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Software Business Models Guide: SaaS, Licensing, Open Source & More

Ulf Lonegren

Software Business Models Guide: SaaS, Licensing, Open Source & More

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On-premise or cloud. Open source, open core, restrictive, hybrid...

Even the savviest tech connoisseur can sometimes get tangled in the rapidly evolving world of software.

Some terms can mean more than one thing. Some models sound deceptively similar but have very little in common.

Some can even be seen as ideologies (seriously).

Pro Tip: Choosing the appropriate software business model is one of the most critical decisions you will make for your company.

If that foundation doesn't support your vision and your customers' needs, even the smartest software marketing strategy won't get you the results you want.

The entire thing will inevitably collapse.

To make the right decision, you need to know:

  • What options you have
  • How they differ
  • Which models could support your needs long-term, and
  • Which ones you’re better off without

Let’s get you untangled.

Types of Software Business Models

In terms of how you plan, build, market and make money from your software, there are a lot of options to choose from. And each choice you make affects all other aspects of your business.

For example, you could choose to build on-premise software. As an extension of that decision, you would have to come up with a marketing strategy that suits that model, and that probably wouldn’t end up looking a lot like SaaS marketing.

Does that make sense? 

Depending on which way you go with one decision, you could open or close doors in other departments and drastically change the direction of your business.

Picking a software business model shouldn’t resemble a risky order from a questionable restaurant. You need to know what everything is, what species they belong to, and which combinations could get you hospitalized.

So here’s your basic atlas:

Category

What it describes

Types of software business models

Distribution

How and where you provide products to customers

  1. On-premise
  2. Cloud-based
  3. Hybrid

Source code licensing

Who has access to the source code and what they are allowed to do with it

  1. Proprietary
  2. Open-source

Revenue streams

How your company makes money

  • Ads
  • Sales
  • Subscriptions
  • Services
  • Combinations

Target audience

Who you are selling to

  1. B2B
  2. B2C

Some of these are pretty self-explanatory, others we will cover in more detail in a second. And, if you were wondering earlier, all software marketing starts with understanding your buyer personas.

But first, let’s talk about ethics.

Ethics of software business models

Ethics of software development refer to ethical issues, good and bad practices, questions of integrity, and law. Things like:

  • Property
  • Privacy
  • Accessibility
  • Accuracy
  • Accountability
  • Transparency
  • Responsibility, etc.

There have been a lot of pledges and codes of conduct suggested by different organizations over time in attempts to protect users and promote values like honesty and integrity among developers.

Ethics of software business models 

The ACM Code talks about professional responsibilities, as well as basic human decency matters like “do no harm” and “contribute to society.”

General Ethical Principles

You get the picture. Many others cover similar points, but despite that, no ethical standard has been widely adopted so far.

Now, in terms of software business models, no model is inherently more ethical than the rest. To say that would be some top-tier holier-than-thou-ism if we’ve ever seen it.

“Unethical” implies things like:

  • Algorithmic bias
  • Privacy breaches
  • Unclear personal data ownership
  • Inaccessible design
  • Poor security
  • Misleading information

You know, general bad practices.

“Unethical” doesn’t mean “this company’s philosophy differs from ours.” Unless by “ours” you mean “legal and sane.”

But that’s exactly it. If someone hit you in the face with a shovel, you’d call them a criminal. You wouldn’t call gardening unethical.

Pro Tip: So long as you make sure you don’t actively or accidentally cause harm, and as long as you follow the rules and some old-fashioned common sense, no software business model is going to pose serious ethical issues

Software as a Service (SaaS) Business Model

You might have read some stats about companies flocking over to SaaS, the market's steady expansion (estimated at $138 billion by 2022), and the recent massive profits of the industry giants.

So what makes the SaaS business model the new black?

Using a SaaS model instead of on-premise software is like renting a furnished place instead of building a house from scratch:

  1. All you need is already there
  2. The initial investment (and risk) is way lower
  3. You don’t have to know anything about building houses

Plus, the reality of many companies is that they need more than one tool to power them. Even if they have an on-premise package running, it’s easier for them to incorporate a SaaS product as needed than to spend a bunch of money, time, and storage to try a new on-premise package.

