Open Source refers to products that are developed collaboratively rather than by a single company. The source code is open to the public, allowing anyone - whether a casual tinkerer or a professional - to join the community and contribute their expertise. As a result, the solutions developed are not proprietary to a single company, but to the general public. As such, Open-Source products are available for free. This does not preclude the possibility of earning revenue through Open-Source business models: rather than directly from the developed solution, indirect revenue can be earned through products and services built on an Open-Source foundation. Businesses that follow this business model benefit from the fact that they are not required to invest in the development of new products. Typically, development occurs spontaneously and without charge by community members. These members are frequently motivated to participate in development by personal interests, such as a desire to improve the current solution. Open-Source proponents are frequently convinced that this approach results in superior solutions to proprietary development because it leverages the community's collective intelligence. Finally, and perhaps most significantly, Open-Source development is not dependent on external suppliers.

Free vs. Open-Source Software

The business model is built on the same fundamentals of the original philosophy of the GNU Manifesto, but the criteria are much looser. Advocates in the free software community are harsh critics of the current open-source business model because it includes companies that charge for products and services.

To be considered an open-source company, a business must make its code available to the public but doesn't require free use.

How Can a Company Make Money with Open-Source Software? 

While open-source has been a driving force in the software community for decades, many people in business are still unfamiliar with the movement. Some even reject it as a true business model and limit open-source to a philosophy for software licensing practices.

The most significant issue critics raise consists of releasing valuable information to the public without protecting intellectual property licenses.

One of the most popular operating systems, Linux, is both free and open-source software. The OS has an incredible community of developers who contribute to the software's development by upgrading, fixing bugs, and solving security issues. While the community version of Linux is 100% free to download, others that include customer support and a warranty require a transaction to access. Enterprises that build apps and SaaS on Linux require maintenance by Linux developers who charge a premium for their services. Since 2005, "over 14,000 contributors from more than 1,300 companies have contributed to the kernel," many contributions coming from some of the largest software and hardware vendors in the world. 

Offering open-source may not make sense for every software company, but there are clear advantages helping some of the most successful businesses in the world.

Advantages to the Philosophy

Linux is a prime example of how a company can build a community based on free software. The open-source company has built a loyal following consisting of advocates, developers, and users who are passionate about the project because they are all essential parts of its progression. Companies that limit their software development internally can never achieve the level of devotion Linux has achieved.

Security

If you are unfamiliar with software or web development, you may be raising security concerns over having code readily available for anyone with internet access to see. However, complete transparency and community support lead to reported vulnerabilities much faster. In addition, solutions are usually resolved within a few days because updates aren't restricted by software licenses.  

Community

The community behind open-source projects like Linux is constantly looking for security concerns and new ways to solve problems on the platform. Commercial vendors are limited to a fixed number of internal developers.

Cost 

A decentralized approach to software development requires fewer paid employees and less overhead. If you have a dedicated community of developers who benefit from the software being available for free, they will offer value through peer review and collaboration on projects.  

Rapid Adoption

Like the freemium business model, open-source software incentivize adoption because there isn't a transactional barrier to entry.

4 Types of Open-Source Models

Taking an open-source project to a viable business model can be challenging. To navigate a path forward, it is essential to understand the 4 types of open-source models.

Open-Core

Extending your project to include commercial products is known as open-core. While the foundational structure is available to the public and available for free, offerings are available at a price.

Professional Services (Proserv)

Linux is an example of a Proserv open-source model. The company offers its services to support its free platform.

In many cases, Proserv companies will offer their services in a subscription model; the most notable example is Red Hat, a Linux-based provider of enterprise IT solutions.

Hosting

Offering infrastructure as a service has become a significant revenue driver in the software space. Hosts like GitHub offer the platform for free but require payment for additional services and to scale through a monthly subscription.

Marketplace

The marketplace model consists of building the infrastructure to host multiple vendors and services from 3rd parties. 

When and how to apply Open Source:

Open Source has found wide application in software design. While you relinquish a great deal of control over a given project, you can gain a competitive advantage by setting standards, sharing resources and risks, and creating a community of users to whom you can later sell additional commercial products or services. Back in the 1990s Open Source was still rather avant-garde, but today the pattern is finding increased application in more and more fields. Open Source is particularly popular among young programmers. Biotechnology and pharmaceutical companies are also increasingly susceptible to this pattern.
Android is a famous company who uses this pattern.