As I’ve covered previously, the route to the enterprise begins with freemium app distribution and conversion. The second phase is Inside Sales.

Inside sales are the future of enterprise sales

Just as there has been a sea change from outbound to inbound marketing, the tech industry is experiencing a similar wholesale shift from outside direct sales reps to inside sales teams. In fact, inside sales jobs are growing at 15X the rate of outside sales roles. Not only is it the future of enterprise sales, it’s also likely all you can afford at the early stages of a company’s growth.

In contrast to traditional outside sales, which is done in-person and tends to involve extensive travel and time expenditures, inside sales is professional B2B sales done remotely via phone, email and chat. It is strategic selling that requires managing a deal through a multi-stage process, multiple touch points with the customer, establishing value and an ROI for the product and supporting complex purchasing methods, like procurement departments, but importantly without visiting the customer.

This is about closing mid-sized transactions in volume – Salesforce.com was built exclusively this way during its first five years. It’s also how you move the billing relationship from a user and credit card to a company so you can grow the deal over time. Recently, there have been many examples of apps that started with a freemium product but offer compelling enterprise value that is monetized by inside sales teams, including Box, Evernote, FreshBooks and Expensify, and Jigsaw, which was acquired by Salesforce for $175 million. And across the many companies I have worked with, this is a common approach that has led to success.

The elements of an inside sales team

So how do you know if you’re ready to build an inside sales team? Truthfully, if the product is shipping it’s never too soon.  A key test is the price at which you are converting free users to paid. There are a lot of apps that only charge 99 cents or $4.99 a month for the premium version. That won’t cut it – your margins won’t support a sales force. You’ll need a price point of at least $25 to $50 per user per month to validate the value of your product and make enterprise sales work. At that price or above, a workgroup of 10 to 20 users can be sold within a customer account for $5,000 to $10,000 per year. Over time, you’ll be able to increase the deal sizes through premium features like administrative functionality.

Your first inside sales team should consist of the company founder/CEO and two salespeople. My advice is not to hire an experienced VP of Sales to build your team. Instead, the founder/CEO needs to become a student of the science behind sales.

In the early stages, the founder/CEO can sell the product better than any high-priced rep or VP. That’s because emotion plays a big role in buying new technology from an unproven startup. No one creates emotion and enthusiasm like a founder. This is what you should look for in your first sales hires as well. Your first reps are likely to be a colleague or a rep with inside sales experience from other startups.  They aren’t likely sitting at Oracle.

First steps and expectations

To get started, hire two reps so you can train them together and expect that one won’t make it. Your first reps should sit next to the founder/CEO, who should plan to spend time sitting in on sales calls and monitoring progress on a daily basis. Salesforce.com’s product is the gold standard for managing inside sales, but there are a number of other tools to try:

(Disclosure: The author’s company, Rembrandt Venture Partners, is an investor in InsideView and PaperShare; and the author serves on the board of Webtrends.)

This is how the founder/CEO figures out how to close mid-size deals in volume, and just like any other start-up situation it takes a lot of trial and error until you achieve traction.

The typical inside rep will make $40,000 to $60,000 per year in base salary. Including bonus, their on-target earnings (OTE) will be between $100,000 and $120,000. Check Payscale or Glassdoor for the latest figures. It’s obviously higher in places like the Bay Area, Boston and New York, but it’s important that your first reps sit down the hall from you. Over time, it will make sense to grow this function in lower-cost areas such as Salt Lake City, Austin, Seattle or Scottsdale, which are all known for having a lot of inside sales talent and experience.

Most Enterprise 2.0 startups are subscription businesses, so quotas should be tied to Annual Revenue Requirement (ARR) or Monthly Recurring Revenue (MRR) with accelerators for contract lengths greater than one year. A typical quota for your first rep is $500,000 of ARR. Over time, enterprise sales reps often settle around a $1 million quota. However, for the first six to 18 months, you should pay commissions based on the number of deals closed, regardless of size. This helps build momentum within the team and recognizes you don’t really know what deal size and volume to expect.

Even if you have a popular app that has some paid conversions, it’s not a slam-dunk that you will be able to successfully transition to inside sales. It’s possible that your product is better suited to single users rather than teams or that you’re not priced competitively compared to the perceived value.

Nevertheless, don’t get discouraged. In practice, if you can close some deals with an inside rep or two, you can sell more with more reps – the scaling is nearly linear. Once you’re really cranking at a high level, it’s probably time to deploy outside direct salespeople to sell very large deals to the largest enterprises.

Scott Irwin (@scottirwin) is a general partner at Rembrandt Venture Partners, where he focuses on Enterprise 2.0 and SaaS investments.

Have an idea for a post you’d like to contribute to GigaOm? Click here for our guidelines and contact info.

