Open source is licensed and usually developed and maintained by a community of independent developers. While the freemium is developed in-house. Thus the freemium give the company that developed it, full control over its distribution. In an open-source model, the for-profit company has to distribute its premium version per its open-source licensing model.
|Characteristics||– Source code is openly available to the public. – Encourages collaboration and contributions from the community. – Typically free to use, modify, and distribute. – Transparency and user-driven development. – May rely on volunteer contributions or donations.||– Offers both free and premium versions of the product or service. – Free version provides basic functionality. – Premium version includes advanced features, often for a subscription fee. – Generates revenue from a subset of users who upgrade to premium. – Often used by software companies and apps.|
|Approach||– Emphasizes community-driven development. – Focuses on transparency and sharing. – Relies on a large user base and community support. – May have no direct revenue model from the software itself. – May generate income from related services, such as support and consulting.||– Uses a tiered pricing strategy. – Provides a free version to attract a wide user base. – Encourages users to upgrade to paid plans for premium features. – Monetizes a portion of the user base while providing value to free users. – Balances between free and paid offerings.|
|Community Involvement||– Relies on a community of developers, enthusiasts, and contributors. – Anyone can contribute to the project. – Collaboration and sharing are key principles. – Development often follows an open roadmap.||– Focuses on attracting a large user base. – Encourages users to explore premium features. – May solicit user feedback and input. – Development priorities are influenced by market demands.|
|Revenue Source||– May generate income from donations, sponsorships, or grants. – Offers related services like support, training, and customization for revenue. – May sell branded merchandise or hardware. – Often relies on a passionate user community.||– Generates revenue primarily from premium subscriptions or one-time purchases. – May offer in-app purchases or upgrades. – Can benefit from advertising if it has a large user base. – Revenue comes from a subset of users who upgrade to premium.|
|Examples||– Linux operating system. – Mozilla Firefox web browser. – WordPress content management system. – Apache web server.||– Dropbox, offering free and paid storage plans. – Spotify, with free and premium music streaming options. – Evernote, providing basic and premium note-taking services. – LinkedIn, offering free and premium networking features.|
|Key Differences||– Open-source software is typically entirely free and open to the public. – Its development and improvement rely on contributions from a diverse community. – There may not be a direct revenue model tied to the software itself.||– Freemium offers a basic version for free and a premium version for a fee. – It focuses on monetizing a subset of users while providing value to free users. – Freemium models are common in software, apps, and online services.|
|When to Use||– Open-source is suitable when you want to leverage the power of a global community for collaborative development. – It’s a good choice when transparency and openness are priorities. – Use when the product’s value is enhanced by a large user base and community contributions.||– Freemium is useful when you want to attract a broad user base with a free offering and monetize a portion of those users through premium features. – It works well for software and online services with tiered functionality. – Use when you can clearly define which features should be free and which should be paid.|
Open-source origin story
The “open source” started by the end of the1990s as a software licensing model, where the code is made available to anyone to change, or perhaps distribute under the open source license. While open source itself is not a business model, but a software licensing model, it has given rise to the whole industry of companies in which business models have been built on top of it, which we will call open-source business models.
But if the open source is free and open, how does it get monetized?
Mozilla Open-Source Model
The way companies build a business model around an open-source can vary widely. Usually, the open-source software is held by a foundation, which is a non-profit company. In Mozilla’s case, the foundation is the one owning the open-licensed browser. The Mozilla Corporation instead collects the royalties coming from the deals built on top of the open-licensed software.
For instance, in 2018, the Mozilla Corporation generated $435.702 million from royalties mostly coming from a deal with Google, featured as a default search engine on Mozilla.
Read: Mozilla Business Model
Slack Freemium Model
Slack follows a freemium model, where a free version is developed in-house. Thus the software is closed and proprietary. The company, which is a for profit holds the right to distribute the software and therefore doesn’t have any constraints in its pricing and distribution strategy.
Free users are converted in paying customers if they want more usage or advanced functionalities. Slack combines the free model with a direct sales force to acquire enterprise customers with yearly recurring revenue of over 100K. Those customers were 575 in 2019, and they accounted for 40% of its revenues.
Key Similarities Between Open-Source & Freemium:
- Software Distribution: Both models involve providing a basic version of the software for free to attract users.
- User Base: Both models aim to build a large user base, with the hope of converting some of the free users into paying customers.
- Customer Acquisition: Both models rely on converting users to paying customers to generate revenue, either through premium versions or advanced features.
Key Differences Between Open-Source & Freemium:
- Licensing: Open-Source model uses open-source licenses, allowing users to access and modify the source code freely. Freemium model keeps the software closed and proprietary.
- Ownership and Control: Open-Source software is often owned by non-profit entities or foundations, while Freemium software is typically owned by for-profit companies that have full control over its distribution and pricing.
- Monetization Approach: Open-Source companies generate revenue through premium versions, support services, or commercial products built on top of the open-source software. Freemium companies focus on upselling premium features to free users to drive conversion.
- Community Collaboration: Open-Source fosters a collaborative community of developers and users, encouraging contributions and modifications. Freemium companies develop the software in-house without relying on external contributions.
