From Free to Profitable: How to Monetize Open Source Software

The open-source revolution began in the late 1990s with the VA Linux and Red Hat IPOs. That same year, IBM announced a $1 billion investment in Linux.

Between massive Silicon Valley funding for open-source projects, Wall Street’s sudden interest in the stock of open-source companies like Red Hat, and market credibility from tech magnates like IBM, it was clear that the open-source development model had gone mainstream. Now, open-source code comprises 90% of most software applications.

But despite its widespread adoption, monetizing open-source software remains a challenge for many developers.

What Is Open-Source Software?

Open-source software (OSS) is computer software with source code that anyone can inspect, modify, and enhance. “Source code” is the part of the software that most computer users don’t ever see — it’s the code computer programmers can manipulate to change how a piece of software works. Programmers who have access to a computer program’s source code can improve that program by adding features to it or fixing parts that don’t always work correctly.

The defining characteristic of open-source software is that anyone with an open-source license can use, copy, study, change, and improve the software in any way. The source code is openly shared so that people are encouraged to enhance the design of the software voluntarily.

By nature, open-source software is free. Anyone with a permissive license can access and modify the codebase without restriction.

This freedom is both a blessing and a curse. On one hand, it allows developers to create powerful software quickly and cheaply. On the other hand, it makes it very difficult to generate revenue from open-source projects.

Open-Source Monetization Strategies

The evolution of open source software commercialization models

There are a few reasons why making money from open-source software is such a challenge.

Since the code is freely available, anyone can use and distribute it without paying a licensing fee. And the cost of developing and maintaining open-source software is borne by the community of developers who contribute their time and expertise rather than by singular companies.

Here are six business models that companies use to monetize an open-source project:

1. Paid support
2. The open-core model
3. GitHub Sponsors
4. Paid feature requests
5. Develop open-source extensions for existing products
6. Software-as-a-Service (SaaS)

Paid Support

Offering paid support is one of the most common ways companies make money from their open-source software.

With this model, the company provides professional support services to users who need help using the software. These services include email and phone support, documentation, training, and bug fixes.

The main advantage of this model is that it’s relatively easy to set up. All you need is a team of support engineers and a way to track support requests.

And as a member of an open-source company that has already developed the software, you already have a deep understanding of how it works and can provide premium support and consulting.

The biggest downside is that it can be difficult to scale. As the number of users grows, so does the number of support requests. And since most open-source projects are held together by just a few developers, it can be hard to keep up with the demand.

The other challenge is that paid support only works if a critical mass of users is willing to pay for it. It might not be viable if your project has a small user base.

To be successful with this model, you need to have a large enough user base to make paid support feasible. Otherwise, you’ll quickly become bogged down in support requests and won’t be able to generate enough revenue to sustain the business.

The Open-Core Model

With the open-core model, the company offers a basic version of the software for free but charges for proprietary features or services. Also called “dual licensing,” this model is often used by companies that offer an open-source (free) version and a commercial (paid) version of their software.

The open-source version is typically a stripped-down version of the commercial software with fewer features and less support. The paid version is an enterprise-grade version that charges a monthly fee for the additional value.

The advantage of this business model is that it allows you to generate revenue from both your free and paid users. And since the free version is highly functional, it can help you attract new paying customers.

The downside is that it can be difficult to maintain two versions of the software, and you need to be careful not to anger your open-source community by charging for features that they think should be free.

You also need to clearly understand your target market and what they’re willing to pay for. Otherwise, you might alienate your users with paid features they don’t need or want.

To be successful with this monetization model, an open-source business should make most of its code open-source. A company should only apply restrictive licenses to the company’s “secret sauce” — extra features that enterprise companies can use to justify paying for the open-core product.

GitHub Sponsors

GitHub Sponsors is a new program from GitHub that allows developers to financially support those who maintain open-source projects.

With this model, companies can make money by sponsoring the development of open-source software projects. GitHub will match all sponsorships up to $5,000 per month during the first 12 months of the program.

The main benefit of this model is that it’s a way for companies to directly support the developers working on open-source projects that they depend on.

It’s also a way for developers to make money from their open-source work without relying on donations or other forms of support.

The downside is that it’s still a new program, so it’s unclear how successful it will be. And since GitHub takes a percentage of all sponsorships, less money goes directly to the open-source project developers.

To be successful with this business model, companies need to find open-source projects that they depend on and are willing to support. Developers need to create high-quality projects that companies are willing to sponsor.

Paid Feature Requests

Open-source developers often have day jobs that pay the bills. Their time to work on open-source projects is limited, so they need to prioritize their time wisely.

One way to do this is by charging for feature requests. With this model, companies or individuals can submit a request for a new feature, and the developers charge money to implement the feature they want.

This monetization method has a few advantages:

It helps open-source developers create revenue while running their open-source company.
It is cheaper for a business to hire you as a service provider to add a specific feature to their project than to build it themselves.
It helps developers learn what features are most important to their users, and prioritize their time accordingly.
To successfully implement new features this way, developers must be very clear about what they are willing to work on and how much they charge. They also need to prioritize their time and decide which additional features are worth their time to implement.

Develop Open-Source Extensions for Existing Products

There are plenty of software companies that sell a paid service or product but want to add proprietary features and integrations.

A great example of this would be a CRM that has an open-source extension for salesforce.com.

The company behind the CRM product can sell the integration as a paid add-on, while still allowing their core product to be used for a lower cost.

In this position, open-source companies have the advantage of being able to negotiate a contract with the firm that provides the product. For example, you might inquire about their interest in financially supporting your open-source project.

In other situations, firms reward developers who build tools that make it easier for customers to use their products. It’s also feasible to create a plugin or connector that links a product with another piece of software.

Software-as-a-Service (SaaS)

If your open-source project is in high demand, you can sell it to businesses and enterprise users as a Software-as-a-Service company.

Successful open-source companies use the SaaS model most often for several reasons:

Without the need for additional human capital, SaaS is the most scalable model for revenue generation.
The SaaS model has the highest customer lifetime value (LTV).
With a recurring revenue model, your business is less likely to experience large fluctuations in growth.
To make money from other open-source business models (e.g., professional services), you’ll struggle to meet the demands of your users. But with this business model, you can sell a software product repeatedly and scale revenue accordingly.

To make this work, you’ll need to package your software so that it can be easily installed and configured by customers.

You’ll also need to provide a way for customers to pay you on a recurring basis, such as through a subscription.

Billion-dollar companies like Uber, Airbnb, and Slack all use a variation of the SaaS model to make money.

Build Your SaaS With KuberLogic

KuberLogic can take a containerized application and turn it into a functional SaaS offering, with integrated billing, monitoring, and customer management within days or even hours. With minimal changes to the application, you can quickly realize the benefits of SaaS.

KuberLogic offers several features that make it easy to get started with SaaS, including:

• Out-of-the-box parts of a SaaS solution to ensure integrity (billing, subscription management, backups/restores, monitoring, etc.).
• An orchestration layer that ensures each customer has their own isolated instance of your software.
• A good blend of cost efficiency and scalability.
• And freedom from vendor and cloud lock-in since KuberLogic is open source and based on Kubernetes.

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