Photo courtesy of dotshock/Shutterstock.com.

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• Personal tools lead to practical business
• NewNet Q4: Platform mania and social commerce shakeout
• NewNet Q4: Platform mania and social commerce shakeout

Enterprise 2.0 remains one of the best opportunities in the technology market today. The enterprise software incumbents are currently a full generation behind, just now entering the traditional SaaS market through acquisition (for example, Oracle’s $1.5 billion acquisition of RightNow and $1.9 billion acquisition of Taleo, and SAP’s $3.4 billion acquisition of SuccessFactors).

Meanwhile, more forward-looking software companies like Salesforce.com are realizing that the route to the enterprise now goes through the user, not the IT department. Salesforce.com has snapped up several Enterprise 2.0 companies, including Assistly, Rypple, Manymoon and Groupswim (now Chatter).

But Salesforce.com is the exception. It will be another five years before the mainstream enterprise software market wakes up to the fact that Enterprise 2.0 apps are the industry’s future. That’s plenty of time for new companies to establish market leadership and challenge the incumbents, who will either have to adapt or buy Enterprise 2.0 startups to remain competitive.

In my previous article, I described the go-to-market model of a typical Enterprise 2.0 startup in three phases: freemium, inside sales and enterprise sales.

This article is focused on phase one — freemium. In follow-up articles, I will dig into the transition to an inside sales force and then how to add a profitable direct sales force to the model. Almost all Enterprise 2.0 startups employ each of these sales strategies sequentially or in parallel at different points in their maturity.

An effective freemium go-to-market effort depends on product design, distribution and conversion.

Freemium product design 

Enterprise 2.0 starts with the premise that “users” are “consumers” first and foremost, and that they make the software purchase decisions, not the IT department. So how do you attract enterprise users?

1. Make your app fun. Employ game mechanics, from vendors like Badgeville, to drive engagement. Design an app that you’re passionate about — perhaps because it addresses one of your own needs. Give it a personality. SurveyMonkey is a good example of app personality resulting in increased market share. The last thing users are looking for is a boring software experience.

2. Study your active users. The key metric of freemium product design is active users. Instrument your app with analytics tools from vendors like Google Analytics or Flurry. The data your users generate will drive product management and usability decisions, which in turn will drive conversion and revenue. Determine the most popular features, and then remove the least popular ones. As Twitter co-founder Jack Dorsey says, “Simplification is key.”

3. Pre-populate the data. No one likes an undecorated room, and no one likes an app with no data. Incorporate data from outside sources such as Google Apps (email and contacts), Salesforce.com (accounts and status), Facebook or LinkedIn (contacts and relationships). Can you expose anonymized or aggregated data from other users? Is crowd-sourced data an option?

4. Don’t forget the APIs. Users expect freemium Enterprise 2.0 apps to work with their existing systems. Publish your own APIs and let your users build integrations and product extensions, and then publish these back to your user community.

5. Prioritize the platforms. Your app also needs to be available through web browsers, iOS and Android, at a minimum. Depending on your specific application, making it available via desktop downloads, bookmarklets, browser plugins or MS Office plugins may increase your user base. HTML5 and cross-platform development tools such as Appcelerator and Sencha can help with this.

Freemium distribution

The key metric of distribution is downloads, so make your product available everywhere your user is likely to be. In my experience, mobile apps tend to accumulate two to five times more users than web-only offerings. Venture investor Fred Wilson covered this in his blog post, “Mobile First, Web Second.”  The mobile market is much larger too. Smartphones and tablets outsold PCs by almost two times in the fourth quarter of last year.

1. Target the mobile user first. Enterprise 2.0 app developers should target the mobile user via the Apple App Store and Android Market (recently rebranded Google Play). The Amazon.com Appstore for Android is the next place to focus in terms of importance. If you have the resources, you should also consider developing for secondary app stores such as Windows Phone Marketplace or Blackberry AppWorld. Getting ranked and positively reviewed on these sites takes some effort and capital, but it’s worth it.

2. Focus next on the web marketplaces. Remember, your goal is downloads. Google Apps Marketplace is Google’s SMB offering. It promotes apps that are highly integrated with Google Apps (Gmail, Calendar, Sites, Docs) and has a healthy market share among small businesses. Google’s Chrome Store is geared more towards individual users, but it is also a productive distribution channel. Salesforce.com’s AppExchange, one of the original marketplaces for Enterprise 2.0 apps, is being repositioned to serve users, not just system admins, and will be another new channel.

3. Investigate the marketplaces of other leading Enterprise 2.0 apps. Examples include the Intuit Marketplace, LinkedIn Application Directory, MailChimp Integrations Directory, Splunk Partner Portal, FreshBooks Add-Ons, Box Applications, Atlassian Plugin Exchange and Heroku Add-Ons.

