The Smallstep Pricing Evolution: Building a Commercial Model from Free to 7-Figures

Building a commercial business on top of open source is like walking a tightrope – lean too far toward monetization and you risk alienating your community, lean too far toward free and you might never build a sustainable business. In a recent episode of Category Visionaries, Mike Malone shared how Smallstep navigated this delicate balance.

The Open Core Challenge

The fundamental challenge of open core pricing isn’t just about setting price points – it’s about creating distinct value propositions. As Mike explains, “you end up competing with yourself” and risk “anchoring people from a pricing perspective at zero.” This challenge shaped Smallstep’s entire approach to commercialization.

Finding the Enterprise Value

Instead of just adding features to their open source offering, Smallstep focused on solving enterprise-specific problems. Their commercial offerings centered on “delivering sort of the enterprise level capabilities around identifying things that need to be secured, seeing when there’s a lapse in policy or compliance in your security program, assigning tasks and noticing where really giving that observability visibility and summary view.”

Building a Flexible Model

Rather than forcing customers into rigid tiers, Smallstep created a highly flexible commercial model ranging “from a free tier all the way up to a million dollars a year.” This approach allowed them to serve different market segments while maintaining their open source commitment.

The strategy proved effective, with “over 100 customers taking advantage of various scale offerings on that platform.” More impressively, they’re now “selling six and beginning to sell seven figure deals.”

The Open Source Advantage

Counterintuitively, maintaining a robust open source offering became a competitive advantage in enterprise sales. As Mike notes, it’s “a marketing asset and it’s a feature for some enterprise customers to have an open source, an open core.” This is particularly valuable because it “derisks from sort of a vendor lock in perspective” and allows customers to “join a community and they can sort of be the change they want to see in the world when it comes to the software that they’re purchasing.”

Scale Changes Everything

A key insight that drove their pricing strategy was understanding how modern infrastructure needs had fundamentally changed. Mike points out that “people don’t have just like a dozen internal certificates anymore. They have their kubernetes and their service meshes and their databases and all their VMs and microservices and Kafka and Elkstack.” This shift in scale created new enterprise requirements that their commercial offering could address.

Community and Commercialization

The company’s approach to balancing community and commercial interests is evident in their metrics: “millions of open source downloads” and tracking that indicates “dozens of Fortune 500 are on our website reading docs for open source.” This community engagement creates a natural pathway to commercial conversations.

Looking Forward

Smallstep’s pricing strategy continues to evolve as they pursue their vision of making “enterprises and large software systems and the Internet as a whole is more secure and safer for everybody.” This broader mission helps frame their commercial offerings not just as premium features, but as essential tools for achieving better security at scale.

Their journey offers valuable lessons for founders building commercial businesses around open source:

1. Focus on solving enterprise-specific problems
2. Build flexibility into your pricing model
3. Use open source as a strategic advantage in enterprise sales
4. Understand how scale changes customer needs
5. Maintain genuine commitment to the open source community

The key to Smallstep’s success wasn’t just clever pricing – it was understanding how to create genuine enterprise value while maintaining the benefits of open source. For founders walking the same tightrope, their story shows that with the right approach, you don’t have to choose between building a community and building a business.