefits and commercial success for the vendor. Let’s keep in mind that most vendors have developers who need to feed their families, too.

The idea behind an open core model is that you are not giving away all features for free, but enough features to build a meaningful community. The paid version of your product comes with more features which are valued enough by users to pay for them.

Business source is the least known of the three models. The idea here is that only paying customers are getting the latest version with all new features. Older versions, or all source code after a time delay of let’s say 3 years, turn into a standard open source license.

I have to admit that I liked the business source model for quite some time. But it has significant disadvantages: your community is no longer getting access to the latest versions. And it cannot contribute to the product any longer. So, you are losing one of the biggest advantages of open source licenses: a faster innovation. This time delay is also problematic from a quality assurance perspective. Your paying customers are now getting the version which is least tested.

Adjacent Business Models: Freemium & The Atlassian Model

Finally, I would like to discuss two adjacent models. They are not based on open-source licenses, but share many of their characteristics. Those are the freemium model and the Atlassian model. A freemium model offers a limited version of your product for free and makes you pay for the whole thing. That sounds very much like the open core model discussed above. If building a developer community and higher levels of innovation are less important for you, a freemium model is often the better choice.

The Atlassian model was introduced by the very successful software company of the same name. It has two interesting twists: the first is that using the software with only a few users is VERY cheap (but not free!). But the pricing curve is rather steep if you add users beyond a certain threshold. This has similar dynamics to freemium models and open core. And it can work very well if the value of the software scales with the number of users. The second twist is to make your APIs very well documented and developer friendly. This allows developers to hook into the product. While this is not exactly an open-source approach, it can still create a lot of innovation and a massive developer community.

I hope this series of blog posts is helpful to figure out if an open source license is the right thing for you or not.  And then ultimately how to match your go-to-market strategy and business model to it.

4 thoughts on “Which is the Right Open Source Business Model for You?

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

  2. Pingback: Is Open Source right for your business? | 5 Minutes with Ingo

  3. Ummm red hat do a lot more things than just OS…..
    Plus others companies like hortonworks brings open source solutions softwares model to business people in a very succefully way…
    the title of the article was promesing but the content conclusion was very desapointed.

    Like

    • Yes, Red Hat today does much more than OS. But between foundation in 1993 and their IPO in 1999 it was all around Linux and a perfect example that “pure” service-based business models can in fact work well. Hortonworks would be another example falling into this bucket – but they are close to infrastructure as well. And this is the point I make later: for business applications, i.e. one or several levels higher than the infrastructure level, there are no real success stories. Here the more balanced models like open core and business source has been proven much more successful. Hope this helps.

      Like

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