These are some of the sexier features of this model:

  • Recurring payments (the so-called SaaS pricing model)
  • Higher customer retention
  • Cloud-based hosting
  • Smaller but frequent updates
  • Ease of use and access
Pro Tip: To meet the demand, many companies famous for their on-premise products are now offering a SaaS alternative.

For instance, next to the standard Microsoft Office package which you have to buy, you now have Microsoft Office 365, which you can subscribe to and access through the Internet.

SaaS Business Model



SaaS business models can be:

  1. Horizontal
  2. Vertical

Horizontal SaaS is the standard model used by popular companies like Salesforce, Zendesk, Trello, Slack, Hubspot, etc. It’s meant to target a wide range of customers from different industries by offering services to help them run their businesses efficiently.

Because they solve a pain point shared by many industries, these products are super simple to use, but not so easy to customize.

Vertical SaaS, on the other hand, targets a very specific niche audience and solves problems unique to their industry verticals.

One such SaaS is Toast.

Restaurant Software Business Model

Instead of targeting everyone who needs help with one common pain point, Toast offers a range of services that solve multiple pain points unique to restaurants, with separate landing pages for each.

This approach allows companies to have all their needs met by one product, instead of having to mix and match universal apps and use just one or two of their features or waste precious time on customization.

Vertical SaaS has been on the rise recently with less competition and high customer acquisition rates.

Open Source Software Business Models

An attitude. A lifestyle. A commitment to the greater good. Open source is often described as a set of values rather than a mere business model. 

The three main reasons are:

  1. Its source code that anyone can access, modify or enhance
  2. Depending on the license, it’s fully customizable
  3. It promotes collaboration and community values

Despite how that sounds, open-source can actually be a lucrative business model. Some of the most popular examples are Linux and Mozilla Firefox. If you scroll to the bottom of Mozilla’s support site, you can find its source code...

Open source business model

... and take a peek behind the scenes.

Github

That’s an easy way to spot these good boys in the wild. If you’re so inclined, you could even volunteer to contribute to its development. As could anyone else.

That’s the appeal, anyway.

If you’re new to the concept, you might be thinking, yeah that’s neat, but how does that work as a business model?

Well, it takes a bit of work, but there are four common approaches:

  1. Support
  2. Hosting
  3. Open-core
  4. Marketplace

Here’s a very simplified explanation of each model:

Support

Hosting

Open-core

Marketplace

  • Integration services
  • Debugging
  • Training
  • Consultations, etc.

Refers to selling access to a fully managed, typically cloud-based infrastructure.

Offers all functional features of the software for free, but charges for premium features.

Platform that offers products and services from multiple vendors in one place.

Examples:

  • Hortonworks

Examples:

  • WPEngine
  • Databricks

Examples:

  • Github
  • Elastic

Examples:

  • Sharetribe
  • Cocorico

Most businesses offer some combination of these.

To recap:

  • Open-source is great because it’s completely customizable
  • It can be tricky to get into as you usually need some level of expertise
  • If you’re not a professional developer or IT-curious, it’s not as user-friendly
  • Despite that (and sometimes because of that), the open-source model is still very much on the rise

Take a look at these metrics and judge for yourself.

Open source software business use case

Image source: bcg.com

Software Licensing Business Models

Software licenses are basically the terms of use you have to sign when you’re buying software. They regulate things like who gets to inspect and edit the source code, under what circumstances, whether you’re allowed to share the code with or without the modifications, etc.

Software licensing

We mentioned proprietary and open-source licensing, but there are many more models for businesses to choose from.

Most popular types of licensing business models:

Perpetual licensing

Floating licensing

Subscription-based licensing

Feature-based licensing

Cloud-based licensing

The user pays for a copy of the software all at once and is able to use it forever. Future versions and enhancements are not included.

Lets companies decide how many licenses they want to share among the employees in-house, so they don’t have to buy a separate one per individual user.

Implies the user is paying for access to the software on an ongoing, recurring basis without a specified end date.

The vendor controls which features the user has access to and sometimes limits how many times the feature can be used. This is a subtype of the metered license.

Allows the user to host their software on the cloud so they aren’t limited to any one device if they need to access it.

