Archive for February 18th, 2010

How to analyse an OSS business model – part two

(now available: part three)

Welcome to the second part of  our little analysis of OSS business models (first part here). It is based on the practical workshops that we do for companies, and so it does have a little “practical” feel to it; as for its theoretical background, it is heavily based on the Osterwalder model, that I found to be clear and comprehensible. It could be adapted easily to other conceptualizations and ontologies on how to describe a business model, if someone wants to use it in a teaching context.

In the first part of our analysis we discussed the basic background concepts and discussed the first two aspects: customer segments and value proposition. As I mentioned before, the analysis is iterative, and should be done collaboratively (for example, by all the people working in a specific group, or by all the managers). As an example of why it should be iterative, we discussed the value proposition: by identifying several different value propositions, we inherently created different customer segments, that receive different value from our hypothetical “widgets, inc.” and this fact can be leveraged by differentiated pricing or different adoption percentages (if the user perceives an higher value, the potential monetary payment may be higher or it may be encouraged in adoption). Let’s continue with channels!

Channels: under this name we can place all the different ways our company interacts with the outside world. A common mistake is to consider only “paid” transactions, while (especially for open source software) a substantial part of value comes from non-monetary interactions. Examples of channel purposes may be sales, distribution (both physical and intangible), company communication, brand channelling and so on. Most channels do have a simple definition (“sales”) while some are indirect and outside the control of the company, for example word of mouth. As any iPhone user can testimony, word of mouth is one of the most powerful information dissemination vehicle, because it is based upon trust in people you already know, and knows what you may be interested in; the flash mob success of some online games on Facebook is a slightly modified version of this principle.

In channel analysis, the various actors in a company try to imagine (or list) all the possible ways someone from the outside may interact with the company or its products. How can a potential customer discover about widgets, inc. products? What actions need to be performed to be able to evaluate or buy? To help in this mapping exercise you can perform what is called the actor/actions mapping. In this activity you start by listing all the actors that may be potentially interacting with you, your users (potential or not), people that may talk about your product… Everything. You start with a simple table, listing the actors and the possible actions that they may want to perform. As an example:

  1. unaware user: casually finds out about widgets, inc. through advertising, word of mouth, email campaign…
  2. potential user: wants more information. Can go to the web site, download from a mirror site, ask friends, look for reviews of the product….
  3. user: wants support. Contact through email, phone, web-based system, (if there is a physical part) may ask for replacement of something…
  4. user: wants a different contract. As before, can use email, phone, a CRM system…
  5. journalist: may ask for information to write a review…

The idea is to try to map all the roles, all the actions, and list all of them along with a sort of small description. Then, imagine yourself while performing the action listed within: who do you interact with? What are the precondition for performing such action? As for the customer segmentation, you repeat this exercise until nothing changes, and at this point you have a nice, complete map of all the in/out relationships of widgets, inc. with the outside world. At that point, you add a value to each channel, in terms of what does it costs to maintain it and what potential advantage brings to you. It is important to bring to the table all potential value (even negative value, or intangible) because for open source software a large part of the channel network will not be directly managed by widgets, inc. but will be handled by third parties that cannot be directly influenced. So, a very simple example: Acme corp. takes the community edition of our software, adds some bells and whistles and creates a nice service business based on that. Is it a value or not? It does have a positive value: enlarges the use base, may provide additional contributions; on the other hand, it competes directly in at least part of the user base. The decision on how to act (the strategy part) depends on what we want to optimize, and is something that is inherently dynamic; so as an example what is good in the beginning (when dissemination of information and adoption is more important than monetization) may not be optimal in a later stage.

This is one of the explanation for the change in licensing by OSS companies, after an initial stage designed to maximize recognition and community contributions; among the examples Wavemaker. As I wrote many times in the past, there is no “bad” or “good” license, the point is that the license should be adopted with a rationale; changing license (when possible) may increase certain factors and modify in general this global channel map for example by changing the percentage of developers that are adopting our software, thanks to a more permissive license. The various parameters of our model (percentage of enterprise/community, independent adopters that integrate our software within their products, return contributions…) are all dependent on many different external conditions that are a-priori imposed by how we manage the company. So, after the creation of our channel map, an important exercise is to try to estimate these parameters, or measure them if possible; this way, we can turn our model into a simulation, giving us insight and allowing us to experiment freely to find the best match for our needs. We will give an example of such parameters after all the pieces of our business model canvas are completed.

Next time: key resources!