How to monetise Open Source

Introduction

Open source software (OSS) is becoming more and more popular among developers. OSN is like a big code library where people can find and contribute to different projects for free. But even though it's free to use and work on, there's a big question: How can developers make money from it?

Now, let's break down the crucial steps you have to achieve into three parts:

• Love by developers: This means making sure that people in the developer community know about and contribute to your project. You can measure this by looking at things like how many stars your project has on GitHub, how many people are making changes (commits), how many suggestions are being made (pull requests), or how many new contributors are joining.
• The interest of the end users or organizations: Once your project is out there, you want people to actually use it. This part is about making sure that your software is being downloaded and used by users. You can measure this by tracking things like how many times your software is downloaded, how many people are using it actively, or how many companies are using it in their systems.
• Perceived value seen by users: This is where things get interesting. You need to figure out what value your software brings to users that they're willing to pay for. It's not just about having a cool project; it's about solving a problem that people are willing to spend money on. If your project is making money, then you know you've found something valuable.

In our journey to understand how to make money with open source, we have to understand each of these areas and learn from the experiences of others who have been through the same challenges.

Understanding Monetization Strategies

When it comes to making money with open-source software, it's essential to have a clear plan in place. Let's break down some strategies that can help developers navigate the complex world of monetization.

1. Differentiating Commercial Offerings

One key strategy is to distinguish your commercial offerings from your open-source ones. This means adding extra features or services to your software that are only available to paying customers. These could include things like cloud versions with additional features, enhanced security options, customizable dashboards and reports, audit capabilities, or single sign-on (SSO) functionality.

By offering these premium features as part of a separate commercial offering, you create value for customers who are willing to pay for added benefits. This differentiation can help drive revenue while still maintaining the core principles of open-source collaboration.

2. Building Upgrade Calls-to-Action (CTAs)

Another important step is to build upgrade prompts directly into your open-source software. These CTAs can encourage users to upgrade to the commercial version by highlighting the additional benefits they'll receive. For example, you could offer a free trial of premium features or provide special discounts for upgrading.

By making it easy for users to see the value of upgrading, you increase the likelihood of conversion from free to paid users. This can be a powerful way to monetize your open-source project while still maintaining a strong user base.

3. Defining Pricing for Commercial Offerings

Once you've identified your commercial offerings and built upgrade CTAs, the next step is to define your pricing strategy. This can involve experimenting with different pricing models to find the right fit for your target market. For example, you might start with a lower price point and adjust based on customer feedback and demand.

It's important to be strategic about your pricing to ensure that you're maximizing revenue while still providing value to customers. By starting with an inbound CTA form from your open-source product, you can gauge interest and adjust your pricing accordingly based on real-world feedback.

Exploring New Ideas

Finally, don't be afraid to think outside the box and experiment with new ideas. For example, you could explore the possibility of not offering an enterprise self-hosted version at all and instead using your open-source software as an on-ramp to your SaaS offering. This can help streamline your business model and attract customers who prefer cloud-based solutions.

Valuation Metrics

Understanding the metrics that investors value can be critical for open-source software (OSS) companies, especially when seeking funding or evaluating growth potential. Let's explore some key valuation metrics that investors consider when assessing the success and potential of OSS projects.

1. Repository engagement

While some may view GitHub stars as a vanity metric, investors often track star growth over time as an indicator of community interest and adoption. A high number of stars suggests that the project is gaining traction and attracting attention within the developer community, serving as a valuable top-of-funnel metric.

2. Contributors

Active contributors and pull requests serve as proxies for community engagement and adoption. Investors look for projects with a vibrant community of contributors, as it indicates ongoing development and support from a diverse group of individuals.

3. Frequency of updates

The frequency and quality of releases provide insight into the project's activity and momentum. A steady stream of releases demonstrates ongoing development efforts and a commitment to improving the software over time.

4. Community

Many OSS companies maintain Slack or Discord communities for customer support and collaboration. The size and growth of these communities serve as additional indicators of community engagement and adoption. A thriving community suggests that users are actively engaged with the project and may be more likely to become paying customers in the future.

5. Companies using your open source

Usage by recognizable companies can signal early momentum and potential future revenue opportunities. Investors are interested in projects that are being adopted by well-known organizations, as it indicates validation of the software's capabilities and potential for broader market adoption.

6. Project Usage

Tracking usage metrics specific to your company can provide valuable insights into the software's impact and potential for monetization. Examples include active users, downloads, installs, unique instances, clusters, pipelines, etc. These metrics demonstrate the value that the OSS product provides to users and serve as evidence of product-market fit, which is crucial for attracting investors and sustaining long-term growth.

Other strategy examples

Let's take a look at some real-world examples of how open source software projects have successfully navigated their monetization journey by implementing clever strategies to limit scalability and drive conversions to enterprise offerings.

1. CockroachDB: Incremental Backups

CockroachDB, a distributed SQL database, implemented a strategy where they made incremental backups an enterprise-only feature. This means that while everyone can use their system and run benchmarks, once users reach a certain size of the cluster, they need incremental backups for data safety. By making this feature exclusive to the enterprise tier, CockroachDB gently encourages large customers to upgrade without giving the impression that the open source version lacks scalability.

