Open Source Software Projects' Business Models
Unveiling the Open-Source Landscape: Understanding Open Core Model and Monetization Strategies [Open Source Software Evaluation - Blog Post Series #4]
In our previous blog post, we discussed the evolutionary stages of an open-source software (OSS) project: from cultivating an active developer community (Project-community fit), to gaining traction among users (Product-market fit), and ultimately identifying a value proposition that customers are willing to pay for (Value-market fit). Each stage is integral to the project's journey from community-backed initiative to a revenue-generating entity.
In the upcoming pair of blog posts, we'll delve deeper into how these growth stages interlock with the strategic choices a project undertakes. The manner in which a project harnesses the power of its community, captivates its user base, and capitalizes on its unique value proposition are all intricately tied to the business model it chooses to implement.
Turning open-source software (OSS) projects into profitable businesses is a journey that takes time and strategic planning. In the early days, the idea of establishing profit-making companies via the open-source distribution channel was perceived as conflicting. It seemed to challenge the primary ethos of open-source, which is to be free and accessible to all. Yet, adapting open-source software for enterprise use holds plenty of profitable potentials. It comes with unique challenges that, when handled well, can lead to profitable opportunities.
In this journey, we've seen different approaches to building OSS businesses. Early OSS companies, or what we can refer to as the first wave, primarily focused on offering professional services. These included services such as installation, training, and continuous technical support. However, this model had its limitations - renewals were hard to predict, and profit margins were narrow. As the landscape evolved, the second wave of OSS companies emerged, adopting what's known as an open-core model. This approach involved providing two software versions: an open-source "core" version, and an enterprise version. The enterprise version was based on the core code but included premium features like enhanced security and integrations. These added features were made available through a subscription model.
In recent years, a new trend has emerged among OSS businesses – the introduction of cloud-hosted services as a revenue source. In this model, users are given access to the open-source binary via a cloud-hosted platform, similar to a standard Software as a Service (SaaS) offering, thereby alleviating the need for users to set up and manage the product themselves.
Whether it's network infrastructure, databases, desktop applications, or browser extensions, open-source project founders have a common concern: "How can I build a business around my open-source project?" Choosing an effective business model is crucial as it impacts not only the project's commercial success but also community support. Regrettably, some communities and projects have split due to disagreements arising from commercial choices and governance issues.
Over the years, the open-source community has crystallized around five key business models, namely:
Open-core: This business model blends open-source and proprietary software. The core product is freely available and open-source, although it might be feature-limited. Users can choose to pay for additional services or access a feature-rich, proprietary platform.
Professional Services (Proserv): Under this model, companies offer services such as support, consultancy, or custom development around their open-source projects. While it provides a direct source of income, it can be unpredictable and requires a corresponding scale in staff and resources to deliver these services.
Hosting: In the Hosting model, open-source companies offer cloud-hosted versions of their software, similar to Software-as-a-Service (SaaS) offerings. This allows users to leverage the infrastructure without worrying about managing it, making it a very convenient and popular model. It can also be combined with the open-core model for additional value.
Marketplace: Open-source projects under this model serve as platforms connecting different parties that interact with the product. They can be quite rare but hold potential for growth. These projects essentially act as intermediaries or brokers, often taking a cut of transactions or facilitating subscriptions.
Corp Sponsored: This model refers to open-source projects that are sponsored or developed by larger corporations, often used as a means of promoting the corporation's proprietary offerings. The open-source project itself isn't primarily a revenue-generating product, but a tool for awareness, goodwill, and sometimes a feeder system to their commercial offerings.
In this blog post, we will focus on the Open-Core business model, delving into its characteristics, advantages, disadvantages, and functionality. We will also explore some successful companies that have utilized this model effectively. The discussion on the remaining four business models will be reserved for our forthcoming post.
Open-Core
The "open-core" model is a fast-growing approach to open-source business. It's a combination of open-source and proprietary software. The basic platform remains free and open-source, albeit with limited features. Users can opt to pay for extra services or to access a proprietary version packed with more features.
