The Challenges of Financing Open Source Projects

Unfortunately, securing funding for Open Source software is exceedingly challenging—not from a technical standpoint, but economically. Most Open Source projects depend heavily on user donations and support contracts with larger entities. Rarely do these projects thrive without substantial backing from a large community or corporate sponsors.

Many well-known Open Source initiatives struggle to sustain themselves financially. The returns for developers and maintainers of most Open Source projects are surprisingly minimal. Successful Open Source projects often become the property of large corporations that finance them. For those inclined towards entrepreneurship, Open Source may not be the ideal path.

User Expectations Can Be Overwhelming

Only about 1.2% of the population in North America and Europe consists of software developers. The vast majority have little understanding of what it takes to develop and manage software, let alone run an Open Source project.

I've experienced enough Open Source endeavors where users presumed my projects were managed by a large team, when in fact it was just me. The average person’s willingness to donate is quite limited; my most significant project on GitHub has garnered only 150 stars, which took considerable time to achieve, and I’ve made only a few hundred dollars.

Open Source Is Not Ideal for Business Applications

For Joe’s “AntiqueSoft,” pursuing an Open Source model might not be the best choice. Since his goal is to generate revenue and establish a business, the Open Source route poses significant challenges. The target audience, antique dealers, may not be familiar with or interested in the Open Source concept.

Even if Joe ventured into Open Source, he would need to explain its benefits and handle the marketing himself to attract customers. While some might argue that’s contrary to Open Source principles, it is necessary to reach a typical customer who may not engage with Open Source products.

On a positive note, Open Source excels in areas targeting technical audiences, such as development tools or server software. If your audience consists of developers, Open Source might be a fitting approach, provided you can find donors or establish a supplementary commercial model like SaaS.

Distributing Your Commercial Software

In today’s landscape, software distribution primarily occurs via the Internet. Previously, software was mainly delivered through physical media like floppy disks, CDs, or DVDs. Users can install the software using an installation package, which then requires them to verify their license—either through online verification or via a license key.

Once confirmed, the user can begin using the software. You can also facilitate license purchases within the software or through an online store. Commercial software licensing operates similarly to physical goods, with options for direct sales and distribution partnerships.

Commercial Challenges with On-Premise Software

A significant challenge arises from the fact that a customer who has purchased a license retains lifetime access. Naturally, you want to provide updates, but since users only pay for the license once, that fee must cover all future costs, including updates.

Many businesses find themselves compelled to release new versions annually, requiring customers to purchase new licenses each time. To maintain revenue streams, you must entice users to buy new licenses by introducing compelling features with each iteration. Given the one-time nature of license sales, you may also need to limit support for each version.

Piracy Issues with Commercial Software

Providing binary files to customers opens the door to tampering, allowing some to bypass license checks, often referred to as “cracking.” While business software is less likely to be pirated due to the associated risks, consumer software frequently finds its way onto piracy sites, leading to an ongoing cycle of copy protection challenges.

Is Traditional Licensing Making a Comeback?

The myriad challenges of traditional licensing have prompted many software businesses to adopt subscription models. Although subscriptions resolve several issues, users increasingly express frustration over the numerous subscriptions they must manage.

Customers often prefer a single payment for a lifetime license. However, the current trend leans towards offering annual subscriptions to avoid the burden of monthly fees. Certain software products, such as libraries and server software, may suit licensing models better than subscriptions.

In Joe’s case with “AntiqueSoft,” targeting everyday users suggests that licensing isn't the best route. A subscription model would likely work more effectively, as Joe may find it challenging to convince non-tech-savvy antiquarians to install a client-server application on their own systems.

Challenges Associated with SaaS and Subscriptions

SaaS isn’t without its challenges. If your software resides on customer machines, piracy remains a concern. As a result, many SaaS companies host their software and provide access via web or mobile interfaces. The restrictive nature of mobile platforms like iOS and Android significantly reduces piracy risk compared to systems like Windows or macOS.

