Why this Open Source Success Formula will Increase your Revenue

Superbokehtheorie

When I worked for Autodesk in the mid-nineties I used to publish a eNewsletter for their channel partners.  The problem was I didn’t know a thing about the channel or the products.  This irritated my boss’s boss to the point where he constantly mocked me behind my back and encouraged everyone else to do so.   Oblivious, I only realized the truth later after a late night drinking episode with a sympathetic co-worker.

I don’t blame the guy, although he was one of those people that mistook pretense for substance and polish for smarts.   I was young, inexperienced and didn’t realize how much I needed to learn about the company and reseller channel.  I sincerely wanted to help our channel partners improve their business.  But because I failed to do the proper research I was ridiculed.

So when I joined MindTouch this lucid memory still haunted me. The voice of mistakes past kept replaying like a collection of worst business moments caught on tape.  Yet, I was new to Open Source but not the industry.  I knew I needed to learn more, but had a very good understanding of the industry and how it benefits corporations and individuals.

The Open Source Success Formula

The open source model has long been admired as one where a company can generate revenue successfully but still remain free for community use.  Still we didn’t fully understand how to reconcile our own success with other high performing open source companies.  So we decided to conduct a survey.  Not a 10 question multiple choice survey, but a live conversation done interview style with numerous follow up questions.

We pushed hard for their best practices and most gave them up willingly.  So far 16 of the top open source executives and companies have participated (we’re still looking for more).

What we found time and time again is that the best- in-class open source companies knowingly or unknowingly followed this formula:

D x CR x ASP = $$ (or € £)

The formula can be broken down as follows:

  • D = Distribution (total number of downloads, subscriptions, etc.)
  • CR = Conversion Rate (meaning: percentage of the Distribution that develops into paid customers)
  • ASP = Average Sales Price
  • $$ = Revenue

While high distribution (D) figures are important, the conversion rate (CR) appeared to be the primary focus of the best in class group.  At some point distribution tops out.   Looking at CR the primary factors are;

  1. Product / solution differentiation from the core (or community)
  2. Product / solution differentiation from competitors
  3. How mission critical is the product / solution
  4. Marketing and sales effectiveness (how well are you communicating #1 – #3 above?)

The ASP is also a direct reflection of how well you execute CR.   Finally, $$ represents the revenue success of new customer acquisition.

We discussed other additions to the formula like adding an +R for Renewals, or adding a B for Brand in brackets around the formula due to it’s affect on every element, or even a cost/margin component, but the core formula stood out as the focal point.  Moreover, the study is focused on new customer acquisition and commercial conversion.

This is only a First Step

While our key findings and best practices will not be published outside of the survey group,  those that understood the formula and built best practices around it were achieving the highest success.  Significantly, those that mastered D but not CR were leaving money on the table.  The challenge is figuring out which area(s) to focus. We hope the formula gives you a head start.

Do you have a different experience?  Want to participate in the study? Please share.

And in case you’re wondering…

My Boss’s boss was let go shortly after my experience and I’m pretty sure runs custodial services at one of our competitors.

13 Comments

  1. Seems to me the critical factors for success (i.e. the 1-4 that make the difference between a 1% and 0.1% CR) are not actually represented in the formula

  2. Matt,

    I agree. The CR is so critical in this equation it may need to be broken out within the equation.

  3. Mark — great stuff. Too many companies focus on shoving stuff into the funnel without thoughtful and measured processes to convert that into revenue. I look forward to discussing with you.

  4. Gentlemen: I understand why people (especially your board members) may think CR is a real number, but I think it’s a ghost. Here’s why:
    http://stephesblog.blogs.com/my_weblog/2009/03/more-on-open-source-conversion-rate-myths.html
    http://stephesblog.blogs.com/my_weblog/2008/01/open-source-bus.html
    cheers,
    stephe

  5. Matt,

    The CR elements are both qualitative and quantitative and are apart of the formula but not necessarily formulaic. To be successful at CR, the entire corporate strategy needs to be aligned and integrated with each element. Working each alone will lead to sub-optimal revenue performance.

    For example, and let’s use (#1) Product/Solution differentiation – the commercial version needs to have enough customer value above and beyond the Core version in order for this element to be successful. Yet, if the core/commercial difference is not (#3) Mission Critical enough and the (#4) marketing team is ineffective at communicating the difference and (#4) sales force doesn’t know how to sell it, then the (#1) element will not lead to any measurable success.

    Therefore, engineering, sales, marketing, product design, etc. all need to be on the same page for each element of CR and they each need to be executing concurrently.

    I’d like to hear your thoughts on this…

  6. Stephen,

    I like your two posts. You bring up some very good points.

    Conversion rate is orders of magnitude different between companies. Business measures are typically within percentage points. Think of ratios like gross margin. They vary between types of businesses by as much as 30% but within an industry they’re pretty steady and act as a benchmark.

    I look at the issue differently. Every company has their own benchmark. Let’s assume today Company A measures CR at 1%. They have an internal goal of 1.5% in 6 months. As long as they are measuring CR at both points in time similarly, I see this as an important measure of success.

    Many users in community do not have money to spend today. They can’t be converted. As a “lead” they will never become a “qualified” lead, and getting in their way trying to sell to them will only be a source of frustration for everyone involved.

    While they may not be convertible today they may be tomorrow. Moreover, these people are already factored into the equation above.

    If a user downloads one copy and installs it on a hundred machines, your knowledge is already off by two orders of magnitude — counting downloads is useless.


    There are best practices (that will be given to the survey group) to track this difference. The technology exists today.

    Don’t simply measure downloads and compare to a number of customers. Measure everything you can think of about your community

    Yes, but these ultimately lead to a distribution event right? Whether it’s indirect or direct the end result goal is still distribution.

    There will come a time when the users move to other organizations bringing their knowledge with them and the new organization will self-qualify to become a customer. Or the user’s own company grows to a point that they become customers.

    These seem to very low probability events. It’s like spotlighting the far right of the bell curve. Moreover, I’d still contend that a CR event occurred – albeit in much longer sales cycle.

    I like your thoughts on community. This subject is well documented in the confidential survey and is an important indicator of future success.

  7. Intriguing story. I tend to agree with your position on the problems, generally. I think you might have gotten a lot more in depth though. Subscribed.

  8. First of all, I firmly believe this post exemplifies a lot of what I’ve been considering for quite a while. One end of the argument is, I can see the point of most things you are mentioning however at the other end of the spectrum, can we not maybe see such circumstances through the eyes of the people who are involved, as opposed to solely looking at it from our own sheltered view. Regardless of the places you visit on this earth you will see people and events you like, and things you are not too . The crucial point of this is to just gain acceptance of the fact that it the way it is and not to be sucked in to all the media hype that encompasses it. I reckon in this individual situation, that is precisely what has occurred, though I may possibly be wrong. I would love to get other peoples’ opinions on this post.

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