Distribution Model for Vendors of Open Source Software

For a firm with an Open Source product, making the software available for no cost is a great way to build a community around it and foster bottom-up adoption. However, this is just the beginning: the firm still faces the challenge of monetizing the product, converting intangible assets such as “Open Source freedom” and “community goodwill” into real money that can be used to fund further product development and community building activities.

In a previous blog post, I discussed one possible strategy for monetization: a modules marketplace for open source products. However, this isn’t the only approach. At Initmarketing, we developed a distribution model to help identify distribution channels for commercial open source that add value and provide a way to put a price tag on elements of the commercial offerings (products, modules, and services).

Understanding The Model

This model explores three facets of distribution: product/service offering, delivery method and distribution channel:

  • The Offering column lists the firm’s available market offerings. These could be different flavors of its product(s), product plug-ins and extensions, and related services such as consulting, training or technical support.
  • The Delivery Method column lists all the available delivery methods for the firm’s offerings. For Open Source software, the most common method is usually online delivery, but some products and services (eg. training) may also be delivered directly at the customer’s premises. Many firms also choose to make their products available as a Software as a Service (SaaS) offering.
  • The Channel column describes the distribution channels available to the firm. The obvious one here is the firm’s Web site, which is typically the first place a customer will look for the Open Source product. Many firms also enter into relationships with partners (eg: OEMs or system integrators) to achieve higher distribution for their product. Finally, firms can also opt for the direct sales route, as a supplement or alternative to partner relationships.

An Example: Typical Open Core Product

The model described above becomes valuable when you begin to connect the elements in the three columns together in the context of your firm’s business model. To illustrate, consider the case of a typical Open Core product, which is available in two flavors: Community Edition and Enterprise Edition. If you were to model distribution channels for such a product, here is what it might look like:
From the above it should be clear that:

  • The Community Edition is available for direct download from the firm’s Web site. It might also be available in the firm’s online shop (if present) as a free download.
  • The Enterprise Edition is delivered on-premise and as a hosted offering, either directly by the firm or through partners.
  • The firm also offers both commercial and free modules for the product, which are available for direct download from its Web site (free modules) and for purchase through its online shop (commercial modules). Both types of modules can also be delivered on-premise through partners or direct sales.
  • Services such as consulting and technical support are available on-premise through partners and direct sales.

The above diagram represents some of the typical cases for an Open Core licensed product. For other types of business models, the diagram would change accordingly.

Base for Further Analysis

In addition to providing a birds-eye view of the current or proposed distribution strategy, this model also provides a base for further analysis. For example:

  • It provides a way to identify which delivery methods and channels are most utilized, simply by looking at the number of connections, and thereby derive additional information about sales process requirements. For example:
    • Where products, modules and services can all be delivered on-premise, this imposes a requirement on sales staff to have sufficient knowledge and marketing collateral for all these offerings.
    • Where products and modules are available both for free download and purchase via the Web site, the Web site must provide corresponding information and support infrastructure (eg: payment processing, security, account management).
  • It quickly identifies areas of under-utilization, which in turn represent potential opportunities for product distribution. For example, the diagram has no arrows entering or leaving the SaaS delivery method. This might be an opportunity for the firm to develop a new business model, by delivering its product as a SaaS solution for a specific market niche.

Summary

Distribution is key to getting an Open Source product into the hands of users and developers, and monetizing on top of user adoption. This model is a useful tool to add to your Open Source marketing toolkit as it provides a way to identify key distribution channels for different elements of the commercial offering, identify areas of concentration or under-utilization, and find unexploited opportunities.

Maximizing Monetization with a Modules Marketplace

For Open Source projects whose software architecture allows it, inviting developers to extend the core product through add-on modules and plug-ins is a great way to raise interest and awareness and thus kickstart or foster an adoption/contribution cycle. In such a setting, Open Source vendors and their business partners should consider building and maintaining an online marketplace or exchange for add-ons, which will serve as a highly effective distribution and sales channel.

Distribution and Sales Channel

Such a modules marketplace allows business partners and community developers to showcase their work, maximize its visibility and earn money by selling custom modules to end-users.

Typically, you’d find all or some of the following offerings in a modules marketplace:

  • Open Source core product (e.g. Community Edition)
  • Commercial core product (e.g. Enterprise Edition)
  • Open Source modules
  • Free proprietary modules
  • Commercial proprietary modules

Benefits

Distributing a product and its extensions through an online marketplace offers significant benefits:

  • Ease of access: By definition, the online marketplace is available 24/7/365, allowing a global audience of users and developers to access it at times that are most convenient to them. This has the potential to increase direct sales volume.
  • Brand building: The marketplace helps strengthen the vendor’s brand, by collecting all (or at least the most important) extensions in a single place, rather than having them scattered over multiple third-party sites.
  • Reduced dependence on third-party distributors: The vendor exerts final control over the marketplace and its actors. This allows it to verify and certify modules and developers, and also reduces its dependence on partners and third-party distribution channels.
  • Better customer information and analytics: By routing all interactions with end-users through the marketplace, the vendor is able to build a better database of its end-users and thereby extract useful analytical information from it (eg. most popular modules, most high-value users, etc.)

