I recently explored how getting customers on an ongoing subscription plan for your product or service can be a recipe for business success. At the other end of the spectrum, hooking them in with something free also can pay off big.

This is called the freemium business model (a combo of the words "free" and "premium") where you basically offer your core product or service for free. The hope is that people will love the free version so much, they'll be willing to pay for upgrades or additional features down the road.

Here are three questions to ask if you're thinking of offering a freemium option to your customers.

Is Freemium Right for Your Business?

It's easy to get lured by the thought of millions of people enjoying your product or service. But, if those users don't provide any value or revenue for your business, then you've essentially got a lot of freeloaders who can ultimately cause you to go bust. If you want to make your freemium model work, you need users who will:

1) Convert to paying customers. Research indicates that only 1 to 10 percent of a customer base end up paying for advanced features, with an average in the 2 to 4 percent range. These people must gain value from using your product over time in order to drive the conversion behavior you desire. Many companies with freemium models (like Dropbox or Evernote) do this by driving users to create assets or content that they have to return to the product to interact with. This is also done with data; for example, when you've sent an e-mail marketing campaign and you have to log back in to get the results or to send another e-mail campaign.

2) Or serve as word of mouth marketing. You'll have a large chunk of users who'll never pay you, but if they are active users of your product they can serve as lead generation machines to attract other paying customers. SurveyMonkey, for example, allows users to send out free surveys. But at the end of each one there is a call to action for survey takers to try SurveyMonkey themselves. My company, VerticalResponse, does something similar by including a VerticalResponse graphic at the bottom of every e-mail sent from our system. The graphic tells recipients that the e-mail was created and sent through VerticalResponse and invites them to take a free trial.

Can Your Product Sell Itself?

With a freemium model, you've got to have a core product your customers will love. It needs to be able to "sell itself" and attract heaps of loyal users based on how awesome it is on its own. As my company's vice president of platform management, Josh, says, "It's just got to work." If you nail the product, it can market itself, help you acquire new users, and reduce customer support overhead. But beware--should the product fail to deliver, you may be destined to fail, too. Trying to attract and retain new users with a less than stellar product can backfire and cost you dearly.

Are Your Customers Attracted by the Word 'Free'?

 While this sounds like a given, not all things are better by being free. Would you go for free brain surgery? Probably not. You'll also want to consider whether your product is easy for customers to use, understand and implement. If it requires lots of hands-on support to get up and running, you may want to steer clear of going the freemium route; you don't want to have to do a lot of upfront work that doesn't bring in any revenue.

Have you attempted a freemium model? What are your tips and pitfalls to avoid? I'd love to hear them in the comments.

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