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Frameworks, core principles and top case studies for SaaS pricing, learnt and refined over 28+ years of SaaS-monetization experience.
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In the ever-evolving SaaS landscape, open source companies have carved a unique position for themselves. While they offer free, publicly available code, many have built thriving businesses with impressive revenue streams. This apparent paradox raises an important question: how exactly do open source SaaS companies make money while staying true to their open source roots?
Let's explore the proven revenue models that successful open source SaaS companies use to create sustainable businesses while maintaining their commitment to the open source philosophy.
The Open Core Revenue Model: Free Base, Premium Features
The open core model has emerged as one of the most popular open source revenue models. Companies following this approach offer a fully functional open source product while reserving premium features for paying customers.
MongoDB exemplifies this approach with its document-oriented database. The core MongoDB database is available as open source software, but the company offers MongoDB Atlas, a fully managed cloud service with additional features like advanced security, automated backups, and performance optimization tools.
According to MongoDB's financial reports, this strategy has proven highly effective. In Q2 2023, MongoDB reported $109.4 million in subscription revenue, representing a 65% year-over-year increase.
This model works because it balances open source values with commercial interests. Users can freely use, modify, and contribute to the core product while companies can generate revenue by providing enhanced functionality for enterprise needs.
Cloud-Hosted Open Source: The Managed Service Approach
Another popular approach is offering the open source software as a managed, cloud-hosted service. This revenue model appeals to companies that want the benefits of open source software without the operational complexity of managing it themselves.
Elastic, the company behind Elasticsearch, has successfully implemented this strategy with Elastic Cloud. While anyone can download and run Elasticsearch for free, Elastic provides a fully managed version with simplified deployment, scaling, and maintenance.
This cloud-hosted open source approach generated $171.3 million in Q4 fiscal 2022 for Elastic, showing a 42% year-over-year growth. The value proposition is clear: customers pay for convenience, reliability, and reduced operational overhead rather than the software itself.
Support and Services: Monetizing Expertise
Many open source SaaS companies generate significant revenue through support subscriptions, professional services, and consulting. In this model, the software remains free, but users pay for access to expert assistance.
Red Hat pioneered this approach with its enterprise Linux distribution. While the software is open source, Red Hat offers subscription-based support, training, and certification services. This model propelled Red Hat to $5.3 billion in revenue before IBM acquired the company for $34 billion in 2019.
This SaaS monetization strategy works particularly well for complex software that enterprises depend on for critical operations. Organizations are willing to pay for the peace of mind that comes with professional support and the expertise needed to optimize their implementations.
Dual Licensing: Different Terms for Different Users
The dual licensing model offers the software under an open source license for non-commercial or specific use cases while requiring commercial users to purchase proprietary licenses.
MySQL (before its acquisition by Oracle) effectively used this approach. The database was available under the GPL for open source projects, but commercial applications that didn't want to be bound by GPL terms could purchase commercial licenses.
This strategy can be particularly effective for infrastructure or embedded software where commercial entities might otherwise be reluctant to use GPL-licensed code due to its "viral" nature that could require them to open-source their own proprietary code.
Open Source SaaS Marketplaces and Extensions
Some companies maintain open source core products while creating marketplaces for extensions, plugins, or templates. This creates an ecosystem where third-party developers can sell add-ons while the parent company takes a commission.
WordPress.com, built on the open source WordPress software, uses this approach with its theme and plugin marketplace. While WordPress itself remains open source, the company generates revenue through its marketplace and by offering premium hosting services.
Enterprise Features and Customer-Specific Development
Many open source companies offer enterprise-specific features or custom development services for their largest customers. These features address the unique needs of large organizations, such as enhanced security, compliance tools, or integration with proprietary systems.
HashiCorp, known for tools like Terraform and Vault, offers enterprise versions of its open source products with features specifically designed for large organizations. These enterprise offerings contributed to HashiCorp's $413.9 million in revenue for fiscal year 2023, representing 51% year-over-year growth.
The Future of Open Source Revenue Models
As open source continues to dominate software development, we're seeing innovative combinations of these models emerge. Companies are increasingly adopting hybrid approaches that combine multiple revenue streams.
Confluent, built around the open source Apache Kafka project, combines several models. They offer Confluent Cloud (managed service), Confluent Platform (enterprise features), and professional services. This multi-faceted approach helped them achieve $585.9 million in revenue for fiscal year 2022, up 51% year-over-year.
Building a Sustainable Open Source Business
For companies considering an open source SaaS model, several key principles emerge from successful examples:
- Create genuine value beyond the open source offering
- Align monetization with user needs rather than artificially restricting features
- Contribute actively to the open source community to build goodwill and adoption
- Focus on reducing friction for enterprise adoption
- Balance open source philosophy with commercial viability
The most successful open source companies maintain a delicate balance between community contribution and commercial success. They generate revenue not by restricting access to their code but by creating additional value that customers willingly pay for.
Conclusion
The success of companies like MongoDB, Elastic, and Confluent demonstrates that open source and profitable business models are not mutually exclusive. By carefully selecting and implementing the right open source revenue models, companies can build sustainable businesses while honoring the principles of open source software.
Whether through open core, cloud-hosted services, support subscriptions, or other SaaS monetization strategies, these companies prove that giving away software can be the foundation of a thriving business when paired with thoughtful revenue models that deliver genuine value to customers.
For entrepreneurs and businesses considering the open source path, understanding these revenue models isn't just academically interesting—it's essential for building a sustainable company that can continue to invest in open source development while meeting commercial objectives.