Open Source Business Models: How Companies Make Money

TL;DR: Open source business models all follow one trade: give the code away, then charge for something around it. The four popular options are open core, hosted software (SaaS), support subscriptions and dual licensing. Most profitable companies mix two or three.

Your bank's website probably runs on Linux. Your favourite app likely stores its data in PostgreSQL. Neither sends you an invoice. Yet IBM paid $34 billion for Red Hat, a company that hands its software out for free. Somebody is paying: here's where the money comes from.

The open source business model, in one line

A software licence is the permission slip attached to the code. An open source licence says anyone can read it, change it and share it, usually on one condition: your changes stay open too. That's a brilliant way to get strangers to fix your bugs. It's a terrible way to stop a competitor copying you.

So open source companies sell what the free download doesn't give you: the setup, the guarantee, the scale, or the right to keep your own code private. Every model below is a version of that idea.

Option 1: Open core (free base, paid extras)

Release a working free version. Keep your best features behind a paywall. GitLab gives away its Community Edition and charges for Ultimate, which adds security scanning and audit reports that large firms need on paper. Supabase offers free database software and sells a managed version with backups and dashboards.

The free copy builds trust and spreads by word of mouth. The paid tier targets teams with deadlines and budgets. The hard part is choosing the cut line: give away too much and nobody upgrades; hold back too much and the free version feels like a demo.

Option 2: Hosted software, or SaaS

SaaS means you rent software that's already running, instead of installing it yourself. Grafana Labs and Sentry both let you download their products free, then charge for a cloud plan. That plan costs money because someone else runs the servers, takes the backups and gets woken at 3am when something breaks.

This model suits tools with fiddly setup. The software works fine on your own machine, but most teams would rather pay a monthly fee than lose a week to configuration.

Option 3: Support and subscriptions

Red Hat proved this can be enormous. The code was free. What banks and airlines bought was a tested, patched, certified version, plus a phone number that a real engineer answers when checkout goes down. It's insurance, sold as a subscription.

It works best when your customers have something expensive to lose. A five-person startup will Google the error message. A hospital won't.

Option 4: Dual licensing

MySQL popularised this one. Use it under the free GPL licence and your own project must be open too. Want to hide it inside paid, closed software? Buy a commercial licence. Same code, two price tags.

This model is fragile. MongoDB switched to a custom licence in 2018 to stop cloud providers reselling its work. Elastic did something similar, and the community forked the code into a rival called OpenSearch. Redis changed terms, then reversed course. Licence changes can split a project in two overnight.

What this means for you

• Building a company? Match the model to where your value sits. If the pain is setup, sell hosting. If the pain is compliance paperwork, sell the enterprise tier.
• Buying software? Read the licence before you build on it. A vendor can change terms later, and your escape route is the old fork.
• Betting your career on a project? Check who pays the maintainers. A popular project with no company behind it can stall the day its author takes a full-time job.

Key Takeaways

• Open source makes money by selling what surrounds the code, not the code itself.
• Open core and hosted SaaS are the two workhorses today.
• Support subscriptions sell best when downtime costs the buyer real money.
• Read the licence. "Free" is a business decision, and business decisions change.

Frequently Asked Questions