How to Get Your Saas Pricing Model Right Against Open Source SaaS Vendors

How Can Vendors Make Money with a Free Product?

An increasingly common SaaS pricing model is one based upon Open Source software. Vendors can set up a SaaS or Software as a Service business using open source software.

The money for the venture does not come from the users adopting, accessing or installing the open source software with a GPL software license. Instead of buying software or leasing software licenses, the customers pay a monthly, quarterly or annual fee for services to support the software.

These services could range from user training, access to online technical documentation, guaranteed software support or software customization services. Vendors cannot sell the GPL software to customers, but vendors can be paid to tailor software interfaces, perform software migrations or create additional software modules not dependent upon the copy left licensed software.
Instead, the open SaaS solutions providers are services that the customer using open source software is missing by using unsupported but free applicatio ns. For example, customers who buy financial software often get free calls to a tech support line or tax experts in March and April.

Customers who install open source applications are either left high and dry when problems arise, search online for a reputable expert to troubleshoot their problems for a significant fee or contact the open source vendor and pay them a hefty fee for help. Open SaaS solutions providers offer the traditional support and training services users need.And open SaaS providers may have a lower cost business model than closed-source software vendors.

Open SaaS providers do not have to pour money into the development of new software versions; this is done by the Open Source providers or user communities. In ideal circumstances, open SaaS vendors simply stay abreast of the latest versions and offer this expertise for a modest cost to users of the Open Source applications.

This lowers their business costs while allowing subject matter experts to focus on profitable activities like billable customer support. The free software SaaS pricing model is based on making money providing technical support, training, database conversion support and customization for payment.

Open SaaS and the Law 

It is illegal to sell open source software with a “copyleft” license such as the GNU General Public License. With Software as a Service or SaaS, the software vendor can avoid distributing software code to users, which could run afoul copyrights or software licensing agreements.
Software as a service still faces significant limits when working with GPL licensed software. Vendors cannot provide GPL “copyleft” licensed SaaS software to a customer for subsequent resale. Vendors cannot provide licensed SaaS software source code in escrow. SaaS vendors cannot use the open source GPL licensed code in another software application for sale to a customer.
Contracts with customers will need to state that customization of GPL software will be owed by the SaaS vendor, though the customer can use them. Open source SaaS providers may be legally required to place these customized versions of the open source software in the open source project’s code libraries as part of their usage agreement. This depends on the open source software’s license.

Financial Considerations 

Hosting open source SaaS software on a server will require investments in hardware or paying hardware leasing costs. The sale of a physical CD or reference manual requires the collection of sales tax if sold to someone in the same state. Depending on where the business is based, vendors may charge sales tax when selling the software licenses. Or they may need to collect sales taxes on the SaaS service under the taxes owed on telecommunication services, just as DSL providers and cell phone companies must collect sales taxes on telecommunication services.
Open SaaS solutions providers take on the obligation to ensure access to all paying users to their services and maintain high levels of IT security. The up time of the servers hosting the SaaS software applications must approach 100% of the SaaS vendor will lose customers or risk being liable for business disruptions of their customers.

Summary

Getting the SaaS pricing model right does not mandate that one rely upon Open Source software. However, software vendors trying to get their SaaS pricing model right necessitates knowing the competition’s business model.

Omri Erel
Omri is the Head of Demand Generation, as well as the Lead Author & Editor of the SaaSAddict Blog. Omri established the SaaSAddict blog to create a source for news and discussion about some of the issues, challenges, news, and ideas relating to SaaS and cloud migration.
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