Open Source Software is not a Business Model – You have to create that

The Important

Open source software:

  • is a development and/or software source code licensing model.
  • does not dictate or describe how value is created, delivered, and captured by a business.

Any business using open source code:

  • may face the need to have a non-product model and/or a tiered licensing model
  • must have clarity about who buyers will purchase the final offering from, and why

Business leaders adding open source software to an existing portfolio:

  • Need to study and understand the nuances of open source
  • May face the complication of a business model / value chain that is significantly different from the core business

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Few subjects create greater confusion for tech business leaders than open source software. The implications of many approaches to open source is the reduction of intellectual property and product differentiation. This is the antithesis of how many business leaders think about value proposition, monetization, marketing, and selling. Open source sometimes implies a non-product value proposition, which is a radically different model for business leaders whose careers were not built within service businesses.

Open Source Software is not a Business Model

In the way we define business model (see: part1 and part2), Open source software is not a business model. There are two basic decisions implied in an open source model. Firstly, who develops the code, a business entity or a community. Secondly, who has access to/can use the software source code. Neither of these decisions determine what the final value add of a business entity might be. Neither of these decisions describes how a business entity using the open source software, creates, delivers and captures value . As a result, we prefer not to refer to open source as a business model, though it might be an important part of a business model, because it might diminish the practicality of some business model options.

Community-based development

There is no certainty that a community will evolve for any given development idea. Just making some source code available does not mean a community will suddenly appear from nowhere. A business that wants a robust community to be part of their development model needs to choose a community that already exists, or have a strategy for creating that community. Communities have been created by both individuals and large businesses.

Community-based development mostly implies a diminished opportunity to build a business around it using a typical product model: selling units of the product. Though, there are a ton of nuances, ifs, and buts to this statement. There is the thinking that a software image/binary can be commercially licensed even if the source code cannot. For example, relative to a buyer’s skill set, a product can be difficult, to compile, install, and operate. In addition, it is possible to pursue models where a base layer of functionality is open sourced or made available on a freemium model, but advanced functionality is created through closed development and / or commercially licensed. The nuances are an article of their own.

The important point is any business that is using open source code developed by a community may face the need to have a non-product model and/or a tiered licensing model. Non-product models include support services, professional services, and cloud services. Tiered licensing include base or freemium license, and advanced licenses.

Accessible source code

Anytime the source code is publicly available, there is the potential that any business can enter the market, and either:

  • Create a derivative product that is differentiated from incumbents
  • Add additional value to the product in a differentiated way to incumbents

This should be of particular concern to business entities that have developed most of the code themselves, or business entities that have not swiveled to a services model (support service, cloud service,…).

There are those that argue customers would rather have a commercial contract with the business that created the original code before it was open sourced, than with a business that forked the code or created a derivative offering. The important for any business is to think through this issue and have clarity about what assumptions apply to that business.

If a business has a belief that customers will purchase from them, then accessible software source can be a path to viral adoption by technical influencers, that drive adoption. It has been argued this lowers marketing and sales expenses.


Open source software implies decisions about who does the development and who is able to use the source code. This may limit business model options, for example complicating monetization through a typical product approach. Businesses utilizing open source software as part of a commercial offering have to construct a business model around the open sourced software: make assumptions about who customers will want to buy from, the best GTM approach, and whether a product or service model is the best option for delivering and capturing value. None of these decisions are dictated or described by software being open sourced.

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