But why stop there? Here are some other common models:

  • Network
  • Element pools software
  • Consumption-based
  • Account-based
  • End-date based
  • Suite-based
  • Trial

We could keep going.

With seemingly endless options, how should you choose?

Firstly, if you’re building a business, the software license shouldn’t be among the first decisions you make. This choice should be based on your product and desired direction, not the other way around.

Your options will narrow down on their own when you make that decision anyway. Building a SaaS product? Well, a perpetual license shouldn’t linger in your thoughts.

Another important thing to note is that you’re allowed to offer multiple different licenses.

It all depends on what you want to sell. So here are some prompts to help you decide:

  1. What type of software business are you building?
  2. What terms would you like to give your customers?
  3. Are there any limitations you want to impose?
  4. What distribution and pricing models are you going to use?
  5. Which license sounds closest to what you had in mind?

If you can’t decide yet, don’t worry. This might be one of those things you have to put in a mental drawer and revisit later.

Cloud Software Business Models

Cloud-based software has been one of the defining models of the past decade and continues to soar today.

These are its key features:

  • Remotely-hosted infrastructure, platforms, and apps
  • Internet-based access through any device
  • Resource pooling and automation of services

As we collectively continue to spend more time on our smartphones, tablets and other devices, these features are only becoming more attractive with time.

Before we get to the juicy part of the story, let’s quickly cover the logistics. So, when it comes to cloud infrastructure, you’ve got your basic four categories:

  • Public Cloud

Offers storage and sources that are openly shared, owned, and run by a service provider. It’s the least secure of the options and is best suited for pay-per-use deals.

  • Private Cloud

Intended for a single organization or company. It can be operated on or off-site and has better security than the public cloud.

  • Hybrid Cloud

Two or more public, community or private clouds combined. Sensitive information is usually stored in the private section while the rest can be public.

  • Community Cloud

Infrastructure shared by a group of organizations or businesses with similar needs.

All clear so far?

Cloud services are where the story gets interesting. Remember these three:

  • SaaS (software as a service)
  • PaaS (platform as a service)
  • IaaS (infrastructure as a service)

We’ve already talked about SaaS, but the other two models are by no means the ugly step-sisters.

IaaS

Infrastructure as a service offers the basic, raw setup required to build and deploy applications on-demand and compensated on a pay-per-use basis.

Compared to SaaS and PaaS, this model provides the lowest level of control but higher flexibility.

IaaS services include the essentials, like IT facilities, storage, networking, firewalls, and servers to help you:

  1. Avoid the costs of owning and maintaining on-premise infrastructure
  2. Scale up or down as needed

A great example of IaaS is Microsoft Azure.

IaaS Model

If you’re still not convinced of the potential in Iaas, just remember that the global IaaS market grew 40.7% in 2020. It may be time to start thinking about what sort of infrastructure you’d like to develop.

PaaS

Platform as a service offers the full environment necessary to develop and run an application in the cloud. It builds on the IaaS foundation, but also includes:

  • Development tools
  • Middleware
  • Business intelligence
  • Graphic user interface, etc.

Basically, PaaS supports the entire application development cycle.

The only things a PaaS customer has to worry about are the services and apps they develop. Everything else is taken care of by the platform, stored on the cloud, and paid per-use.

A prime example of this model is Heroku.

PaaS model

Like Iaas, the global PaaS market is growing and is expected to reach $319 billion by 2030.

Final Word on Software Business Models

Weighing out the available software business models and picking the right solution is the first and most vital decision for your company.

There’s no obvious winner here. No, all models aren’t equal either, but your perfect combination really depends on your

  • Niche
  • Expertise
  • Target audience
  • Technical requirements
  • Business objectives
  • Personal preference, etc.

Now that you know what’s out there, you can pick one or two options that obviously satisfy most of your needs and go from there.

Want to learn more about the world of software beyond business models? Then feel free to take a look at some of our other articles.

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Ulf Lonegren

Ulf Lonegren

Ulf is one of the co-founders here at Roketto. His passion shines brightest when tasked with increasing business growth through inbound marketing. If you want to talk strategy, give Ulf a shout and you’re likely to see him spark with excitement.