- Product Development Strategy: Open-Source software is continually improved by the community’s contributions, whereas Freemium software development is driven internally by the company.
- Monetization Flexibility: Both models provide flexibility in generating revenue, allowing companies to experiment with various strategies to find the most effective one for their product.
- User Engagement: Offering a free version of the product attracts a larger user base, providing an opportunity to engage and build a relationship with potential customers.
- Value Proposition: To succeed in both models, companies must offer value to their users through the free version and compelling enough reasons to upgrade to the premium version.
- Balance Between Free and Paid Features: Finding the right balance between the free and premium features is crucial. The free version should be valuable enough to attract users, while the premium version should offer significant added benefits.
- Long-Term Sustainability: Both models require a well-thought-out business strategy for long-term sustainability, which may involve a combination of revenue streams and continuous product improvement.
- User Conversion Strategies: Successful execution in both models depends on effective user conversion strategies, such as offering free trial periods, providing seamless upgrade processes, and emphasizing the value of premium features.
- Community Engagement vs. In-House Development: Companies adopting the Open-Source model benefit from community engagement, while companies pursuing the Freemium model have more control over the product development process. The choice depends on the organization’s resources and objectives.
Open-Source Business Models Case Studies:
- Apache HTTP Server:
- Open-Source Model: It’s the most popular web server software in use. Anyone can use, modify, and distribute it.
- Monetization Strategy: While Apache HTTP Server itself is free, companies offer paid support, consultancy, or premium tools built on top of it.
- Open-Source Model: Elasticsearch is a search and analytics engine based on the Lucene library.
- Monetization Strategy: Elastic, the company behind Elasticsearch, offers cloud-based solutions, premium features, and support for enterprises.
- Open-Source Model: A powerful tool for 2D and 3D graphics, animations, and games.
- Monetization Strategy: While Blender is entirely free, the Blender Foundation accepts donations and also offers paid training and certification.
- Open-Source Model: A distributed version control system commonly used for source code management.
- Monetization Strategy: While Git itself is free, platforms like GitHub and GitLab provide repositories to host Git projects and offer premium features for collaboration and enterprise use.
Freemium Business Models Case Studies:
- Freemium Model: A music streaming platform where users can listen to music for free with ads.
- Monetization Strategy: Users can upgrade to Spotify Premium to enjoy ad-free listening, offline downloads, and higher audio quality.
- Freemium Model: A visual collaboration tool for organizing tasks and projects.
- Monetization Strategy: While the basic version is free, Trello offers premium plans with advanced features, integrations, and security controls for teams and enterprises.
- Freemium Model: A note-taking and organization app. Users can store notes, images, and web clippings for free.
- Monetization Strategy: Evernote offers premium and business plans with features like offline access, more storage, and advanced collaboration tools.
- Freemium Model: An online writing assistant that checks for spelling, grammar, and clarity in your writing.
- Monetization Strategy: The free version offers basic writing corrections, while Grammarly Premium provides in-depth writing feedback, style suggestions, and plagiarism checks.
|Software Development||The Linux operating system is open-source, allowing developers to access, modify, and distribute the source code freely.||Dropbox offers a freemium model, providing basic cloud storage for free and offering premium features for a subscription fee.|
|Content Management Systems||WordPress is an open-source CMS that anyone can use, customize, and extend for various website needs.||Evernote offers a freemium service, providing basic note-taking features for free and premium features with a subscription.|
|Web Browsers||Mozilla Firefox is an open-source browser, allowing users to customize and contribute to its development.||Spotify offers a freemium model, providing ad-supported music streaming for free and premium ad-free, offline access with a subscription.|
|E-commerce Platforms||WooCommerce is an open-source e-commerce platform for building online stores, offering customization and scalability.||Shopify offers a freemium e-commerce platform, providing basic store functionality for free and advanced features with a subscription.|
|Mobile Apps||Android, the mobile operating system, is open-source, enabling device manufacturers and developers to use and modify it freely.||Spotify offers a freemium mobile app, allowing free streaming with ads and premium, ad-free listening with a subscription.|
|Project Management Software||Taiga is an open-source project management tool that allows teams to collaborate on projects with full customization.||Trello offers a freemium project management tool, providing basic task management for free and advanced features with a subscription.|
|Video Streaming Platforms||VLC Media Player is an open-source media player that can play various video formats and is highly customizable.||Netflix offers a freemium video streaming service, providing a free trial and premium access to a vast library of content with a subscription.|
|Educational Resources||Moodle is an open-source learning management system (LMS) used for creating and delivering online courses.||Coursera offers a freemium online learning platform, providing access to free courses and premium content with a subscription.|
|Graphic Design Software||GIMP (GNU Image Manipulation Program) is an open-source graphic design software for image editing and manipulation.||Adobe Creative Cloud offers a freemium graphic design suite, allowing limited access to Adobe tools for free and premium features with a subscription.|
|Social Media Platforms||Mastodon is an open-source social media platform, enabling users to create their instances and customize their experience.||LinkedIn offers a freemium social networking platform, providing basic networking features for free and premium job-seeking and networking tools with a subscription.|
Read: Slack Business Model
Connected Case Studies
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- History of Trader Joe’s
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