Phill Ryu, co-founder of Impending

Ever since the iOS App Store launched in 2008 and became a new distribution method for independent mobile developers worldwide, the notion of what an app is worth — and what developers should charge for an app – has changed. At first, if you wanted to be paid for your work in the iOS App Store, you simply put a price on the software — around 99 cents — and if your app was any good, saw the money (well, 70 percent of the money) start to come in.

But the golden age of the paid app is very much in the past. If you want to make money — especially if you’re making a game, like Ryu — the trend for the last several years (which still holds true today) is the free-to-play/freemium model. In-app purchases allow developers to put their apps on the Store for “free” and charge for upgrades within the app. Just about a quarter of revenue from iPhone apps in the U.S. come from paid apps — but nearly three quarters of iPhone app revenue comes from apps that are free with in-app purchases, according to Distimo.

There’s also plenty of anecdotal evidence that the companies that do the best with this model tend to be larger companies and not smaller, independent developers. The failure of Gasketball and Bombcats are some of the best-known examples of independent game disappointments — from a revenue perspective. The problem hasn’t been getting critical praise or promotion from Apple, as those and Outwitters’ flameout showed last year. The problem is in betting enough people will pay for things inside games to make up for all the freeloaders — also known as the Zynga model.

Getting paid and staying independent

Setting up in-app purchases is a lot more involved and more resource-intensive, especially for the “indies” that don’t have a ton of resources, Ryu explained to me over coffee in San Francisco last week:

“A lot more money is being made in the top-grossing apps, but customer behavior has fundamentally changed and they are going to free-to-play. That’s sad to me — the paid app market was super friendly to these indies. Not only was it super inexpensive to implement that monetization model … to implement free-to-play you have to analytics, and it really encroaches on the design of your app. It doesn’t even work on many kinds of apps.”

A preview of Hatch on an iPhone

Ryu is no whiner. He thinks a lot about app sales dynamics — he’s been making software since he was 14 — and at 25, admits that he probably loves the App Store “more than 95 percent of the people that work at Apple.” But his dilemma is not unique: every smaller developer — including plenty who don’t have near the successful track record that Ryu and his Impending co-founder David Lanham do — are facing the pricing question. For now, he said, they’re leaning toward paid. But he keeps going back and forth.

The app Ryu is working on right now is a long-held vision of his that draws on the old NeoPets and Sim City concepts combined with our constantly present mobile devices. Hatch is due out later this summer — if you want a peek at what’s coming, check out the incredibly detailed teaser site set up for it.

If you see that page and even look back at the apps Ryu’s helped to bring to fruition — from early iOS gaming hit The Heist to Clear and more — it’s clear that these are high-quality apps. So how — and how much — should he and his partners be charging for years’ worth of work? Should they give it away for free and cross their fingers that some people will pay up?

How often should you ask users for money?

It obviously does work for a lot of developers, even smaller ones. FiftyThree, which gives its Paper iPad app away for free, charges for additional features like pens and tools — and is consistently one of the top-grossing iPad apps. CEO Georg Petschnigg finds paid apps are limiting, because once the price of an app is set, it’s harder to take features away in future versions because people have paid for them. That, he said, can lead to bloated software.

“In-app purchase is a tremendous opportunity to offer something (like how a) chef only puts what people want to eat on a menu, we see in-app purchase as a mechanism for paring down the feature set and offering up what people want to buy,” he told me. “It keeps the software footprint small and efficient. And from a design persepctive it’s incredibly liberating.”

On the business side, he points out it means they’re not limiting their value per customer either.

The decision on pricing comes down to the type of app a developer is looking for and the relationship they want with the customer.

“I think that if we’re going to be doing buinesss here we should probably be making money off of the long-term relationship with the pets, instead of charging up front,” Ryu said. “So free-to-play matches a pet and that kind of experience. But on the other hand, we’re also interested in creating that kind of long-term relationship, and Hatch is supposed to be a happy place you go to … is it better to ask for money once or ask twice?”

