An open source business model represents a scalable and community-driven solution that can make the difference for startups and companies.
The advantages that a model of this type is able to ensure are multiple, but to make the most of this opportunity it’s necessary to know perfectly its critical issues as well. Similarly, it’s important to know what distinguishes an open source business model from a free or freemium solution and it’s useful to analyze the most relevant case studies in this field.
Within the guide you’ll find all this information, as well as precise indications on how to build a truly solid open source business model. Get comfortable because we’re about to start: the first step, obviously, is to understand what an open source business model is, starting from its definition.
What is an open source business model
An open source business model is a business model that provides that the source code of a software is made publicly available. This means that anyone can access and use it, analyze it, modify it, and distribute it, generally (but not necessarily) without costs.
Keep in mind that a solution of this type is clearly distinguished from so-called “proprietary” models, whose code is instead closed and not accessible to everyone, because it’s owned and under the control of a single entity.
There is, however, another important distinction you must consider: very often people tend to confuse open source software with free software. Don’t make this mistake too.
The difference between free software and open source
Although free software and open source models have common advantages, they differ in their initial assumptions and in the approaches that guide them.
Free software focuses particularly on the freedom granted to users. This freedom translates into the possibility of executing, studying, modifying, and distributing the software, without restrictions. The initial assumption, therefore, is linked to an ethical and social choice.
The focus of open source software, instead, is centered on the source code that is made available and distributed to everyone, albeit not always for free. The principles at the basis of a model of this type are transparency, sharing, and collaboration among members of a community who contribute to improving the software itself.
To understand even better the difference between free software and open source, it’s appropriate to rely on the words of Richard Stallman, founder of the free software movement who, distancing himself from the open source model, clarified that his movement fights for freedom and justice while the idea of open source mainly values the practical advantages of sharing knowledge and collaboration. In relation to the double meaning of the word “free” in English “free” and “gratis,” Stallman then added:
“When we call software ‘free,’ we mean that it respects the essential freedoms of users: the freedom to run it, to study and modify it, and to redistribute copies with or without modifications. It’s a matter of freedom, not price.”
Why open source is strategic for startups and tech companies
The choice to adopt a business model based on open source is strategic for an innovative startup and for a company operating in the tech field, since it offers flexibility and savings. In particular, companies that don’t have particularly high resources (at least at the beginning of their entrepreneurial adventure) can adopt an open source business model to innovate and respond effectively to the large and aggressive competition in the market.
Advantages and critical issues of open source for companies
In the previous paragraph we mentioned the fact that a model based on open source is strategic for startups and tech companies; now it’s time to better understand why. In this paragraph we’ll analyze in detail the advantages (but also the critical issues) that a business model of this type brings with it.
Reduction of TCO and increase of ROI
One of the main advantages for companies is related to the fact that an open source business model reduces the hardware requirements of machinery and devices on which it’s executed. The natural consequence of this is that machines become obsolete later and it’s possible to continue using the machine fleet at one’s disposal for longer.
In more technical terms, the model based on open source reduces TCO (Total Cost of Ownership, that is, the total cost of ownership, which includes all costs incurred by the company for the acquisition, installation, execution, and maintenance of an asset) and increases ROI (Return on Investment).
Independence from suppliers and licenses
Another evident advantage related to the open source mode is independence from software suppliers, since the source code of open source software is available to everyone, who have freedom to adapt and customize it based on their specific needs.
Legal and security risks: how to manage them
Using open source software, however, also has risks. And you necessarily need to know them. The main ones are related to the legal sphere and, specifically, to license compliance and the disputes that may arise regarding intellectual property rights.
Another danger concerns the aspect of security: since open source source code is publicly available, it could also be scrutinized by malicious actors, with the aim of identifying any weaknesses to attack.
Open Source vs Freemium: models compared
At the opening of this guide we’ve already clarified the difference between open source software and proprietary software, as well as that between free software and open source. At this point it’s appropriate to also clarify a further distinction: that between open source model and freemium.
