Lessons Learned: A Services-Based Open Source Business Model
A recent survey we did of enterprises using open source, showed that they are not big fans of the open-core business model. Recent blogs by Matthew Aslett, Jay Lyman, John Mark Walker center around this issue of the future of the open core business model.
At OpenLogic, we are a VC-backed company that has developed a business using a "services-based" model around open source. Our definition of services-based matches with Matthew Aslett's.
By “services” we are not simply referring to support services, training, implementation services and consulting. The term also includes software delivered as a service, and features delivered as a managed service – such as via Red Hat Network. It includes anything you can think of, in fact, that can be considered a service, rather than a product.
I wanted to share with you a few of the lessons we've learned as we've developed this services-based model in the hopes that it may help others in that are considering a services model for their open source businesses.
1. Expand your picture of "product"
In the old, proprietary software world, your product was a piece of software. In the world of "open-core", most vendors just split the software into two pieces -- the free open source part and the proprietary part. They then sell the proprietary part just like any proprietary software. That may be comfortable, but it can also force you to act just like a proprietary software vendor so that you can control and own the IP.
If you consider a model where the software is completely open source, you need to look beyond the software to monetize your business. If you expand your view to the "whole product", you now have a variety of other options that customers value that you can use to monetize your business (channels, add ons, partnerships, services, etc). At OpenLogic, we've built our business around several of these "whole product" elements:
- Certified library of open source software
- Notification and updates on open source changes
- Indemnification on open source software
- SLA Support on 500 projects
- Consulting services
- SaaS Open Source Governance platform
Our value is in being a one-stop shop with expertise across many open source projects.
Other companies have also figured out ways to monetize other "whole product" elements:
- Certification of open source with other products (RedHat, SLES)
- Hosting of open source software (SugarCRM)
- Add-on management tools (SpringSource, MuleSource)
- Commercial licenses (MySQL)
- Backport of patches (RedHat)
When you consider your business model -- look broadly at your whole product to find the best way to generate revenue.
2. Learn to live without lock-in
At OpenLogic, we offer support on hundreds of open source projects -- some of which have competing support vendors. At any given point, a customer may decide that one of those vendors offers a better support offering. When the contract comes up for renewal, if we haven't delivered value or provided outstanding support, we likely won't get a renewal.
Instead of fearing this, we embrace it. It means that we need to stay focused every day on delivering value, offering competitive pricing, solving customer issues quickly and accurately and ensuring we meet customer needs.
Instead of agonizing over the fact that customers could switch, we just get on with it. Lots of other businesses across many industries are in that same situation. If they can build successful businesses, so can we.
3. Build your business so you can price for value
Open source is typically priced lower than competing proprietary products. However, when you build a business around completely open source software (not open-core), you likely will have vendors who compete with you on support, services and training for the product. When you are operating in a competitive landscape, you better make sure your pricing is competitive.
To do that, you need to examine all of the costs associated with traditional, proprietary software and determine how you can lower the costs of your business. Open community development models (as opposed to a vendor-controlled community) can save on development costs. Open source can also reduce sales and marketing costs. However, you need to go beyond these obvious areas to find other ways to operate differently.
At OpenLogic, we developed a unique federated support model that aligns our costs to actual customer issues. We also have developed lead generation and sales processes that are much lower cost than expensive enterprise sales processes. The specifics of your business will vary, but there are many opportunities to structure your business in a way that you spend less and can price for value.
4. Re-think your misconceptions about margins
Many people from the proprietary software world, including VCs, have the misconception that "services" businesses have lower margins. The misconception comes from equating "services" with "professional services". Once you realize that a "services" business goes above and beyond traditional professional services, the picture on margin changes drastically.
Margins on support business are very good. Look at RedHat's margin (over 80%) as an example of this. If you look at proprietary vendors like Oracle, their business is built around making money from their support and maintenance offerings.
Once you let go of the idea that services always means lower margins, you'll open up many more opportunities for your business model.
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