No obvious solution

This question comes up as there’s a bit of a movement afoot that smaller developers should just charge more — and forget nickel-and-dimeing their users via in-app payments. Right now $4.99 may stick out as an expensive mobile app. But in proper perspective of the software industry as a whole, $5 is nothing. It’s a coffee and a bagel in the morning. Minecraft on the iPhone is $6.99, but as a console game, on the Xbox it’s more than twice that.

Productivity suite Readdle works in a similar field as Paper, but it went the other way: charging more. Readdle, which now has 40 employees worldwide, charges as much as $7 for its apps, and they too are often listed among the highest-grossing iOS apps. And like others in the App Store, they’re seeing those numbers — download and revenue — slipping, even with promotion from Apple. Just moving to in-app purchase isn’t necessarily the obvious solution. CEO Igor Zhadanov said he wasn’t sure his users would like being prompted to unlock a certain calendaring feature while trying to get work done.

So Readdle is looking to move some of its business beyond the iOS App Store: by building up its software into an enterprise product because “we don’t want to have to rely on the App Store.”

For Hatch, as of last week at least, Ryu is thinking of charging up front. “But, then again, balanced against this past week of wondering where the paid market will be going, maybe we’ll start paid and move downward in price.”

“It’s a new world that we have to figure out or else we’re going to be stuck in the old dying world. I saw that happen with Mac developers: when the App Store opened up on the iPhone, they had a big head start, but out of matters of principles and politics, didn’t (take it). I saw so many Mac developers not make that transition,” said Ryu. “We have to make that next jump. I hope we’re not those people.”

Thumbnail image credit: Kelly Bumford via Compfight cc

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FreedomPop is not revealing which devices it will sell or when it will offer them, promising only a launch date of later this summer. I admit I’m a little skeptical about this new curve in FreedomPop’s business model, since this isn’t the first voice service it has promised to deliver.

Back in January, FreedomPop announced a partnership with textPlus to integrate its over-the-top text and VoIP application into its mobile broadband plans. That service was supposed to launch in the first quarter, but it failed to materialize. I asked FreedomPop about the status of that deal and a spokesman told me that a TextPlus-FreedomPop app is still in the works, but would be available to its customers within the next month.

The status of this new voice service also looks a bit iffy. Not only is FreedomPop withholding key details about how the communications service will work – for instance, whether it will support free out-of-network calls and SMS or will provide customers with phone numbers – it apparently hasn’t even selected a VoIP provider to power it. According to the spokesman, FreedomPop is still trying to lock down the technology it will use and is even considering working with textPlus as white-label service provider.

I’m not trying to get down on FreedomPop here – the mobile virtual network operator definitely has some innovative ideas on how to change the mobile industry. But the Atomico-backed startup is developing a reputation for making big promises and then failing to deliver. When it first launched last year, its flagship product was supposed to be an iPhone modem sleeve that connected to Clearwire’s WiMAX network. That sleeve has been caught up in U.S. Customs for nearly a year.

Still, despite FreedomPop’s predisposition toward hype, it has made several promises it has kept. It pre-announced plans to support bandwidth sharing among customers and enter the home broadband market – both of which came to pass. If FreedomPop can deliver on its new VoIP service, it could shake up the mobile industry. Not only would it bring its freemium data and social bandwidth model to the mobile carrier market, it could become the first operator to offer a completely IP-based mobile service.

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But starting Wednesday FreedomPop is selling a new hotspot modem that connects to Sprint’s nationwide CDMA EV-DO network. The modem will likely clock sub-megabit 3G speeds when on Sprint’s network, but it will connect to any Clearwire tower when available. That allows FreedomPop to give its current customers nationwide coverage as well as market the service to customers outside of Clearwire’s 80-city footprint.

As we’ve reported, FreedomPop eventually plans to tap into Sprint’s new LTE network, allowing it to wean itself off Clearwire’s WiMAX systems (it will keep its home broadband service with Clearwire though). According to CEO Stephen Stokols, FreedomPop will start selling an LTE-CDMA hotspot in about six months. He added that the mobile virtual network operator (MVNO) wants to wait until Sprint builds up its LTE footprint before making the leap. Right now Sprint has 88 cities and towns under its LTE umbrella, but plans to make a big expansion push this summer.

