In building my latest company, many people have asked me “how will this make money?” And even when it was still in its idea stage, I’d quickly say “with a freemium business model, of course.” I needed an easy, efficient, and trustworthy way to attract users into paying for a service, and most people assume that a freemium business model works best.

But I think there’s a lot more to this thing called “freemium” than meets the eye. It’s distinctly different from offering a free trial or a free sample. The biggest problem with freemium is that the conversion rate from free to premium is utterly low — some say that the average conversion rate is 3%. But in the companies that implement freemium business models well, I see that they attack one thing that customers can’t argue with: an actual, urgent need. By doing this, they’ll assuredly increase their conversion rate and customer satisfaction. In case you forget, here’s a checklist that you can post on your wall:

freemium model

The key is in acquiring users who are looking for a potential solution to a problem, and may or may not pay depending on what they need. But when they have that urgent need for your upsell, they’ll gladly pay. Here are two examples of companies that understand freemium:

VistaPrint.com is best known for “selling” free business cards. I first heard about them when someone gave me a business card that said “Made by VistaPrint.com” on the back of it. I ordered my first batch of free cards, paid for $5 shipping, and I was a happy camper. The poor souls from VistaPrint made practically nothing off my purchase.

Two years later, and the week before my first TED Conference, I knew that I had an urgent need for business cards. So surely enough, I went back to VistaPrint to get my “free” cards. But fortunately for them (and unfortunately for me), they understood that freemium models work best when the customer has an urgent need, and they showed that in their shipping prices. I got free cards from them before, so I knew they were good. But I needed a new batch within 72 hours, and VistaPrint made a nice profit from the rushed shipping costs that I paid them. Take a look at their pricing breakdown for free business cards:

vistaprint, freemium

I think the key here is that VistaPrint spent less time worrying about features that would be “nice to have”, and more time on selling me something that I absolutely needed to have, and something I’d obviously be willing to pay for. Props to them!

Another company that’s done a great job at freemium is PBworks.com. (formerly known as PBwiki). I worked there last summer, so I had a lot of time to think about why their model works so well. Firstly, the company targets so many different demographics: individuals, students, teachers, companies, conferences, engaged couples, people trying to lose weight, among others. But most of these users will never pay for PBworks, because they don’t have a need to. And even if there were “cooler” features that PBworks could offer, these users probably wouldn’t pay. As a student using the product for personal use, I remember ignoring the upgrade button on the top right of the screen, and using PBworks as far as free would take me. In fact, I still have a personal wiki I use for taking notes in class, and I see myself as the type of user who’d never want to pay for premium features.

But now I run a company, and we love our PBworkspace. In fact, I think I’m addicted. But my colleagues and interns are too. And while I’d still do anything possible not to pay for “cool-to-have” premium features, PBworks is smart enough to make me pay for its service because I need it. There were two things that they could do: cut me off after I made too many edits to my wiki, or heavily encourage me to pay when I’d have a clear need. They chose the latter route.

This is precisely why the “per user” model is so powerful. You get the benefits of a full-fledged product, but you only pay for what you need. For the first 3 users, PBworks is free, but when I bring in more people, I have to pay $8/user. Which is a relatively small cost to pay for something that I’ll probably need to have. Take a look at their pricing structure. Note that I omitted the free plan.

pbworks, pbwiki, freemium

What’s interesting about this is that the difference between the “Professional” and “Professional Plus” plans is trivial. We normally expect the most expensive plan to have 20 baller features that the others don’t have, just to convince you to pay for the more expensive plan. But PBworks isn’t that naive: they realize that as long as you have a need for more than 3 people to collaborate on a wiki, (which is pretty much every organization out there), you’ll pay for the product out of sheer need. And the difference between their “Professional” and “Professional Plus” plans shows their understanding of this too: Some organizations need to have 24/7 live support, and they’re willing to pay for that.

But at the end of the day, when the organization’s decision maker needs to figure out which PBworks plan to purchase, it isn’t comparing featuresets between plans. It’s about selecting the one plan that solves the needs you have, and PBworks and other enterprise software companies such as Freshbooks and Salesforce do this well.

So ask yourself, “where is the actual need?” With VistaPrint, the need comes down to getting business cards in a timely manner. With PBworks, the need is when an organization has more than 3 users on a wiki. For Indinero, my current company, the need is when a company has more than 2 bank/credit card accounts that they need to keep track of. By thinking about “what the user needs” rather than thinking about “what a user sees as cool features to have”, you’ll be taking full-advantage of the beautiful thing called freemium.

Speaking of smart marketing, VistaPrint decided to give you guys a 25% discount on all products, and an 80% discount on premium business cards. For a product that I’ve actually paid full-price for, I highly recommend them. If you run into another company with a unique business model, please send me a tip at jessicamah (at) jessicamah.com.