In the 1990s, there was a fair amount of skepticism around the open-core model. Many feared that companies might intentionally weaken the open-source core to make their commercial offerings more attractive. This was a particular concern during the Microsoft "embrace, extend, extinguish" era. However, over the past decade, numerous commercial open-source companies have proven they can successfully manage their open-source projects. They create products that enhance their open core without causing conflict. In some cases, they even place open-source project governance under non-profit organizations, like the Apache Foundation. Nowadays, open-core is the leading model for recent open-source success stories, including companies like Confluent, Elastic, GitHub, Docker, MongoDB, and Redis.
Several design patterns have emerged among open-core companies. Their commercial offerings usually complement the open-core, rather than conflict with it. These patterns include:
Ease-of-use pattern: This covers SaaS, user experience, and collaboration tools.
Enterprise pattern: This encompasses scalability, security, management, and integrations.
Solutions pattern: This provides use case-specific functionalities.
Two main factors appear to influence these choices:
Features that enterprise users find valuable.
Features that are unlikely to be added by the community and are on the roadmap for the open core.
It's crucial that the community doesn't feel that essential features are being withheld from the core product. For most successful open-core companies, only a small percentage of their overall users are paying customers. Therefore, ensuring the open-source product's success is vital for the commercial offering's success.
Both proprietary and open-source software can benefit from the open-core model. Proprietary software can use it to raise open-source community awareness, while open-source software can use it to take advantage of new ways to monetize. It's worth noting that the "openness" level can vary within the open-core model. Companies can choose to be more or less open, based on their strategic business needs. Finding the right balance between proprietary and open-source is the biggest challenge of the open-core model.
Open Core’s business models
The open-core business model has developed into four distinct layers: Skinny, Thin, Lean, and Thick. Each of these layers has unique characteristics and offerings. They differ in terms of their level of openness, their target customers, and the features they offer.
Source: CB Insights
The Open-Core business model has matured and now includes four distinct layers. Each layer has its own unique features and benefits. They're referred to as Skinny, Thin, Lean, and Thick. Each of these layers varies in terms of how open they are, who they target as customers and the functionalities they deliver.
Skinny Open-Core
Skinny Open-Core represents the most basic and limited version of the open-core model. It focuses on providing a minimal set of features, often essential for basic functionality. The target customers for this model are developers and small businesses, who may not require a comprehensive feature set or advanced capabilities. The core open-source software in this model is typically straightforward and accessible, with limited add-ons and additional services. It serves as a starting point for businesses and developers to get familiar with the product and its functionality.
The productization and delivery model of Skinny Open-Core focuses on providing a lightweight, self-service experience to its users. As it primarily targets developers and small businesses, the delivery method emphasizes simplicity and ease of use. Customers can quickly access the basic feature set and start using the product with minimal setup and configuration. The Skinny Open-Core model usually comes with a limited set of documentation and support resources, aiming to help users get started and address fundamental issues.
Thin Open-Core
Thin Open-Core offers a slightly more extensive feature set than Skinny Open-Core, while still targeting developers and small businesses as its primary customers. This model includes some premium features and add-ons, enhancing the core open-source product's capabilities. Thin Open-Core often provides better support and documentation, aiming to bridge the gap between the basic version and a more robust offering. Companies adopting the Thin Open-Core model strive to strike a balance between providing essential features and offering additional value to their customers.
The Thin Open-Core model offers a more extensive productization and delivery model than the Skinny Open-Core. It still focuses on simplicity and self-service, but it provides a more refined and polished user experience. The delivery method includes better documentation, more support resources, and a broader range of features, giving users access to premium capabilities while remaining relatively easy to use. This model is designed to help small businesses and developers find value in the enhanced offering without overwhelming them with complexity.
Lean Open-Core
Lean Open-Core targets mid-sized businesses and enterprises, offering an expanded set of features and capabilities compared to the Thin Open-Core model. In addition to the core open-source software, Lean Open-Core includes enterprise-grade features such as scalability, security, and integrations, making it more suitable for larger organizations with more complex requirements. This model often comes with better support, documentation, and services to assist customers in getting the most out of the product. Lean Open-Core aims to provide a more comprehensive solution while maintaining the open-source core at its foundation.
Lean Open-Core targets mid-sized businesses and enterprises, and its productization and delivery model reflect this focus. It offers a more sophisticated and comprehensive delivery model, which includes better documentation, more extensive support resources, and a more polished user experience. The delivery method is designed to assist customers in implementing and managing the product in a more complex organizational context. Lean Open-Core provides a more tailored experience, catering to the needs of larger organizations with more advanced requirements, while still maintaining the simplicity and ease of use associated with the open-core model.