FreedomPop is only selling a hotspot, the Overdrive Pro, on the new network. It’s signature device, a sleeve modem designed to fit around the iPhone 4 and 4S is still AWOL, caught up in the Federal Communications Commission’s testing process. Stokols said he still holds out hope that the device will clear those tests soon. That’s probably of little consolation to the customers who pre-ordered the device last May, but Stokols said he’s hoping that a belated approval will clear the path for an iPhone 5 sleeve later this year.

Even without the Sleeve, FreedomPop has been growing rapidly as consumers latch onto its free 500 MB of monthly data and its bandwidth sharing and earning features, as well as its hotspots and iPod Touch sleeve, Stokols said. He wouldn’t reveal exact subscriber numbers saying only the virtual carrier has “hundreds of thousands” of customers. FreedomPop also plans to launch a voice service in the next few months via a partnership with VoIP and IP messaging provider textPlus.

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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.

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For a $3.49 a month, you can store up to 500 MB of unused data in a kind of rainy-day fund, which grow to a maximum size of 20 GB. The feature is available to all of its USB dongle and mobile hotspot customers, whether they pay for subscription tiers or indulge in FreedomPop’s free 500 MB plan (though if you enroll in the rollover plan, the service is obviously no longer free). Using FreedomPop’s social networking features, customers can also give portions of that banked bandwidth away.

FreedomPop notified its existing customers of the service on Wednesday, and in 24 hours 30 percent of its free customers had enrolled in the service, a FreedomPop spokesperson said.

Why the interest? Well, if you think about it, there’s not too much too you can do with 500 MB a month if you’re regularly using a mobile broadband service. But there are many people who only need mobile broadband on occasion. I count myself as one of them – I really only need a mobile hotspot service when traveling.

While I’m completely unwilling to pay $30 a month for a hotspot I use only every few months. I would be willing to pay a few bucks a month for a hotspot that I would allow me to consume hefty amounts of gigabytes at specific times without incurring massive overage fees. It’s a concept that FreedomPop competitor Karma is also latching onto, selling a gigabyte of data that never expires for $14.

The subscription model only works if you’re a regular user of a service. In the case of mobile broadband there is a huge potential for casual users who don’t want to be locked into pricey monthly plans. It’s good to see that companies like Karma and FreedomPop are starting to tailor their pricing to target just such users.

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That iPhone shell is of course FreedomPop’s signature product. It’s a WiMAX modem that fits over the iPhone 4 and 4S, substituting its 4G connectivity for the 3G radios embedded within. Ultimately, FreedomPop’s plan is to turn the iPhone into a full-on softphone providing IP voice and messaging services through textPlus. The mobile virtual network operator’s (MVNO) key point of differentiation is that it provides its baseline services for free: 500 MB of free data each month, plus the opportunity to earn more.

It’s a bit hard to execute that plan, though, if the device providing that connectivity isn’t anywhere near its customers. FreedomPop started taking pre-orders for the device back in May, and it officially launched its beta service without the sleeve in September, shipping mobile hotspots to customers. Since then we’ve gotten several reports from GigaOM readers that they had pre-ordered the sleeve but had heard no word from FreedomPop on when it should arrive.

Stokols told Fierce he expects the sleeves to pass FCC approval in the next few weeks, allowing the virtual operator to ship its first batch of 5,000 iPhone modems, but he added that the delay has cost FreedomPop and its overseas manufacturing partner $550,000 so far. Unless Stokols is somehow valuing that shipment at $1,100 per sleeve, FreedomPop probably has a lot more than 5,000 sleeves waiting to come into the country.

Update: We got hold of FreedomPop. Here’s what Stokols had to say about the holdup in an email:

“The holdup is due to the fact that the FCC is requiring an additional test for the Sleeve that requires tweaks directly to iPhone (turning off iPhone antenna). FreedomPop is working to get the necessary support to complete the final test. The actual test will take a couple days, so assuming we get needed Apple support, we are still optimistic for a ship date in [the] next month.”

Stokols added in the email it plans to make it up to customers waiting to for the iPhone shell by offering them a free 1 GB of data once they’re activated. And while the iPhone sleeve isn’t available, FreedomPop has begun selling (and shipping) its iPod sleeve, which fits over the iPod touch, effectively turning it into a data all-IP smartphone.