Freemium conversion

The key metric here is conversion rate. If you have successfully executed your product design and distribution, you should have a sizable free user base, and in my experience, one to three percent of them will convert to your paid version. Increasing your conversion rate may be the difference between success and failure, so experiment with ways to improve it.

1. Erect a paywall. The most common way to convert free users into paying customers is to erect a paywall that unlocks additional features or capacity. The analytics you collect from your early free users will give you insight into which features are considered most valuable, and thus what you should consider charging for. A single monthly price per user is the most common method of charging.

2. Offer a preview or free trial of additional features. One common way to increase your conversion rate is to entice users to upgrade by offering a preview or free trial of additional features within your app.

3. Remove barriers to conversion. One company, Atlassian, has developed a clever way to increase in-app conversion called Causium. Instead of charging users, Atlassian asks them to donate a small amount to a charity called Room to Read. The fundraising is for a good cause, but the strategy is really designed to get users to input their credit card details, thus removing a crucial barrier when you attempt to convert them to a paid subscription later.

4. Feel the love. Evernote CEO Phil Libin believes in the “NPR model.” Evernote gives users a fully functioning app for free. Libin believes that by developing a deeply loyal and happy user base, some will love the product so much that they will voluntarily pay for the premium edition. Even if your users don’t love your product as much as Libin’s, offering a fully functioning free app and then selling premium add-ons, such as integrations with existing enterprise applications, is an effective conversion strategy.

“Freemium” is an evolving term and startups are constantly experimenting and redefining the model as it applies to Enterprise 2.0. Please let me know what’s working for you. And stay tuned for my next article, which will outline the key metrics and best practices for selling Enterprise 2.0 software using an inside sales force.

Scott Irwin (@scottirwin) is a general partner at Rembrandt Venture Partners, where he focuses on Enterprise 2.0 and SaaS investments. He is very bullish on small startups’ ability to disrupt the stodgy enterprise software market.

Image courtesy of Flickr user bixentro.

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• Social third-quarter 2012: analysis and outlook
• Personal tools lead to practical business
• NewNet Q4: Platform mania and social commerce shakeout

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• New challenges for the IT organization
• Connected world: the consumer technology revolution
• Who and what to watch in the new era of the living room

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• New challenges for the IT organization
• NewNet Q4: Platform mania and social commerce shakeout
• Work media tools in 2012 and beyond

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• Why the big data startup boom will likely be short-lived
• A clouded view of Google Music
• Opportunities with Communications-as-a-Service

So what other collaboration trends does the study confirm? Remote work, it turns out, is largely a privilege of those higher up in the office food chain. Previous demographic studies on telecommuters and remote workers have revealed that they’re a highly educated, highly paid lot, who are generally higher up in their organizations. Forrester concurs, saying:

The report also reveals that workers are untethered from the office as they rise in rank. 53 percent of individual workers are office-bound, but that number drops to 35 percent among managers and supervisors, and plummets to just 10 percent among directors and executives.

No surprises there, then, but another finding is eye-opening. Here at WebWorkerDaily, social technology at work is a big topic, and we cover a variety of social tools for enterprise, from Jive and Chatter to Yammer. But despite its being a fast-growing market segment with huge media buzz, Forrester reveals exactly how far these technologies are from going mainstream. The research concludes (italics are mine):

Adoption of enterprise 2.0 technologies is still nascent. Only one in six Gen Y professionals uses social tools. Despite significant and ongoing investment in enterprise social technologies, their roughly seven-year lifespan within enterprises has yielded a maximum of 12 percent adoption within the overall workforce. This market has failed to displace traditional collaboration technologies like email as a preferred way to communicate at work.

Of course, this finding doesn’t mean that 12 percent isn’t the thin edge of a very big knife. We may yet see social for the enterprise slice into the mainstream market, but the Forrester research is a nice reminder of the gap between what’s commonplace among media types and geeks and what’s still alien to “regular people.” Several articles have made this point lately about consumer social media and Twitter. Perhaps it’s worth making about enterprise social as well.

For the time being, is enterprise social overblown?

Image courtesy of Flickr user Iain Farrell

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• Social Media in the Enterprise
• Focusing social platforms for enterprise collaboration
• Personal tools lead to practical business

Although those are some pretty impressive figures, the news is perhaps most notable for how it has been made public: through a case of mistaken identity and the modern world of instant public broadcasting. A Google employee named Patrick Barry received an email at his Gmail account apparently intended for TouchTunes’ CFO, also named Patrick Barry.