Let’s start with the similarities: in both of the two models just mentioned, first of all, a basic version of the software is provided with the aim of attracting users. Both models, then, are based on converting users into paying customers so as to be able to generate revenue through premium versions or more advanced features.
A difference, instead, lies in the fact that the open source model uses licenses that provide the possibility for users to freely access the source code and make changes to it, while in the freemium model the software remains “closed” and owned by a company that maintains full control of it, also regarding distribution and prices.
The approach to monetization is also different, although both models offer wide flexibility in revenue generation: a company that adopts an open source business model generates revenue through, for example, related services such as consulting and support, or through donations, grants, and sponsorships. A company that chooses the freemium model, instead, mainly focuses on upselling premium features for free users and on one-time purchases.
When to use one, when to use the other
Now that you know the difference between open source model and freemium, you also need to know when it’s better to use one rather than the other.
To make this decision it’s necessary that you reflect on a particular aspect: companies that adopt an open source business model can benefit from having a large community at their disposal whose members commit to making improvements to the software. You can adopt this solution, therefore, if you intend to exploit the power of the global community for collaborative development and if openness and transparency are your priorities.
A company that opts for the freemium solution, instead, maintains greater control over its development. This particular option is indicated, especially, for those who can and want to attract a large user base with a free offer and monetize a part of them with premium features.
The choice between open source and premium model, in extreme synthesis, depends on your startup’s objectives and the resources you have available. Whatever the solution you adopt, keep in mind that both models require a well-considered business strategy for long-term sustainability, which can translate, for example, into a mix of revenue streams and continuous software improvement.
Case studies: real examples of open source monetization
Some practical examples of open source monetization can help you understand what we’re talking about.
Apache, Blender, Mozilla
Apache HTTP Server is free and open source software for web servers that anyone can use, modify, and distribute. The company monetizes through paid support and consulting services and through integrated premium tools.
Blender is free and open source software used mainly for modeling, animation, rendering, and 3D content production. It monetizes in various ways: among these, donations, training, and subscriptions stand out.
Mozilla Firefox is an open source browser that offers users the possibility to customize the browser itself and contribute to its development. The large part of Mozilla Corporation’s revenues derive from royalties earned through Firefox web browser search partnerships and distribution offerings.
Elastic and the cloud
Elasticsearch is a search and analysis engine based on the Lucene library. Elastic, the company behind Elasticsearch, monetizes through cloud solutions, premium features, and enterprise support.
GitHub, GitLab and premium services
GitHub offers web-based hosting for software development and version control using Git, which facilitates collaborative development of source code among programmers. It proposes plans for teams and business customers and also monetizes on some apps developed on it.
GitLab is an open source web platform dedicated to managing Git repositories. In GitLab the hosted service is open and free, but the software is closed. This makes GitLab an example of an open core model, an evolution of open source in which a fundamental part of the software is made available for free alongside premium features or add-ons that are monetized.
How to build a solid open source business model
Before saying goodbye, all that remains is to clarify how it’s possible to build a solid open source business model. There are 3 steps.
Align model, strategy, and governance
The first essential requirement for an open source initiative to prove truly winning is the need to align business model, strategy, and governance. You must be well aware that adopting open source software can expose you to security, legal, and operational risks that you must be able to manage. This means adopting very precise and clear policies and guidelines.
Valorize the community
By now it will be clear to you that the open source model is based on principles that promote knowledge sharing and exchange, innovation driven by collaboration, and equality of opportunities. Valorizing the power of the community means focusing on values such as the already mentioned collaboration and sharing, but also inclusivity, transparency, and meritocracy.
Innovate while staying open: an opportunity for startups
Having reached the end of this guide dedicated to the open source business model, by now it will be clear to you that we’re not just talking about a model, but rather a true identity choice, centered on openness, trust, freedom, and flexibility.
Nowadays, where the race against technology is increasingly frenetic, to develop innovative products it’s now increasingly necessary (and it’s even more so for startups) to open up to the outside, so as to be able to seize external ideas, skills, and technologies and grow faster.
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