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textPlus, formerly known as Gogii, and FreedomPop have matching philosophies and business models, which the companies said made them an ideal fit for a partnership. Both have a baseline service that they offer free to customers: FreedomPop gives out 500 MB of free WiMAX data, while textPlus offers free in-network messaging and calling. Both start charging if you move beyond that core service: FreedomPop selling additional megabytes and textPlus phone calls to customers outside of its network.

It’s not quite clear exactly how the two will integrate their services when they launch this quarter, though FreedomPop said it would start offering the equivalent of monthly calling plans, the cheapest being free while the most expensive would be a $15 plan with unlimited texting and 1000 voice minutes.

FreedomPop is a mobile virtual network operator (MVNO), relying on Clearwire’s WiMAX network to provide 4G service. Unlike other mobile broadband MVNOs like Karma and NetZero, it isn’t just focusing on data modems and hotspots. It’s also selling a sleeve which fits over the iPhone 4 and 4S, replacing the devices’ standard 3G connectivity with its own 4G service. FreedomPop’s ultimate aim is to make its money by selling value-added services, not access itself. Voice and SMS are key components of that strategy.

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The service will look almost identical to the mobile service, which awards each customer 500 MB for free and incentives to earn and trade megabytes through social networking and promotional programs, FreedomPop Stephen Stokols said. The residential service will use Clearwire’s WiMAX network initially, making it available in larger cities covering about one-third of the U.S. population. It will link into the same social features and eventually host the same value-added services such as VoIP, Stokols added.

The key differences will be that residential customers will receive a more powerful stationary modem called the Hub Burst, get access to bigger pool of free data and pay cheaper data rates once they consume that free allotment. In fact, Stokols said FreedomPop plans to increase the size of the bucket of free data it gives its mobile customers beyond 500 MB. We’ll have to wait until next month, though, to see the new pricing and policy details on both the residential and mobile service, Stokols said.

Update: FreedomPop began taking pre-orders for the $89 Hub Burst on its website Wednesday though it still hasn’t released any additional service plan details.

Why residential broadband? Stokols said it’s a market just screaming for a low-price alternative. By FreedomPop’s calculations the typical residential DSL or cable user consumes less than 6 GB of month, but still pays the same $50 or more a month as power users. “We can provide a meaningful broadband plan for around $10 a month for that user,” Stokols said.

Feature image courtesy of Shutterstock user alexmillos

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Palo Alto, Calif.-based Totango sees aggregate free-trial conversion rates below 8 percent for most companies and as high as 20 percent for a select few players. What contributes to that higher rate? Super simple sign-on processes and easy work flows that help customers get up and running fast are important, said Totango CEO Guy Nirpaz. (Conversion rates from freemium to paid –  depending on who you ask — range from 1 and 10 percent with most hovering in the 2 percent to 4 percent range.)

To see how companies are faring with trials, Totango signed up for ten name-brand trial services as a regular customer. And then it waited — not using any of them. Six of the 10 were oblivious (or at least seemingly oblivious) to the fact that a prospective customer had registered. There was zero follow-up. The best of the companies acknowledged the potential customer with what appeared to be personal emailed offers of support including, in some cases, the email address and phone numbers (!) of an actual person who could help them get acclimated.

When the companies did communicate, 60 percent did so without addressing the customer by name.  Nirpaz called out Jive Software and New Relic as two companies that did things right. Update: Totango blog post with more info is here.

Note to vendors: Communicate, communicate, communicate

The best companies also increased their attempts to engage the customer as the trial progressed — They scheduled a call, offered a webinar, sent a satisfaction survey. Jive won plaudits by sending personal email from a “success coach” that engaged the recipient by first name, offered links to their trial instance, to a community site, along with the coach’s email address and direct phone number.

Free trials may be a more attractive to many startups than the freemium model — which offers a limited version of the overall product or service forever, but “upsells” a full version to people who want to pay for more storage or more services. Dropbox — and its 50 million users — is the poster child for freemium. No one doubts that tens of millions use Dropbox to store and share files. But, how many actually pay for the privilege? Dropbox does not share that.