Apparently amused, Barry promptly relayed the news in a public post on his Google+ account:

In case anyone cared, touchtunes.com just got $45M series E investment at a $300M valuation. People really should remember not to mis-type their email addresses when sending confidential stuff like this – it turns out that I am not pbarry@touchtunes.com.

I’ve reached out to TouchTunes for comment, as well as to Google’s Patrick Barry. I’ll update this post with any additional information I receive.

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• Social Media in the Enterprise
• Social media in Q1: commerce and discovery dominated
• Google doesn’t like walled gardens — except its own

However we’re already seeing some notable signs that the IPv4 pool is shrinking, including a $7.5 million deal by Microsoft to buy up some unused IPv4 addresses. For consumers, the lack of IPv4 addresses may add a little latency to web requests, but it’s not like they won’t be able to visit their favorite web sites unless their ISP (like mine) doesn’t get its act together. Check here for your readiness. However, new devices such as a smartphones and tablets will come online which will force enterprises to adopt IPv6 or increasingly clunky mitigation standards. From the Ovum release:

…[O]ne of the major reasons for enterprises’ lack of urgency is that there are still plenty of IPv4 addresses available, meanwhile issues such as a lack of return on investment and more pressing IT priorities are also playing a part. “Most enterprise customers assume that having plentiful IPv4 addresses alleviates any need to make the move; it is just not that simple,” commented Sapien… [T]here are some triggers that will motivate enterprises to make the move. For instance, the growing number of new consumer devices, such as smartphones, that will be assigned IPv6 addresses, and the new web applications that will be accessed by these devices.

It’s hard to get people excited about a changing Internet addressing scheme, especially since the consequences of doing nothing are slightly less efficient networks and more workarounds to keep the older structure in place. Reminds me of politics.

Updated: Someone sent me an awesome video on the dangers of one of the more popular IPv6 workarounds implemented by ISPs. These dangers include difficulty targeting ads to individuals as well as making it hard to geo-locate users. Here it is.

Image courtesy of Flickr user satanoid.

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• The new IT manager, part 1
• 12 tech leaders’ resolutions for 2012
• Connected world: the consumer technology revolution

“Untethered,” for most of us, isn’t technical jargon for how hardware communicates, shares or connects, but rather the ability to work unrestrained, able to jump from one activity to the next without cumbersome hardware and software slowing us down.

In the end, however, it isn’t just the technology that must evolve and set the stage for a new way of working. As users, we must embrace change as well and be willing to move away from old ways of thinking and working. We can begin by moving to a more simplified cloud-based setup.

Step 1: Gradually Move to the Cloud

One of the best ways to simplify the way we work is by reducing our reliance on location-dependent software and hardware. Over the years, I’ve gradually moved away from using a single computer; now the bulk of my work is available online, and where I once worried about the inevitable computer crash that would create days of additional work and headache, I can now simply move to any other computer with an Internet connection and barely miss a beat.

With the advent of services like Google Docs, it’s much easier to stop thinking in terms of the solution and instead focus on the medium or output. Instead of using local programs for things like documents and spreadsheets, for example, we can opt for online applications, like Office Web Apps, Google Docs and Zoho, that can handle these types of files.

Step 2: Minimize

To create a centralized “dashboard” for your work, begin weeding out extra steps that might currently exist in your setup by trying to moving away from using solutions that only handle particular problems or tasks.

Simon wrote about this from a developer’s standpoint in a GigaOM Pro article, Enterprise 2.0: Web Apps and the Patchwork Quilt Problem (sub. req.). As a user, you can adopt a simpler way of working by taking a minimalist approach to software and hardware. Instead of using a separate application for each problem, figure out ways to re-purpose what’s already in your toolbox, or adopt different tools that can address more of your needs.

You might currently use ten separate programs to manage an equal number of smaller tasks, and although this approach might be effective at alleviating specific pain points, it creates an often greater problem of tracking the applications being used, as well as syncing, searching for, and accessing information across multiple platforms. By reducing the number of tools you use to the “lowest effective dose,” you can greatly improve productivity and the ease in which you work. Zoho, for example, offers project management, web conferencing, invoicing and a host of other business solutions in one stop.

One word of caution: While I’m trying to keep my day-to-day tools and apps be kept to a minimum, I’m still very aware of the risks of relying on a single solution. It pays to back up important work and information in a second location, in order to not become overly dependent on any one platform.

As we transition to cloud computing, our main goal is to keep things simple and to make the process of work faster and more effective, and while technology is gradually improving to make work and life easier, as users, we still have to learn to embrace the change to achieve it.

Do you think technology has made work easier or more complicated for the end user?

Photo courtesy Flickr user ralphbijker

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• Enterprise 2.0: Web Apps and the Patchwork Quilt Problem
• Personal tools lead to practical business
• What Enterprise Software Vendors Could Learn from the Consumer Space