Open-core companies produce both open-source software and source-available proprietary software and follow the buyer-based open-core business model for determining what’s open source and what’s source-available. The open-source project is always free and downloadable without restrictions.

Most companies have a SaaS hosting option and will provide a free, hosted version of their software. This is not the same thing as the open-source project. A free tier comes with limitations, usually in the form of consumption, number of users, storage, or some combination of those things. From a business perspective, the goal of the free version is to drive people to upgrade to paid versions.

Pricing has a negative correlation with demand. When the price goes up, the number of customers willing to pay that price will go down. Optimizing pricing strategy is often a consistently evolving consideration for companies. In general, pricing alone should be the primary reason 20% of people are not willing to buy the product.

Buyer-Based Open Core (BBOC)

Buyer-based open core is a framework for determining which features are open source and which are proprietary. The BBOC method places features into tiers based on the most likely user. There are typically three tiers, and the order of increasing cost and tiers is based on the buyer. Features that appeal most to an individual contributor are open source and free. Features that appeal most to management or an executive are proprietary, and you charge the highest amount of money. It's no longer about "Where is that feature technically?" Or "How much more work was it to make?" Or "Where in the repo does it live?" It's about the end-user.

📹 Watch the full presentation on Commercial Open Source Business Models.

Advantages of buyer-based open core:

  1. Features are consistently added to the free and open-source version.
  2. You can serve different users with a single use case by building propriety functionality on top of existing open-source features. For example, you have a collaboration feature that is free to use, but approvals are paid.
  3. Executives are least likely to contribute to open source and have complicated use cases. They pay for features that meet their specific and possibly unique needs.
  4. Executives are the least price-sensitive. You can charge a lot of money for the features an executive needs.

With buyer-based open core, the plan scales with the highest-tier user. Everyone within a company is on the same plan and gets the same features even if they don’t use them. The disadvantage of buyer-based open core is that it's harder to keep the open source and proprietary code separate.

Module-based open core

The opposite of buyer-based open core is module-based open core, where features are separated based on functionality.

Module-based open core tends to have:

Module-based open core makes it harder to create proprietary features because functionality within the product is either solely open source or solely proprietary.

Open source versus free version

The open-source project and the free version of your software are not necessarily the same thing. The open-source project should always be available to download, use, and modify via the repo it’s stored in. It’s not usually available as a hosted SaaS product. The free version of the software is usually a hosted, SaaS product and it may be a forked version of the open-source software.