Speaking Sunday at the Harvard Business School Cyberposium, Dropbox co-founder and CEO Drew Houston said revenue is not his top priority — gaining critical customer mass is.  ”If people aren’t using it they’ll never pay. If lots are using it we think they’ll come,” he said. Given that Dropbox now has something like $260 million in funding, it has wiggle room that other startups do not.

At another Cyberposium session on freemium and subscription models, freemium wasn’t feeling the love at all. “I like free trial, but I’m not a fan of freemium for startups. It’s too easy to build something that people can use but not pay for. So build something that people are willing to write a check for,” said InsightSquared Co-founder and Chief Product Officer Sam Clemens.

“Freemium is a cop out.”

Feature photo courtesy of Flickr user Alan O’Rourke

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Customers can bring their total monthly data allotments to 1 GB via two means: by adding other FreedomPop subscribers to the carrier’s internal social network of users and through special promotional offers such as filling out an online survey or watching a video ad. The social element, however, isn’t a mere referral service in which you get a one-time bonus for bringing a new customer to the network. You keep receiving the 10-MB per-person bonus as long as your contacts remain active subscribers to the network (and they remain your friends).

Right now there is a limit to how much freebie data a customer can earn, capped at 500 GB. But according to FreedomPop COO Steven Sesar, FreedomPop eventually plans to ease that restriction. Sesar said FreedomPop will not only allow customers to rack up data bonuses from more friends, but it will overlay onto its social platform more value-added services, the of use of which will also accrue extra megabytes. One of the ideas FreedomPop has in the works is its own VoIP service. Eventually customers will be able to trade data like currency, allocating unused megabytes to friends.

We’ve already detailed many of the aspects of FreedomPop’s unique freemium business model and its wholesale relationships with Clearwire and Sprint. However more specifics on its plans and pricing emerged for this week’s launch:

• FreedomPop is offering customers two modems: a mobile hotspot and USB dongle. Both devices are technically free though customers have to put down a $49-$89 deposit, but it’s fully refundable. The company will begin selling sleeve modems that fit over the iPod Touch and iPhone 4 and 4S in coming weeks.
• Though FreedomPop isn’t limiting what you consume with your free data allotment, it is putting restrictions on how fast you consume it. Though the specific details aren’t spelled out on its website, it appears non-paying customers won’t have access to the WIMAX network’s full mobile broadband speeds. FreedomPop is selling a “Speed Plus” service for $3 a month, which doesn’t throttle speeds and prioritizes packets over those of non-paying customers.
• Apart from the Speed Plus plan, FreedomPop is selling two prepaid data plans both of which undercut the prices charged by the major operators. The first comes with 2 GB of data for $18 a month, while the second has 4 GB for $29 a month. Customers on those plans pay 1 cent for each megabyte of overage, while on the free and $3 plans customers pay 2 cents for each additional megabyte.
• The beta is open to all comers, but FreedomPop has an upper limit to the number of customers it will accept. Sesar wouldn’t identify the specific number, saying only it was restricted to the number of devices the MVNO has in inventory.
• Another reason for limiting subscribers in the beta is that FreedomPop can’t yet offer nationwide service. Since it’s solely using Clearwire’s WiMAX at launch, it’s limited to that operator’s 4G footprint, which covers roughly one-third of the US population.
• Next year, FreedomPop will switch wholesale partners, trading Clearwire’s WiMAX for Sprint’s new LTE network. Sprint’s 4G service won’t be complete at that point either, but FreedomPop will also tap into Sprint’s 3G CDMA network giving it near nationwide coverage.

Most interestingly, FreedomPop isn’t restricting customers to a single device. Seras said that he expects families and even some individual subscribers to sign up for two or more devices, and each device will get access to its own separate free 500 MB allotment.

The potential for abuse, though, is obvious. A customers could order multiple devices and spread his or her monthly usage among them. That customer could even rack up more free data on each device by making each device “friend” the others on FreedomPop’s social network. Sesar, however, said FreedomPop will restrict that kind of behavior and will shut off customers that have too many devices linked to a single account or credit card.

Sign image courtesy of Flickr user frankh

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