Why freemium models are ‘sexy’ but overrated

We hear the term “mobile first” bandied about by investors and entrepreneurs, but in reality, we’re still in the very early days of mobile commerce.

Indeed, entrepreneurs are still experimenting with distribution and revenue models, and they’re making plenty of mistakes are they learn.

Enterprise cool kids like Yammer and Asana offer their product for free — the “freemium model” — and then make a strong case to purchase an enterprise-wide subscription or move larger teams to paid versions of the product. Startups often believe they can follow this model and that their products will be a near-instant hit with large organizations if it’s well designed and easy to use.

[For more, read our feature on the “Dropbox effect” myth.]

Above: Emergence Capital’s Sean Jacobsohn.

Sean Jacobsohn, an investor at venture firm Emergence Capital, is concerned that this “sexy” freemium model has been overplayed by entrepreneurs, who aren’t considering their potential buyer. It works in certain cases, but not if the app is targeting a specific vertical or role within an organization.

Over the years, Jacobsohn has witnessed the models that work, and he has some advice to share to today’s entrepreneurs. He will be a judge at MobileBeat 2013’s Innovation Showdown, a competition for 10 mobile companies to pitch their ideas. This year’s focus will be on how your company embodies, enables, or amplifies a killer mobile experience.

Jacobsohn shares his views on the future of mobile business applications, monetization strategies that work, and the startups that are on his radar.

VentureBeat:  What are you looking for from MobileBeat 2013’s Innovation Showdown finalists? 

Sean Jacobsohn: Not only do the finalists need a sharp business description, but they also have to showcase a mobile product design that is instantly accesible. Companies shouldn’t design apps that require explanation or thinking. The winners will solve a problem in a way that seems so intuitive that an explanation will almost seem superfluous. Those who use apps like Evernote or Uber simply know what to do.

VentureBeat: What specific technology will draw your interest? 

Jacobsohn: I’m really looking for mobile-first approaches, meaning startups that solve a key pain point in a vertical industry or those who solve a problem for someone in a specific role, like sales or marketing. It could replace an existing technology and become the de facto standard or solve a problem that does not currently have a solution. More specifically, I’m on the hunt to fund mobile startups with a focus on several key verticals: health care, education, and real estate.

VentureBeat: One of the biggest challenges for entrepreneurs is distribution. What’s working?

Jacobsohn: Yes, people are still trying to figure out how to best get in touch with potential buyers. In some cases, entrepreneurs offer their apps for free or [give] free trials. App stores are most effective, but there is a ton of noise [on those] and plenty of consumer apps.

VentureBeat: I’ve heard Yammer’s model referred to as the “freemium trap.” Should entrepreneurs build a base of customers by offering the product for free? 

Jacobsohn: A lot of people think the freemium model is sexy, but successful freemium businesses get you 3 percent conversions. You need a demonimator in the millions to have a viable business. That works in certain cases, but not if you’re going after a smaller segment. I often suggest that entrepreneurs offer a free trial rather than giving the product away for free.

VentureBeat: Can you call bullshit on any common misconceptions you hear from entrepreneurs? 

Jacobsohn: Some entrepreneurs believe they can just build a great product and rely on a reseller to distribute it. They don’t think about what’s in it for the reseller. The other misconception we already touched on: the freemium model. In most cases, the entrepreneurs can’t make the business model work.

VentureBeat: Have entrepreneurs typically thought about security, and protecting corporate data? 

Jacobsohn: We’re seeing people bringing their own device and business app to the workplace [This trend is often referred to as “BYOD,” or bring your own device — Ed.), just like they do in their consumer life. To make that a corporate wide purchase, you will often need the chief information officer to bless it. I think that protecting corporate data will be on of he factors that influence the CIO’s decision. There are a lot of solutions out there, though. Mobile device management can alleviate this concern to some level, so IT can still focus on buying the best application for the ir business.

VentureBeat: Given that employees are bringing devices and apps to work, do mobile business entrepreneurs still need to hire a traditional sales force? 

Jacobsohn: Yes. Often, people are not using the product in the most optimal way when it’s free. People can get tired of the app pretty quickly if they are not using it in the correct way. You get the most value when you get the whole company using your product, and a traditional enterprise sales force can help you get there.

To read more about the firm’s investment thesis on the future of mobile business, review the research here.