While licensing doesn’t necessitate managing infrastructure, SaaS requires you to host the software for customers, placing you in the role of infrastructure operator. If you struggle with uptime, customers may demand refunds for outages affecting your “Software Service.” This concern drives many SaaS businesses to leverage cloud providers for their managed services.

Subscription, Consumption, or Both

SaaS offers two paradigms: a fixed monthly fee—often structured in tiers—or consumption-based billing. Many businesses adopt a hybrid approach. Customers generally favor fixed monthly fees, as they provide predictable costs, but this can lead to unprofitable situations for heavy users.

Consumption-based fees are particularly attractive to businesses, as customers pay only for what they use. In cases of fluctuating usage, you may prefer this model to manage infrastructure costs effectively. If users resist a consumption model, throttling may become necessary for power users.

An example pricing strategy for “AntiqueSoft” could involve: a tiered fixed monthly fee or a consumption model based on the number of books or items stored—charging $0.50 per book and $5 per connected distribution channel monthly. The challenge lies in simplifying the pricing while ensuring profitability, especially with power users.

Marketing Your Software-as-a-Service Subscriptions

Through effective marketing efforts, potential customers find their way to your website, where they can sign up for SaaS subscriptions and gain immediate access. This entire process should be self-service, ideally taking no more than 15 to 30 minutes from signup to usage. If your software requires human interaction for sales or installation, it does not qualify as SaaS but rather as enterprise software.

Enterprise ASP is not SaaS! A common misconception is that any hosted software qualifies as SaaS. Application Service Providers (ASP) operate software for customers. If you install server software for a client, you are functioning as an ASP.

For the “AntiqueSoft” scenario, SaaS would be the most suitable route. Prospects can visit the website, select a pricing tier, sign up, and start using the software right away, which helps avoid lengthy and costly sales processes. Offering a free trial period of 7 to 30 days allows users to test the software. Free trials today serve as modern equivalents of Shareware or demo versions from the late 90s and early 2000s. The key commercial challenge remains converting trial users into paying subscribers.

Pseudo-SaaS: Not a True Software Business

Suppose “AntiqueSoft” operates like a SaaS, but instead of charging a monthly or usage fee, it takes a percentage of each book sale made through the platform. In this case, the business model hinges on the antique book market—if it falters, so does the viability of “AntiqueSoft.” From a commercial standpoint, this model doesn’t classify as a software company but rather as a book distribution platform, placing it within the retail sector.

Customers may favor such models since they only pay when they profit, but their willingness to pay typically caps at a certain percentage—most would hesitate to allocate more than 20% of their revenue to the software platform. Charging per sale shifts costs to the customer’s sales and marketing budget, while monthly fees generally fall under IT expenses, which can have significant implications, especially for larger clients.

For “AntiqueSoft,” a pseudo-SaaS model like a marketplace is ill-advised, as it relies on customers to sell an increasing number of books annually. Features that do not directly drive revenue may become financially burdensome for “AntiqueSoft.” A platform model akin to Abebooks would be more appropriate.

Adware and Freemium Models

If users are unwilling to pay for your software, both Adware and Freemium models have proven effective for generating revenue. They are not mutually exclusive; software can function as both SaaS or licensed while incorporating Freemium and Adware elements. Mobile games often exemplify this, offering free versions with ads alongside premium options to eliminate ads.

While many users dislike Adware, its success is undeniable. Though advertisements in software can be bothersome, users may tolerate them for free access. If you can cleverly integrate ads, such as through affiliate marketing, they may be less intrusive.

In the case of “AntiqueSoft,” it could effectively use both strategies: offering a free version with ads that limits users to managing 500 books. Users seeking to manage more could upgrade to a premium plan, creating a “forever free” option instead of a limited trial.

Implementing Your Business Model

Stripe and PayPal are the most popular platforms for implementing SaaS business models, allowing you to manage subscriptions, one-time payments, and usage fees. The advice is to start small and simple to begin generating revenue, then progressively expand your software offerings. Maintain simplicity to ensure revenue flow works effectively.