Startable – Healy Jones’ & Prasad Thammineni’s Blog

Lincoln Murphy, the well known SaaS Marketing guy, got pretty upset at a recent TechCrunch piece on the freemium pricing strategy that posted this weekend. Lincoln says (I’m on his email newsletter list; it’s pretty good): “In a nutshell the Complete Guide to Freemium on TechCrunch is a post by someone who got lucky enough to get their post accepted so he can get a backlink to his site from TechCrunch and where he takes the results of studies and some words from high-profile VCs and weaves it together into a post for the TMZ of the tech industry.”

Ouch. That’s a little harsh. The article isn’t bad at all. The conclusion is 100% great, actually.

What is Freemium?

However, I don’t think it’s the Ultimate Guide to what is a actually a pretty complicated pricing strategy. I happen to disagree with the author’s ideas that a time based free trial = freemium. I can’t tell if my disagreement is a big deal or not – his company, FutureSimple, has a free trial offer, so it’s hard to know how much of the piece is using that as the basis for the post vs. a couple of professors he references. I disagree with the idea that a free trial is freemium so much because OfficeDrop recently made the switch from a free trial to having a free forever plan and we called it “going freemium.”

My definition of freemium is that a user will have the opportunity to use the service/software/whatever forever without having to pay for it. It may be a limited plan or limited features, it may be ad supported; whatever. It just means you can use it for as long as you’d like without paying. FreshBooks has a freemium model, but you run out of “free” pretty quickly. You can jump through hoops to keep it free, but most likely you’ll upgrade. A free trial that expires after a set number of days doesn’t meet my definition of freemium.

OfficeDrop’s free plan is driven by our mobile distribution strategy. I write a little bit about why we think apps are taking over here. But you should listen to my conversation with Lincoln – I call it “Healy Jones on Freemium.” Our free plan is a free forever plan, with some upgrade triggers baked in – search limits, storage limits, OCR limits. But it’s a pretty good product for free; we are the only company offering free high quality OCR for scanned images coupled with storage. People seem to like the plan… and they also seem to like to upgrade to paid plans. We like that part for sure!

Lincoln is putting on a webinar on kicking butt with your company’s free trials model. I think he’s got some good stuff, so I’d suggest you register!

Techcrunch has an article on how Microsoft’s online division has lost money for the past 22 quarters. That’s a long time.

The article takes a pretty negative tone toward Microsoft. The comments seem to indicate that people think Techcrunch is continuing it’s Google and Apple lovefest and is attacking Microsoft because of this bias.

Regardless of TC’s bias towards or against Microsoft, I think the piece could be written about Google – if you replaced “MSFT” with “Google” and replaced the highly profitable “Windows and Office Divisions” with “Adwords” and replaced the loss making “online division” with “everything else at Google.” Basically, Google is still struggling to make money in other divisions that are not search and ad driven.

The battle between Google and Microsoft isn’t a battle for sissies. They aren’t fighting for second place – they are trying to destroy each other. Google doesn’t mind losing money in Chrome (OS or browser), Android, or Docs if it hurts Microsoft where their chief source of cash flow is (i.e. Office and Windows). Microsoft is willing to lose lots of money to try to make Google’s primary source of income, online search/advertising, hurt. They each also understand the importance of the other’s core divisions, and they both want a real piece. Disrupting either is going to be hard and expensive.

That’s the reason each is willing to have their profitable divisions subsidize their losses in the other divisions.

So, is this an opportunity or threat for startups trying to compete in or around these spaces?

Well, it’s a little of each, IMHO. It’s an opportunity, since if you manage to get traction in either area you have two fight-to-the-death potential acquiring companies. But it’s a HUGE threat too, because if you choose to enter one of these areas you are competing with two huge titans who are willing to make economically insane losses to get marketshare. For example – let’s say you are trying to do an email startup (this is just an example). You are competing against two companies that likely have a very different business model than you can afford. They just want users/marketshare of their email services, and the revenue and margins are not particularly relevant. So if your business model requires making money… well, you could be in a really tough spot.

To compete against either you need either an enormously better understanding of the customer, translated into a massively better product… or amazingly deep pockets.

Interesting research from Flurry again (they were the ones who put out the info that mobile app usage is topping regular web browsing). This time they have data showing that free or “freemium” app titles are generating more revenue than pure paid apps. From a MediaPost summary of the research:

Flurry shows that over the last six months, revenue from free-to-play game apps has overtaken that from paid apps. Among the top 100 grossing games in the App Store as of June, more than two-thirds (65%) of the revenue generated came from freemium games and 35% from paid games.

That’s nearly opposite the situation from six months ago, when paid game apps accounted for 61% of revenue and free titles, 39%. What’s changed since January? Peter Farago, vice president of marketing at Flurry, pointed out that Apple began counting in-app purchases toward app gross revenues at the end of 2010, reflecting the impact of that sales stream in its ranking of top-grossing titles.

