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Just how do you make money with open source?

July 20, 2012

I was talking with someone who’s mulling over bringing their cool open source project to LocationTech and their company becoming a member. They asked a very reasonable question: “How do we make money?”.

Hmm, just how do you make money with open source anyway? ImageHow do you give something away and yet still make a living based on it? Seems a bit bizarre. And to be honest, there are a lot of people much smarter than me who have done a good job of explaining various open source business models with examples – just Google it. I’ve written about this in the past also. For this reason, I’m not even going to try in this post. Instead I’m going to try something simpler. I like simple things.

We’re asking the wrong question. Open source is in part a) A license b) A methodology for developing something and c) A community of interested people. Feel free to add more items. But notice… open source is not a business model.

So in truth let’s back up. This may be a bit tedious for a second. To make money, you need more income than expenses. Simple enough right? To make income, people need to want to pay you money for something. You solve some problem and they’re grateful enough to give you money for doing so.

The last time I had my roof re-shingled it occurred to me. I could do this! I could drive to my store of choice, pick out shingles, tar paper, nails, and other materials and re-shingle my roof for myself. Bah, we both know I’m not going to do that for obvious reasons. Compared to someone who does this for a living, even though I care deeply, I may very well make stupid mistakes simply out of ignorance. Also, let’s face it, I value my time doing other fun things more than the money it costs me to pay someone who specializes to do to this. So right, I happily pay for a problem to be solved. Solve my problem and I’ll pay you.

ImageNow it’s a wonderful market interaction between problem solvers and people with problems needing to be solved. There are people out there who will fix my roof if I pay them enough. There’s a few so I get choice. There’s quite a few customers so they do too. Shenanigans follow as we figure it out. Eventually my roof gets re-shingled and I cut someone a cheque to pay them.

So there’s two key parts to the business: 1) The cost of the factors of production like raw materials, labour, etc. and 2) what I pay. Ah, this is where it starts to make a bit of sense maybe.

Open source can help you reduce your expenses. This can be from sharing costs and risks for R&D. There’s other interesting benefits such as faster time to market potentially as well. You may see benefits from marketing if people are trying your software before they buy. If you can really do it well, you can open up a whole new market with open source components and a consortium of complementary partners.

So simply put, you may make money with open source if you spot opportunities to reduce expenses and increase income. If you can find some way to compete and use what makes your business unique to make it attractive to customers, then you’ve got a successful venture.

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