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.

Your go-to-market strategy should drive the decision for open source

This is the second part of a series.

  • Part I: Is Open Source right for your business? – Introduces some of the advantages of open source licenses but also makes clear that you should make the decision for open source based on your go-to-market strategy.
  • Part II (this post): Your go-to-market strategy should drive the decision for open source – discusses a basic framework to determine if open source or at least a freemium strategy is something you should consider.
  • Part III: Which is the right open source business model for you – discussed the different options for open-source-based business models as well as adjacent models.

Let’s assume that your business already has a general strategy. This means that you in general know what your desired market position is and how you want to get there.  Your product, marketing, and sales strategy should all follow this strategy of course. One key area is your go-to-market strategy which defines:

  1. who are you selling to,
  2. what resonates most with this group, and
  3. how are you selling to it.

To figure this out, you need to look at different dimensions of your business.  The most important ones are your customers, your company itself, the ecosystem you are operating in, and your product. Every company is different, and so is your go-to-market strategy.  This post does not intent to cover all aspects on figuring out how to go to market.  Our goal is to “just” find out if open source is the right licensing strategy for you or not.  To do this, you need to answer the following 15 questions:


  • How is your market segmented? Developers or end users?  Technical buyers? Line of Business buyers?
  • Is a high level of innovation needed for your target segment?
  • What kind of company are you selling to? SME vs. enterprises?
  • How much awareness do you need to create? Can a user community play a role in this?
  • What is your approach for demand generation? Do you sell to users? Cold calling?

Indicators for the need of open source: Your market segment is developer-centric, or at least you deal with technical buyers. Your buyers care a lot about a high level of innovation. It is important to quickly integrate the latest technical developments.

Indicators for the need of a free offer: You mainly sell to smaller companies. Your most important lead source are the users of your product. Cold calling, events, or other forms of lead generation play a less important role. A user community exists for your product created through word of mouth.

If nothing of the things above applies to you, you can stop reading.  A traditional enterprise software approach is more likely to work for you.


  • What is your mission? What motivates your employees?
  • What is your sales channel? Direct or do you have a large focus on indirect channel?  Is the indirect channel creating own intellectual property based on your product?
  • How service-intense is your offering? Is your product a self-starter?

Indicators for the need of open source: Your mission anchors around changing the life of many people or disrupting industries. The main path to achieve this mission is to build allies. You depend on partners who create their own intellectual property around your product.

Indicators for the need of a free offer: Your mission anchors around market leadership and owning a market. Your product is a self-starter and does not need a complex setup or lots of education.


  • Do you need to make a fast land-grab or are you in a market where you replace an existing solution?
  • Who are your competitors?  Are they already offering products for free or even under an open source license?
  • Is your product part of a technology stack?  What about the other products?  Are they open source?

Indicators for the need of open source: You have many competitors and some offer their product already open source. Your product is part of a technology stack where all or most other products are open source.

Indicators for the need of a free offer: You follow a land-grab strategy trying to own your market quickly.

Be careful if you are in a market with only a few competitors and none is open source yet. It often does not make sense to open your own product in the early stage if there are no other reasons for doing so.


  • Is your product supposed to be the best-in-class leader in your field? Or are you following a good-enough strategy replacing an existing solution?
  • Can a community fill gaps in quality assurance, documentation, or education?
  • Do you offer an API so that developers can augment your product through extensions?
  • Is your product running on-premises or is it Software-as-a-Service?

Indicators for the need of open source: Your product is solid but not best in class. You follow a good-enough strategy for replacing current market leaders. You have a strong user community which is willing to help you on documentation. You have an API for extending your product or envision a marketplace for extensions.

Indicators for the need of a free offer: You have a SaaS product with only little time commitment necessary to get started.

It is hard to motivate a user community to provide documentation. Do not over-estimate your ability to get input from your users on those things!

How to read your answers to those questions?

Now three things can happen:

  • No or only a few indicators for open source: If you only got a few positive hints that an open source license is the right thing for you: don’t do it. You will only get the disadvantages of open source but none of the advantages.
  • Hints that you need a free offer but the license does not matter: Use a freemium-based business model instead of an open source license.
  • Hints that you need a free offer and open source matters: Go with an open source software license. And chose one of the open-source based paradigms for packaging & pricing (next post).

Practical Example

To illustrate this framework with an example, I give you some of the key answers for RapidMiner:

  • Our buyers are technical buyers and developers (data scientists in our case).
  • Data science is a field with a high level of innovation.
  • We already have a user community of more than 200,000 users attracted by word of mouth.
  • We use a PQL approach for selling, i.e. customers become users first before we sell to them.
  • RapidMiner’s mission is to change the way of how the industry of data scientists is working.
  • We sell directly and through partners, who often create own intellectual property.
  • The data science market is still premature and a fast land-grab is the desired strategy.
  • Crowded competitive landscape with many open source technologies.
  • The technology stack for data scientists is full of open source technologies.
  • The evolution of data science and machine learning is so fast that an API for extensions or a marketplace is a must.

There are also some points which make RapidMiner not perfect for an open source or even a freemium approach:

  • Data science is complex; the product has some learning curve.
  • We sell to companies of all sizes, especially also to larger enterprises.
  • The product is among the best in class.

But as you can see, there is more evidence that an open source license is beneficial for RapidMiner than not.  You can do the same exercise for your business which should tell you if open source is something you should consider. The next step is then to develop a business model around a good packaging of your product. We will discuss this in the next post.

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.