An online marketplace is not only good for developers; it’s also good for end-users:

  • Central directory of add-ons: Users now have a central, vendor-endorsed directory of modules and extensions that they can use to enhance the product’s core functionality. Instead of having to search multiple sources, they can look in a single location (which saves them time and effort) and they might also be able to read comments and reviews from other users  (which guides them to an appropriate solution).
  • Access to specialists: The online marketplace is also a good place to connect with developers who have specialist experience in that product – which is handy when there is a need for special customization or system integration.
  • Ease of use: If the marketplace is tightly integrated with the core product, end users can directly try, buy and upgrade extensions through a simple one- or two-click process within the application itself, without needing to fire up a separate Web browser window (Irakli Nadareishvili recently wrote an interesting blog post on the benefits of this approach in a Drupal context).
  • Lower software cost: The online marketplace allows the vendor to deliver its product over the Internet in a secure manner, thus saving on shipping, printing and CD/DVD mastering costs. These benefits are passed on the end-user in the form of a lower price. The marketplace also serves as a central “memory”, allowing users to re-download the product at a later date if required

Case in Point: The Android Market

As an example, consider Google’s Android Market, which is exactly the kind of exchange platform I’m talking about above. Google provides and maintains the Android Market infrastructure, allowing developers to freely list their custom apps for users to download or buy. Any Android-based handset can access the Android Market free of charge (it comes pre-installed on most Android phones). In effect, Google has created a giant exchange platform for developers and users to connect and transact with each other, increasing revenue potential (which makes developers happy) and spurring innovation (which makes users happy).

That isn’t all, though. The Android Market, which offers an app for almost anything you can think of, is a key driver for Google’s “product”: the Android operating system. The more apps there are, the more interesting Android becomes for end-users, and the more end-users there are, the more likely developers are to build apps for Android. It’s a virtuous cycle with tremendous potential to drive adoption, and it has benefits for all actors in the ecosystem.

Additional Source of Revenue

Creating a marketplace for business partners and community developers to distribute and sell their custom modules and extensions is an important step in driving community adoption and to monetize on top of it for every member of an Open Source ecosystem. It offers time and efficiency benefits for end-users and revenue potential for commercial entities.

But perhaps the biggest beneficiary is the vendor at the center, who now has a self-sustaining distribution and sales channel charged by the community around its product, plus some additional revenue such as:

  • Commission: The marketplace also becomes a new indirect revenue stream for vendors once they ask for a commission for each module sold.
  • Certification: Raise visibility of certified extensions in the modules marketplace to provide an incentive to buy training and certification services from the vendor.

LinuxTag 2010: Call for Papers Ends Today

LinuxTag is the most important place for Linux and open source software in Europe. Last year, LinuxTag had over ten thousand attendees, and over 300 speakers. This year, the 16th LinuxTag will be June 9-12, 2010 at the Berlin Fairgrounds in Germany.

LinuxTag seeks exciting and suitable proposals for presentations in the conference tracks. The Call for Papers ends today.

I am proud to be a member of the LinuxTag Program Committee. Although a lot of proposals have already been submitted, there are some topics missing that I’d personally like to see covered. So, if you’re up for a last minute submission, get your inspiration from the following list:

  • Is/was the recent economic crisis an opportunity for Open Source?
  • More real-life case studies on how OSS is being used in mission-critical scenarios.
  • A European or global perspective on Open Source in Public Administration.
  • How to make use of Amazon EC2 or Google AppEngine with Open Source apps?
  • Technical tutorials for beginners, especially for building Web apps (e.g. PHP/Ruby/Java/etc. for beginners).
  • High performance Web environments with Open Source tools
  • Security in the Cloud
  • What’s the status of some of the regional Linux distributions?

I can’t promise that your talk will be accepted if it covered one of the above topics. The review process is of course a joint effort of the whole Program Committee. Anyway, it’s definitely worth a try. Of course, any other topic I did not think of is also highly welcome.

Go here to submit your LinuxTag proposal.

Open Source Vendors Must Think Global

Open Source software vendors outside of the U.S. or UK tend to make a fatal strategic mistake: They sacrifice international marketing communications at the altar of a regional sales focus.

For example, an Open Source business started in Spain will naturally feel more comfortable with doing sales in Spain with most employees speaking and thinking in Spanish. Spain is where our sample company comes from, it’s a safe haven, and it’s where the bulk of sales are being made. Why should they go global, invest in building an international business and take the risk?

