The key to making money: Charge for your product

It's tough making money online and with open-source software, but doubly if you don't charge for your product, and if you charge the wrong people.

I loved this presentation by David Heinemeier Hansson of 37Signals. His topic? How to make money as an online software company.

His verdict? Charge for your product, but be careful whom you charge.

Chris Anderson elaborates on this theme:

37Signal's secret is not to target consumers (who don't like to pay) or big companies (that's a crowded space). Instead, they target the "Fortune 5 Million"--small companies with specific needs that are underserved...

It's interesting how closely some of Heinemeier Hansson's ideas map to the commercial open-source world, in which charging for one's value is, as Roberto Galoppini suggests, not always straightforward.

Why? Because proprietary vendors have long conditioned customers to expect to get charged for the wrong things or, at least, to expect to get charged too much for the right things. Larry Augustin suggests, in response to a post of mine, that "one of the things companies using an open-source model need to do is make sure they get paid for up-front costs up-front." Easier said than done.

As Larry summarizes, enterprises have been conditioned to expect their vendors to dump all the risk of a software decision on themselves. They try to "get back" at the vendors by writing punitive terms into license agreements (e.g., acceptance periods that make revenue recognition difficult), requiring the vendor to jump through demos and pilot hoops upfront at the vendor's cost, and more.

Hopefully, as enterprises come to invest more trust in the open-source vendors, some of these practices will fade and the process for selling software services will level out. In the meantime, however, Heinemeier Hansson has it right: you need to charge for your product, and usually whom you charge is much more important than what you charge.

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