Free apps generating more revenue than pure paid apps

So, this research is focused on games, but OfficeDrop is betting the same will be true for our b2b SaaS app. We switched to a freemium model earlier this week, mainly driven by the feedback we were getting in the app stores. App store people just expect to try stuff for free and don’t like free trials. We can’t get them to read the app description that talks about the free trial period; they just look at stars, download and then leave a nasty review without trying the service. Hopefully this freemium experiment will pay off for us. Initial web signups are promising, but it’s too early to tell!

Anand Rajaram, co-founder of OfficeDrop, (i.e. my coworker) recently penned a piece on Kissmetric’s blog about how we almost doubled the conversion rate of our pricing page. Check it out!

Obviously this is very important for a SaaS company!

This picture needs no captions. Although, do you remember when Apple looked like it was going out of business?

As I mentioned in a previous post, my company recently did a lot of cool testing during our site redesign. Anand Rajaram, OfficeDrop’s co-founder has a series of posts on Performable’s blog that talk about tips, tricks and tools that we used during the process:

Optimizing Conversion Rates Part One – Quantitative Tests

Optimizing Conversion Rates Part Two – Qualitative Tests

Optimizing Conversion Rates Part Three – Lessons Learned

OfficeDrop co-founder Anand Rajaram has posted his second piece on Performable’s blog about how OfficeDrop used user testing during our site redesign to increase our site’s conversion numbers.

One of OfficeDrop’s cofounders, Anand Rajaram, and I (and the rest of the team too!) recently learned a lot about our customers during a site redesign. Anand really used some cool, cutting edge online tools to help us with this redesign – and as a consequence we were able to nicely increase our site’s conversion rate.

He is writing a series of posts on this redesign on Performable’s blog. The first is up, Optimizing Conversion Rates with Simple Tests. I’m not going to lie, it’s a pretty good post! Online testing tools are pretty powerful, and I’d encourage you to try some of the ones we used, like UserTesting, Feedback Army, and FiveSecondTest.

You should look at every page of this presentation by David Cancel on creating a data driven startup. It is really, really good.

Although I do seem to spend a LOT of time after the end of each month trying to make the data make sense at OfficeDrop, it is worth it.

Hiring talent is one of the most challenging things facing a startup. Hiring the best programming and technical talent is even harder. Taking data from The Entrepreneurs Census, which I wrote about yesterday, we can get a glimpse into how hard it is to hire programmers in Boston, Palo Alto and New York.

It may be easier for startups in Boston to hire programmers than startups in Palo Alto

Startups in Boston may have a better time hiring programmers, as measured by how long it takes to fill an open position and by the percent of startups that have open positions.

Hiring Programmers in Boston vs Palo Alto

The two thirds of startups in Boston were able to fill open positions in under three months – verses about half in Palo Alto and 63% in New York City. (OK, the difference between New York and Boston is probably statistically insignificant.) Three months is a lifetime for many software and web startups; being unable to add a critical developer in that period of time could derail product launches and critical feature updates. Heck, a lot of startups are out of business in 6 months to a year, so if you can’t fill your positions by then who knows if it’s even worth still looking…

The data collected by the study would fit with anecdotal evidence that I have heard from friends starting companies in Palo Alto. Many people have told me that it’s impossible to find talent in the SF Bay area… especially at a reasonable price. I know it is hard to find good people in Boston as well, but this study would suggest it is a bit easier here than in Palo Alto.

Compensation of programmers in Palo Alto is higher than Boston and New York

And of course the other important part of the equation is how much it costs to hire talent. From the study:

Compensation for Programmers Palo Alto Boston

Doing some really crude math, it looks like programming talent in Palo Alto is 13% more expensive than Boston and 36% more expensive than New York. (I very roughly calculated that the average comp in Boston was $66.85k, Palo Alto 75.65k and New York $55.75k; I assumed the comp for each salary range was in the middle of each range for my calculation. Again, the numbers are small so the difference may not be statistically significant.)

The other data point in the above compensation chart that I’m trying to get my head around is low end and high end. The high end is easy enough to understand; you have to really pay up to get good talent in some cases in Palo Alto (and NYC). This doesn’t surprise me too much, but it is interesting that the high end is zero for Boston. Maybe due to a small sample set? I just don’t know enough.

The low end is also pretty intriguing. I’d bet that most of the sub $50k programmers are working for equity. It looks like regions OTHER than Boston have more programmers working for a pittance, trying to get equity. Does this mean that Boston has less of a founders culture???

Pretty ironic and not really very important, but Gmail decided to add in this little advertisement to the top of an email conversation that I’m having with someone about this post… it looks like Google is hiring developers in Boston!