Open core companies produce both open source software and source-available proprietary software and follow the buyer-based open core business model for determining what’s open source and what’s source-available. The open source project is always free and downloadable without restrictions.

Most companies have a SaaS hosting option and will provide a free, hosted version of their software. This is not the same thing as the open source project. A free tier comes with limitations, usually in the form of consumption, number of users, storage, or some combination of those things. From a business perspective, the goal of the free version is to drive people to upgrade to paid versions.

Pricing has a negative correlation with demand. When the price goes up, the number of customers willing to pay that price will go down. Optimizing pricing strategy is often a consistently evolving consideration for companies. In general, pricing alone should be the primary reason 20% of people are not willing to buy the product.

Open source versus free version

The open source project and the free version of your software are not necessarily the same thing. The open source project should always be available to download, use, and modify via the repo it’s stored in. It’s not usually available as a hosted SaaS product. The free version of the software is usually a hosted, SaaS product and it may be a forked version of the open source software.

The open source software may be hosted in a “sandbox” environment where users do not need to sign up with accounts. The hosted open source “sandbox” operates as the free tier. When this is the case, the limitations on what a non-”sandbox” free tier may look like should focus on driving users to the paid tiers more quickly to reduce friction.  A limited trial of premium features in place of an additional free tier is recommended to help reduce that friction.

Features that are available in the free version of the software should also be added to the open source version. It’s important to maintain a good, usable version of the open source project in order to contribute back to the open source community and encourage bottoms-up adoption of the product.

Good, better, best pricing tiers

In its simplest form, the open core pricing model has three tiers: good, better, and best. It’s recommended to use a price-based costing strategy for determining the market for pricing levels.

Tier Free (Good) Premium (Better) Enterprise (Best)
Price $0 $9 $25
Billing per user/mo billed annually per user/mo, billed annually

Good = free

The “good” tier is free and drives upgrades to a paid version. Even though the “good” tier is free and open source, it is usually a separate offering from the open source self-hosted version of the product. For products that are solely self-hosted, the open source version may be your free tier and upgrades to paid plans will be driven primarily by features. Only offer one free tier.

Avoid free forever plans. The intention of providing a free tier is to let people try out the product. Free tiers should have limitations that drive people to upgrade. Examples of limitations include usage, compute consumption, storage, and/or a number of something (for example: searches, projects, users, etc.)

When the cost of goods is significant, offering them for free is not recommended. Instead, consider providing a generous trial period without requiring credit card information, allowing users to get a good feel for the product. A well-designed trial period can help users understand the value of the product and encourage them to upgrade to paid plans.

Considerations for creating a “good” tier:

  1. Should require creating an account
  2. Automatically starts as a 30-day free trial of the premium offering, then reverts to basic features
  3. User and/or consumption limitations:
    1. Collaborators (5 people)
    2. Storage (1 GB)
    3. Compute (10 models)
    4. Transfer (100 syncs)

Better = premium

The” better” tier includes everything in “good” and introduces source-available paid features targeted toward managers.

Considerations for creating a “better” tier:

  1. Can include base-level support