Sooner or later, there will be global competition in the same niche from another Open Source vendor or project. Someone else will reach a critical mass of international community and business adoption much quicker than the Spanish company will ever be able within its country of origin. And then our sample vendor will find itself against a much stronger competitor who isn’t afraid to take risks.

Essentially, Open Source vendors must think of themselves as global and look at regions as regions, and not the other way round.

In order to do this well, English should be the main language of communication with the public right from the start. Make sure all general marketing collateral is first available in English. This will make English and an international point of view part of the company’s DNA from the beginning, which is critical for success.

Independently, it is of course important to note that in some regions you will only be able to attract early adopters by communicating in English. Pragmatist buyers in countries such as France or Germany will appreciate if your sales stuff spoke French or German and related marketing collateral were available in their native language. This trend of early adopters willing to try out English-only products while mainstream users wait for the product to mature, allows for easy and free market research. If the early adopters in a region start using and talking about your project and you were able to win a few prestigious customers, it is time to consider localizing there.

So, don’t make this mistake, thinking like a regional Open Source vendor that goes global. Rather think like an international company focusing its sales efforts towards certain regions.

Looking at this from another perspective, I never understood discussions whether MySQL (for example) is a European or US company? Trying to link banner Open Source vendors with national or regional pride is totally neglecting the fact that Open Source is and always has been a global business.

Survey Identifying Business Needs for Semantic CMS

Please shell out a few minutes to help the IKS Project identify business needs for semantic CMS by participating in a survey. The results will help the EU-funded project to work towards an Open Source interactive knowledge stack.

There are two different sets of questions, depending on your background:

Thanks for participating in the survey and please spread the word!

Commercialization of PHP Software

I’ve just published an article that explains how a PHP-based product can gain a good position in the market and be made appealing to customers by using marketing communication. The focus is on products licensed under an Open Source license. Yet, most of the recommendations also apply to proprietary offerings.

The article has initially been published in German by PHPmagazin. It has now been translated to English and is available on the Initmarketing website: Commercialization of PHP Software.

Top Commercial Reasons Why Open Source Communities Matter

I’ve yesterday had a conversation with the CEO of an Open Source company who sounded rather frustrated when I discussed the importance of nurturing Open Source communities. He said:

People seem to think they have a right to free software and free support. It is not about free speech. It’s all about free beer!

I don’t think this blanket judgment is true. There have always been freeriders in Open Source communities, but the overall benefits of an Open Source community to an Open Source business always outweigh the community loss imposed by freeriders.

Here are the top commercial reasons why Open Source software vendors should invest in community development:

  1. Better sales lead generation: A growing Open Source community translates into a growing sales pipeline if done well, i.e. OSS vendors can monetize a part of the community user base and convert them to commercial users.
  2. More effective sales: Community-driven sales requires less effort compared to a direct sales approach, because potential buyers have already evaluated the Open Source product and contact sales only when they are ready for a purchase.
  3. Raise visibility: A vibrant Open Source community fosters branding and word-of-mouth marketing.
  4. Build a Brand Community: Open Source brands grow and thrive around real value created by a community of engaged, informed participants. A healthy community adds tremendous value to almost any activity a company engages in.
  5. Larger install base: The goal is to build the corporate brand as well as product and service quality by creating a larger install base.
  6. Cost-effective marketing: The larger and the more active an Open Source community, the more it helps to spread the word and the less investment in marketing is needed to achieve the same level of visibility.
  7. Higher credibility: A growing Open Source community helps companies to be perceived as a true Open Source vendor by journalists, analysts and potential customers. A critical mass of community members also indicates how well a product solves a problem and that there is actual demand.
  8. Cost-efficient and competitive business: Commercial Open Source offers the best cost-benefit ratio for enterprise customers due to cost savings, innovation and investment protection enabled by a vivid Open Source ecosystem that contributes bug fixes, new features and more.
  9. Investment protection: Reduce client risk by broadening the base of product-related skills.
  10. Test and develop new markets: Open Source offers companies and organizations a highly cost-effective route into international markets. Through community development tactics, OSS vendors can test and develop new markets and communities with little upfront investment.
  11. Externalize 1st Level Support: Enable community to help themselves share information, to reduce support burden for the OSS vendor on basic issues.
  12. Technology and thought leadership: Community development will help to establish an OSS product as a technology leader in the space by attracting external developers. Based on that, OSS vendors can through appropriate communications also become a thought leader.

At the Edge of Open Source Communities and Companies

Matt Aslett has made his stance on a discussion that started on Twitter about Open Source vendors giving away control to their community with the goal of better monetization. I concur with Savio Rodriguez’s doubts, but I believe that it is an issue worth while to be discussed, because it basically questions of the open core business model favored by investors.

As you might expect, let me take a look at it from the marketing perspective.

