Saturday, July 9, 2011

4 ways to profit from free software solutions

In my last article, I tried to demystify a few questions concerning free software solutions. I went rather quickly through one of the most important aspects though: how do providers profit from free software? I will complete my answer in this article.

Why offer free software? Why would a provider or even an investor be interested in giving away their product?

Not only is it expensive to build, but you need to host it, distribute it, promote it, etc. All of these are quite expensive. So why offer it freely?

I'll present the most popular ways to profit from a free software solution: 
  1. Notoriety:
    When a provider specializes in software development and chooses to offer a free software solution, it can be to increase its notoriety. Clients know that if the company was able to put forth a working and popular solution, they will be able to build other great software solutions. The provider will therefore not get direct revenues from their free software solution, but they might get great promotion for their other services.

  2. Fidelity
    Free software is a great way to acquire client loyalty.  There are two popular ways to meet this objective:

    Offer a free basic version: This method consists of offering a limited set of specifications of the software for free. Generally, these free versions will be offered for individuals or very small businesses. As their needs grow, they need to upgrade the version of the software; that's when they need to open their wallets. Since they already have all the data in the software, why not simply pay a small amount and avoid going through a new training and migration process to switch the software altogether.

    Offer a free trial: This is without a doubt the most popular form: let the clients get used to the software solution and validate that its appropriate for them in a short trial period and then start asking for money. The provider will hope the user is either satisfied or sufficiently committed at the end of the trial period to stay as a paying customer.

  3. Traffic
    Sometimes, the simple fact of having a large number of clients using the software can make it profitable. Here are two popular ways to achieve profitability through traffic:

    Publicity: Some providers will get paid to display ads in strategic positions of their software. This form of revenue by itself is not as popular as it used to be. The reason is that it takes a very large amount of clients to make interesting amounts of money: putting a few Google AdSense ads in a site, for example, will constitute a source of revenue but seldom will you see providers depending solely on this revenue model. Nowadays, to use a publicity revenue model, providers must find original ways to make good product placement so that their sponsors benefit from the publicity and are therefore enclined to pay larger amounts than simple banners might provide.

    Acquisition: How many businesses are acquired by their larger competitors? A lot! If you've built a software solution for which you've attracted a lot of clients, chances are your larger competitors will be on the lookout for you even though you might not be profitable.

    The "pusher" model: This is a classic: offer a free solution and once you have a very large number of clients that are committed to the solution, change your model from free to paid.

  4. Support
    For certain software solutions, the clients might not necessarily want to deal with the installation, the training or the support of the software themselves.  The providers will offer different support packages and/or specialized consultation fees.  The clients that need the support can pay for it and those that want to learn and manage the solutions themselves, will do so. The software will therefore remain free for the companies that feel comfortable managing everything themselves
So don't worry about free software providers!  They rarely offer a free solution out of pure generosity. As any business model, they won't always be profitable and many won't be success stories. But one thing is certain, they all do it for a particular reason.  Some will be very open on their intentions whereas others will stay discrete. Keep in mind though that this isn't different from any other software business model.

If you're hesitating to use a free software solution because you're afraid the provider will not be profitable and will close shop in a few years, ask yourself this: is buying a software solution that different? The providers offering a paying software solution might get direct revenue, but if that's their only revenue source, is it sufficient to cover all the development, support and hosting costs?  What determines the success of a software provider is not necessarily the cost of the solution but also its popularity and traffic.

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