Open Source Business Part 1: Benefits of Open Source

MongoDB users frequently ask me how 10gen and other open source companies make money. I thought that I’d share a bit about how open source businesses work in a series of blog posts. The series will be broken into roughly three parts:

  1. Benefits of the open source model
  2. Ways to monetize open source
  3. How to build an effective sales and marketing machine

In this post, I’ll address the benefits of building a company around open source software.

Adoption

Making your product free is an excellent marketing strategy. In many ways, the open source model is a version of the “freemium” model that companies such as LinkedIn have embraced. Most people use LinkedIn as a free professional networking tool, but recruiters and sales reps pay a premium to get access to additional features and services. Making LinkedIn a free service enabled the network to gain critical mass so that paid versions would provide significant value to recruiters and sales professionals.

Similarly, at 10gen, most of our customers started using MongoDB because of an independent decision by a developer. The developer builds a prototype, and once it’s working the management team asks how its built. At that point, the management team sees a working app and starts asking about support and services for the underlying technology. In this way, open source technology enters large enterprise through the “back door” via an internal advocate on the development team.

Shorter sales cycle and lower cost of customer acquisition

Because open source software tends to be introduced by developers, by the time companies start talking to an open source vendor, they’ve already decided to use the software. The conversations with the sales team are about the services the vendor offers, rather than the software itself. Hence, sales cycles can be quite short — typically weeks or months.

For proprietary software companies, the first interaction with a prospect is usually much earlier in the decision cycle. A sales rep would approach someone in the management hierarchy about doing a proof of concept using the software product. In this scenario, the selection of software is a top-down decision that can take several quarters or even years to close. These long sales cycles expose vendors to a high degree of risk. They are time consuming and if the deal doesn’t close, the costs are sunk.

Open source sales reps manage many smaller prospective customers across a high-volume of transactions. At open source companies, inbound interest comprises the majority of the sales leads (i.e. people completing a “contact us” form requesting information about pricing). Sales and marketing must focus on scoring and prioritizing a high volume of leads over cold calling or outbound prospecting.

It’s true that many users will continue to use the open source software without paying for services. In that case, the sales rep can quickly and easily move on to the next prospect.

Feedback and Contribution

Open source businesses also have reduced R&D costs. Providing feedback is an important part of the social contract in open source. The user community is extremely willing to provide feedback on features, report bugs, and even contribute fixes. While many users may never pay a vendor for services, the majority of users will contribute to the overall ecosystem and create value for both the vendor and the overall community.

Partners

For any software startup, a key to success is building partnerships with software vendors and systems integrators. Partners help you reach new audiences and deliver services more effectively. Integration with other vendor technologies enables long-term traction.

Partners are much more likely to invest technology with a large community of users, regardless of whether those users pay. Offering your software for free makes it much easier to create a critical mass of users, and, in turn, attract partners who can further proliferate your software.

Free software disrupts entrenched players

When established vendors dominate a market, an open source company has an opportunity to disrupt the market by offering a high-value alternative at a lower price point. Vendors like 10gen can afford to charge lower prices because they benefit from shorter sales cycles and reduced R&D costs through community feedback. Closed source companies cannot afford to lower their pricing as their whole business model depends on charging customer licensing fees. (For more on this topic, you should read Max Schireson’s excellent blog on the value-based pricing trap.)

As I mentioned above, open source software is usually introduced at enterprises through an internal developer champion. In companies accustomed to paying expensive licensing fees, demonstrated cost savings from using open source on a single project can be very powerful. That project becomes the beachhead from which the open source vendor can start to penetrate other groups within the company, and ultimately replace entrenched closed source vendors.

In my next post, I’ll outline monetization strategies across several open source companies.

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