What I see in markets where plenty of open source offerings exist with a multitude of business models (e.g. in the CMS space), is that there is growing pressure on vendor-driven models to adopt more of the benefits of the community-driven model and vice versa.

There are various business tools that allow OSS vendors and their investors to test how much they will actually benefit from gradually moving control to the community. Switching to a more permissive license might be the last step.

For example, OSS vendors can increasingly include community members in discussing and executing the marketing strategy. Furthermore, a vendor could initialize a community board where the vendor discusses release cycles and development issues with community members. Both efforts could later lead towards a community-owned association that holds the trademark and decides upon the development roadmap.

On the other hand, community-driven OSS projects sometimes envy OSS vendors, especially when it comes to the ability of rolling out a focused marketing. I’ve heard from a hand full of board members of OSS associations that they’d love to a) actually have a marketing budget and b) have control over that budget without the need for lengthy discussions to reach consensus among the community. Things might perhaps be moving towards some light vendor-style structures here, given that OSS projects need to increasingly compete with OSS vendors. In the end, it’s all about OSS projects becoming more professional.

A Primer on Europe for US-Based Open Source Communities and Vendors

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Wazi just published an article I wrote, comparing Europe and the US, which hopefully allows Open Source vendors based in the US to better understand the European market.

The article is based on the research I did for the talk I presented at this year’s OSBC. The part I personally find most interesting is:

It’s worth noting here the German study revealed that saving on licensing costs is more important to those adopting open source software for the first time. The longer someone uses FOSS, the more important the freedom aspects become namely open standards, vendor independence, and the free and open source software philosophy. Hence, open source vendors need to approach potential customers in Europe differently depending on how open source savvy these potentials are.

That same study actually revealed a high level of satisfaction of users of Free and Open Source Software.

I’d like to thank the InitMarketing team for their valuable input while researching the topic and writing the article!

Now, enjoy reading my article over at Wazi: A Primer on Europe for US-Based Open Source Communities and Vendors

Supporting Internal Open Source Evangelists

Free and Open Source software is often being introduced through the back door in SMBs as well as large corporations. In-house developers can any time download it at no cost and install it to see if it fits the requirements for internal projects. Due to this kind of go-to-market strategy, MySQL’s Marten Mickos once stated: “We don’t believe in converting.”

The question is: How about internal converting? How about the day, when in-house developers need to justify the use of FOSS to their managers when they seek to consolidate the corporate IT infrastructure? Will FOSS speak for itself?

That’s the day, when enthusiastic in-house developers should start to act and regard themselves as internal Open Source evangelists. They will attempt to build support for FOSS within their organization to establish it as part of the IT landscape. What can they do in favor of FOSS and what should FOSS vendors and projects do to support them?

As much as it is important in the public to achieve a critical mass of FOSS supporters, it is critical within organizations to convince the critical minds, i.e. the decision makers. Here are some points how internal evangelists should be supported:

  1. Internal Open Source evangelists might face the problem of being “the prophets in their own land”. They need to be supported in any possible way by external “objective” sources. For example, through publicly available marketing and sales material highlighting the business benefits of a certain FOSS product. Furthermore, FOSS vendors could have sales staff visit on site and talk to management directly. In general, it is highly important that there is enough easily accessible marketing material provided by FOSS vendors and projects that allow internal evangelists to pick or develop good arguments. A common mistake, especially by FOSS vendors is to hide valuable information, asuming that it will make potential clients call them, while it actually hurts the back door go-to-market strategy.
  2. The still growing momentum and usually positive media coverage helps internal evangelists to advocate FOSS within their organization by refering to success stories.
  3. The best argument in favor of FOSS is a working implementation. Given the easy availability and access to FOSS source code, in-house developers can quickly set up a proof-of-concept or even specific simple solutions for internal use.

In general, FOSS might benefit from general organizational changes going on in today’s companies that reward inidividual and bottom-up initiatives. Flat hierarchies are supposed to avoid the problem that the person actually purchasing software is not the person actually using it. Technical staff that enjoys building IT solutions with Free and Open Source software that actually works as advertised will not be frustrated by software purchased due to mesmerizing sales presentations.

FOSS as a movement can actually support companies in becoming more efficient and effective, not only in terms of TCO, but also in terms of reduced staff turnover and more innovation, because it supports a more open and egalitarian corporate culture. Once these two phenomena converge, proprietary vendors will have a hard time matching such a corporate culture and yes, then we won’t have to believe in converting any longer.

I am looking forward to discussing aspects of internal FOSS evangelism at the German OSMB workshop on FOSS as part of an IT strategy taking place Thursday, Jan 29, 11-13:00 together with moderator Heinrich Seeger (Heise) and the other panelists Matthew Langham (Indiginox), Dr. Uwe Schmid (McKinsey), Kristian Raue (Jedox).