Market Segmentation in the Open Core Model

Life is exciting in commercial open source land. On Tuesday this week, another commercial open source vendor relicensed its product while at the same time disavowing the open core model, which they call a tiered approach to their business. This disavowel piqued my interest, not because the open core model is good or bad, but because the argument seemed confused to me and illustrates how important it is to understand your users and the resulting market segmentation.

In the open core model, a vendor open sources some but not all of its source code, expecting that customers will pay to receive the missing pieces. The vendor mentioned above argued that this will lead to an inferior open source product. While this can happen, if it does, it is not necessarily a problem of the open core model but rather either a consequence of (a) an unfortunate market situation or (b) insufficient understanding of user classes and resulting market segments.

Users can be classified along at least the following two dimensions:

• Enterprise vs. non-enterprise users
• Those who need enterprise features and those who don’t

The following matrix shows this classification:

For an enterprise software product, non-enterprise users are not relevant from a sales perspective. They are neither willing to pay for support nor are they in need of enterprise features like authentication, authorization, etc.

Enterprise users may pay for software, depending on how important it is to them. A line-of-business user of a database, for example, may not yet need aforementioned enterprise features. This changes, as soon as a centralized IT department gets involved. Such a department will naturally want these enterprise features and is likely to be willing to pay for them, making the open core model play out as intended.

Everything is fine, if the user classes also represent different market segments based on different needs. Then, a product manager can define the enterprise features that separate those who need them from those who don’t. A sales person can use this to turn an non-paying enterprise user into a paying customer.

However, if the users are all the same with identical needs, then withholding enterprise features from the open source version will be painful to all non-paying users alike, leading to the moniker crippleware for such software. The vendor is caught between a rock and hard place: Either withhold features and face community wrath, or do not withhold features and let go of a major reason why companies buy.

The database vendor mentioned above who relicensed must have felt that all their users were the same, and hence there was no market segmentation possible like illustrated above and as needed for the open core model to work. Hence they let go of it.