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Summary:

Asking potential customers to buy a mobile app instead of a free one is a huge mistake, said investors on a panel at Google I/O about the freemium business model, where companies give their product away for free and charge for premium features and services.

Asking potential customers to buy a mobile app instead of giving them a free one is a huge mistake, said investors on a panel at Google I/O about the freemium business model, where companies give their product away for free and charge for premium features and services.

While investor Jeff Clavier said $4.99 has become the standard premium app price, he recommended against charging in favor of recurring revenue.

Subscription models, in-app upgrades and virtual goods are a much better idea than an upfront fee, said the panelists. Charging for mobile apps “sucks,” said Brad Feld of the Foundry Group. “You never want a customer to be a single-instance experience.” That’s a surprising statement, given the popularity of paid mobile apps, and the propensity of freemium businesses to offer a paid mobile app and a free “lite” version. But Jeff Clavier of SoftTech VC agreed. “Now that you have the ability to charge in-app you really want to do your math,” Clavier said. “Recurring revenue will make you way more than $4.99.”

Some of the other strong and quotable advice from the VCs and angels on the panel:

Know why you’re going freemium: There are three main reasons to offer a version of your paid product for free, said Dave McClure of the Founders Fund. First, giving a new user time to learn what your product is; second, taking advantage of viral distribution; and third, improving the value of your product for users via the network benefit of having more people using it. Know which reason you’re choosing and design around it.

Don’t forget the business model: “Put your business model into beta at the same time you put your product into beta,” said Joe Kraus of Google Ventures.

Pick big markets: The vast majority of customers for any freemium business will choose the free option. For just about everything except antivirus apps, “It’s about a 2 percent asymptote on conversion for most apps from free to premium,” said Kraus. Don Dodge of Google said he’d surveyed 25 freemium companies and found the average was between 3 and 5 percent of users converting to paid, depending on the price point. The lesson? “You want these markets to be really big,” said Matt Holleran of Emergence Capital. That may mean that the enterprise market doesn’t make sense — though you may be able to successfully piggyback onto Google Apps, Holleran said.

Making some customers pay will cap your growth: Feld spoke of his experience with the RSS company FeedBurner, which had 100,000 publishers at the time it was bought by Google. Of those, just 2,000 paid $5 per month for premium features. But the real business was advertising within feeds. After Google bought the company, it extended the premium version to everyone for free. The lesson, said Feld: “The freemium model may actually get in your way relative to the indirect opportunity.”

Making some customers pay will divide your company: The real danger in a freemium model, said Kraus, is it introduces a “cultural split” within the company between what to put in the paid version and what to put in the free one. But McClure disagreed, saying great businesses are not a zero-sum game. Let the customer advocates clash with the people trying to keep the lights on and see what happens, he said.

Don’t trust yourself; trust the numbers: “Your instinct about what a customer will pay for is likely wrong,” said Feld. McClure recommended that any would-be freemium entrepreneur read the book “Predictably Irrational” to learn about people’s non-intuitive buying preferences. The panelists agreed heartily that startups should collect and analyze analytics before, during and after a product is launched.

Pricing is hard: But here are some tips: Kraus, who founded and ran online document editor JotSpot before it was acquired by Google, said to look at consumer behavior around cell phone plans, where they tend to pay one tier higher than what they use. Over the course of a year, that’s more expensive than just incurring a couple overage charges. “People are not optimizing for lowest price, they optimize for least surprise.” Kraus also argued, “It’s much easier to raise prices than to lower prices. The people who got the earlier price feel like they got a good deal. If you lower they’re p***ed off.”

Related research from GigaOM Pro (sub req’d):

Report: Monetizing Digital Content

  1. Any of these people develop and sell actual mobile apps? And, did they provide at least 2 examples to show where this has worked? I mean, Apple tells us the top grossing apps, right.

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  2. Freemium is an economic imperative. When the marginal cost of your product is zero you have to get it into as many hands as possible. If you don’t, someone else will. It will be exceedingly obvious how to make money. That hard part is getting usage.

    This is so obvious that I don’t know why it needs to continually be stated.

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    1. Yes, there is another solution: don’t enter a market dominated by hype, hobbyists and users that will not pay anything.

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  3. Interesting.. Why would a customer subscribe to app? Just to continue using the app for as much as he wants. Don’t think customers are going to do it. If its a cloud based apps (where you maintain a data center and provide additional services) then it makes sense…

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    1. That’s exactly what they’re saying. Customers subscribe to a service, and the app is one way to access that service.

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  4. If it’s not a free app, I won’t put it on my phone. Why should I pay for a pig-in-a-poke? Once I know that it will work approximately 100% of the time, and if I can see an advantage for the paid / premium version, then I would consider paying.

    In the computer world, this should make sense. But some companies don’t have a ‘lite’ version of their product, and people like me will continue using what they have been using– from other companies.

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  5. There are a couple good SlideShare presentations out there from Pandora and Xobni – http://www.forentrepreneurs.com/two-excellent-startup-presentations/ – that speak to this very topic on freemium. While Pandora didn’t start as a mobile app, they are a pretty good case study for giving your product away for free, building critical mass, and then profiting huge from the 1-2% that upgrade to premium subscriptions.

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  6. [...] suis tombé sur cet excellent article  (Gigaom: Never charge for a mobile app) qui nous résume un des panels qui s’est tenu lors du Google I/O la semaine dernière, le [...]

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  7. [...] Gigaom tells us (after a VC panel at Google I/O ) that we should never charge for a Mobile App. [...]

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  8. [...] Never Charge for a Mobile App (and Other Freemium Lessons From VCs) Tech Insider [...]

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  9. Welcome to Google World, where only Google makes any money.

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  10. [...] why you’re going freemium. Dave McClure of Founders Fund said earlier this year there are three major reasons to offer a version of your paid product for free: to give users time to learn what your product is; to take advantage of viral distribution; and to [...]

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