Thick Open-Core
Thick Open-Core represents the most feature-rich and comprehensive layer of the open-core model. It targets large enterprises and organizations with complex needs, offering an extensive set of features and capabilities. In addition to the core open-source software, Thick Open-Core includes advanced features like enhanced security, sophisticated integrations, and top-tier support. This model aims to deliver a complete solution that caters to the specific needs of large organizations while maintaining the advantages of an open-source foundation. Thick Open-Core typically comes with more substantial support and services, ensuring customers receive the highest level of assistance and guidance throughout their journey with the product.
The Thick Open-Core model offers the most comprehensive and feature-rich productization and delivery model among the four layers. It targets large enterprises and organizations with complex needs, and its delivery method is designed to provide the highest level of support, documentation, and user experience. The Thick Open-Core model includes advanced features like enhanced security, sophisticated integrations, and top-tier support to ensure customers receive the best possible experience throughout their journey with the product. The delivery method is highly tailored and optimized to cater to the specific needs of large organizations, offering a complete solution that seamlessly integrates with their existing infrastructure and workflows.
Exploring the Characteristics of the Open-Core Model
Profit Margin
The Open-Core model is distinctively noted for its high-margin potential, a critical factor for its growing popularity. The strategic blend of open-source and proprietary elements allows for a dynamic revenue structure. The core platform, being open-source, is accessible to a broad user base. However, the model's real financial advantage surfaces from its proprietary tier, where developers can create, package, and sell advanced features as part of this exclusive offering. This pay-for-premium approach can lead to significant revenue generation, hence resulting in high margins. The ability to monetize advanced, value-added features separately opens a lucrative stream of income while still fostering the spirit of open source in the core platform.
Defensibility
When it comes to the defensibility of the Open-Core model, it's a matter of fine balance and strategic planning. The model's defensibility heavily hinges upon maintaining a symbiotic relationship between the open-source core and the proprietary offerings. Striking this equilibrium is a delicate task: the company must safeguard the integrity and value of the open-source project while simultaneously developing enticing, premium features that customers see as worthy of investment. Companies operating under this model must not detract from the open-source community's vitality and contribution, as it forms the bedrock of their product. By successfully offering valuable premium features that don't compromise the open-source core, companies can build a robust and defensible business model.
Product Scalability
Scalability is another strength of the Open-Core model. The combination of an open-source foundation with proprietary enhancements creates a fertile ground for growth and expansion. As the company's user base grows, so too does the demand for additional, more sophisticated features and services. The Open-Core model empowers companies to meet this demand head-on. It allows them to expand on their open-source foundation, developing and introducing new features that cater to various customer segments. Consequently, the company can grow in tandem with its user base, while the open-source community continues to benefit from and contribute to the core platform. The scalability potential of the Open-Core model is generally high, allowing for sustainable growth and business expansion.
Noteworthy Examples of Successful Open-Core Model Implementations
The Open-Core model is no theoretical construct; many successful companies have leveraged it to great effect. Examples of businesses thriving under the Open-Core model include a host of industry heavyweights: Confluent, Elastic, and GitHub are prime instances where they have utilized an open-source core to capture a broad user base, supplemented by a proprietary tier to monetize premium features. Docker, MongoDB, and Redis also exemplify the successful implementation of this model. These organizations showcase the practical application of the Open-Core model, offering insights and lessons for companies considering this approach. They stand as a testament to the model's viability and potential for delivering both open-source community benefits and business success.
Open-Core business model offers a powerful blend of open-source flexibility and proprietary revenue potential. It's a strategic approach that leverages the broad appeal of open-source software, while also providing a pathway to monetization through value-added, proprietary offerings. The success of companies like Confluent, Elastic, and GitHub illustrates the promise and potential that the Open-Core model brings to the table.
But the Open-Core model is just one way to navigate the open-source landscape. In the world of open-source software, one size does not fit all. Different projects, with their unique goals, communities, and challenges, may find other models a better fit. In our next post, we will delve into the rest of key open-source business models - Professional Services, Hosting, Marketplace, and Corp Sponsored - each offering distinct strategies for balancing community engagement with business sustainability.