Exploring the open-source business model and how companies monetize it
With the rise of open-source solutions and solution providers, one of the biggest questions asked is, how do businesses monetize while giving away the source code for free?
What is an open-source company?
An open-source company is an organization that develops software but makes the source code freely available to the public. This means that others can copy the code and engine, deploy it themselves, develop it, fix bugs and more. This allows the software not only to be widely accessible for free but also to evolve in a very collaborative way.
If everything is free then how can it be monetized?
We don't have to look very far to find examples of open-source companies that have become unicorns and continue to grow. Some great examples are Elastic ($608 million in revenue, 2021), HashiCorp ($320 million in revenue, 2021), and RedHat ($3.4 billion in revenue, 2021). All these companies operate an open-source business model but have huge revenues and valuations. This is what we are going to look at.
There are many different ways that open-source companies can monetize - ultimately this comes down to the goals of the business. We are going to explore a few of the options available but keep in mind that these are just some of the ways it can be done and open-source continues to develop and grow at a rapid pace.
Donations
One of the most popular models is to offer the source code and documentation completely free and let its users donate at their discretion. This is normally done for smaller projects and donations can be solicited in various ways, such as a button on the website, a link in a newsletter, a Github donation, or one that I like - buymeacoffee.com. The latter allows you to embed an option into your website or interface and donate at the value of a coffee. Although donations are a great way to monetize some projects, this method is not feasible for bigger companies that have complex solutions and large overheads.
Support
Paid Support or Premium Care, as it’s commonly termed, is a very common business model that has done very well for larger commercial companies. This model allows users to still access the code and deploy it for free but also enables an option for companies/users to pay for additional support. This monetized plan often includes perks such as help deploying the software, customization and ongoing support for general use. Just because the source code of a project is open, it doesn’t mean it's easy to deploy or manage. This is where companies such as Red Hat have been successful and use this particular model to great effect.
The benefits of this model are, as Red Hat has demonstrated, you can build a revenue-generating company that can be scaled effectively. The drawback is, some companies only make the open-source code available with a paid plan, which goes against the open-source ethos. To truly use this model effectively, companies should offer the source code for free regardless of an option for additional support.
Licensing
Open-source companies can also license their open-source software, which applies rules to how their software can be used, edited, distributed and copied. Some open-source companies will allow individuals and smaller organizations to use their software for free while charging larger companies a fee to deploy it. Normally a license fee comes with additional benefits, such as support and training, etc. There are also two main types of licensing that open-source companies can utilize.
-Copyleft license This is a type of license in which, if code is copied and modified it still retains the original license terms
-Permissive license This grants licenses based on different needs and is much more diverse.
Licensing and open-source licensing is a huge topic in itself and Snyk has done a fantastic job at explaining this. You can read more about it here.
Cloud-hosted Services
Finally, the last model we will look at is hosting. While open-source organizations can still offer their code for free, some may offer a hosted version which is much easier to set up and maintain. This means customers can effectively use their product like any other SaaS and they typically charge on a subscription basis.
The hosted model is very popular as it now allows quick deployment but also reduces the level of maintenance and custom work developers need to carry out. The main limitation of offering a hosted model is, it will require the open-source company to offer web hosting and everything that goes along with it. This can require an enormous amount of maintenance and development.
The open-core model
The open core model is when a company releases the core software for anyone to use but then also controls things such as the roadmap and what commits are accepted into it. By doing this, the company can also charge for extra features which customers may want. Some examples could be functionality features or even security/compliance modules. This model has been very popular with open-source companies and is widely seen as a very fair way to operate. It is also very important to make sure that the open-core has enough value that developers will rally around the product from the get-go. Companies that offer very little value from the free version and charge for additional features, do not see great traction in the open-source community.
Controversial opinion
I personally believe that OSS is not a business model but a development model. We are debating this internally, so we would love to hear your feedback and opinions on this subject.
Summary
Although open-source code is widely free and available to use, it has become a popular choice for companies who also want to commercialize. The benefits of open-source are vast and with the variety of business models we discussed you can understand the various options to create a successful, revenue-generating business.