2. Confluent: Elastic Scaling

Confluent, the company behind Apache Kafka, provides elastic scaling as an enterprise-only feature. Although customers can manually scale Kafka on their own, when they reach a certain scale, it becomes more practical to upgrade for advanced scalability features. By offering elastic scaling exclusively in the enterprise tier, Confluent incentivizes users to move to the paid version as their needs grow.

OSS Companies: Segmented Security and Scale Features

Many open-source software companies adopt a similar approach by providing basic security and scalability features in the open-source version while reserving advanced features for the enterprise edition. This strategy allows users to get started with the software and experience its benefits, but as their requirements evolve, they are encouraged to upgrade to unlock additional functionality and support.

By providing valuable features that address the specific needs of users as they scale, these companies effectively monetize their open-source projects while still fostering community engagement and adoption.

Common Pitfalls to Avoid

As developers embark on the journey of monetizing their open source software, it's crucial to be aware of common pitfalls that can hinder success. Let's explore some of these pitfalls mentioned in the discussion and understand why they may not be effective, along with alternative approaches.

1. Charging for Support Only

One pitfall to avoid is charging for support only, without providing additional value-added features. While it may seem like a straightforward way to generate revenue, relying solely on support fees can lead to high customer churn. When users become comfortable supporting the product themselves, they may question the value of paying for support, leading them to seek alternatives.

Alternative Approach: Instead of solely charging for support, consider offering a combination of support services along with premium features or enhancements. This provides customers with tangible benefits beyond just assistance, making the value proposition more compelling.

2. Publishing All Enterprise Features under a Permissive License

Another pitfall is making all enterprise features available under a permissive open source license. While this may initially attract users to the open source version, it can deter them from upgrading to the enterprise offering. Users may opt to enable these features themselves in the open source version, undermining the incentive to pay for the commercial edition.

Alternative Approach: Instead of publishing all enterprise features under an open source license, consider dual licensing or withholding certain features from the open source version altogether. By reserving advanced functionalities for the commercial offering, you create a clear distinction between the two versions and incentivize users to upgrade for additional capabilities.

3. Charging a Small Price for Self-Hosted Versions

Charging a small price for self-hosted versions, especially below a certain threshold like $20K, can lead to inefficiencies and high support costs. Low-priced self-hosted options may attract customers initially, but they can result in long sales cycles and inadequate revenue to sustain the business effectively.

Alternative Approach: Instead of setting a low price for self-hosted versions, consider tiered pricing structures or value-based pricing models. This allows you to align pricing with the value delivered to customers and capture a fair share of the value created by your software.

4. Limiting Scalability of the OSS Version

Limiting the scalability of the open source version, such as imposing restrictions on seats or traffic, can deter potential users from adopting the software. Users need to have confidence that the open source version can scale to meet their growing needs, and limitations may discourage them from using the product altogether.

Alternative Approach: Rather than limiting scalability, focus on ensuring that the open source version is robust and scalable to accommodate a wide range of use cases. By demonstrating the scalability and reliability of the software, you can attract more users and foster greater adoption within the community.

By avoiding these common pitfalls and adopting alternative approaches, developers can navigate the monetization journey of open source software more effectively, ensuring sustainable revenue growth while maintaining the integrity of their projects.

Practical Steps for Monetization

As open source project maintainers embark on the journey of monetization, it's important to take practical steps that can help drive revenue while maintaining the integrity of the project. Let's explore some actionable steps that project maintainers can take to effectively monetize their open source software.

1. Experiment with Different Pricing Models and Feature Offerings

One of the first steps in monetization is to experiment with different pricing models and feature offerings. This may involve offering a range of pricing tiers with varying levels of functionality, or exploring subscription-based models versus one-time purchases. By experimenting with different approaches, project maintainers can better understand what resonates with their target audience and optimize their monetization strategy accordingly.

2. Changing Licensing to Require a Paid Plan for Commercial Usage ( we don't recommend )

Another used strategy is to change the licensing of the software to require a paid plan for commercial usage. This means that businesses or organizations using the software for commercial purposes would need to pay for a commercial license. By implementing this change, project maintainers can capture revenue from companies that derive value from the software in their business operations.

3. Build Upgrade CTAs into the Open Source Product to Drive Conversion

To encourage users to upgrade to premium versions or paid plans, project maintainers can build upgrade calls-to-action (CTAs) directly into the open source product. These CTAs can highlight the benefits of upgrading, such as access to additional features or premium support, and provide an easy pathway for users to transition to paid offerings. By integrating upgrade prompts into the user experience, project maintainers can drive conversion and generate revenue from their open source software.

4. Emphasize the Importance of Understanding the Needs and Preferences of the Target Audience

Perhaps the most crucial step in monetization is to prioritize understanding the needs and preferences of the target audience. Project maintainers should actively engage with users, gather feedback, and conduct market research to identify pain points and areas where the software can add value. By aligning the monetization strategy with the needs and preferences of the target audience, project maintainers can ensure that their efforts are focused on delivering solutions that users are willing to pay for.