Creating and capturing value from freemium business models: A demand‐side perspective

Abstract

Research Summary: While it has long been recognized that the business model can be a source of performance heterogeneity, less is known about how the business model affects consumers' perceptions about a firm's products and services. By taking a demandside perspective, I argue that business models create and capture value when the elements that compose a business model improve how consumers perceive a firm's products and better enable heterogeneous consumers to act on their willingness-to-pay. I develop theory on how the freemium business model competes with the premium business model and test hypotheses in the market for digital PC games. Results show that freemium games are played less and generate less revenues and that greater variety in games' menus of paid items is associated with higher revenues.Managerial Summary: Freemium business models are increasingly prevalent in the digital economy, yet very little is known about how freemium affects consumers' perceptions of value and their willingness-to-pay. In this article, I study how the freemium business model competes with the premium business model in the market for digital PC games. Results show that freemium games are played less and generate less revenues than premium games and that greater variety in games' menus of paid items is associated with higher revenues. This implies that in order to achieve competitive parity with firms operating the premium business model, firms operating the freemium business model need to create more value (e.g., through improved product quality, income from advertisements, or unlocking network externalities) or operate at lower costs. K E Y W O R D S business models, demand-side view, freemium, value creation, value capture, video games

Business model diversification and firm performance: A demand‐side perspective

“…While our moderating and supplementary analyses provided different pieces of evidence supportive of the view that demand‐related BMD can lead to demand complementarities, we see value in additional research to examine the operation of this mechanism more directly. For example, future research using WTP information following Rietveld's () experimental design in a multi‐business model context would be valuable to further illuminate the exploitation of demand complementarities more directly. Moreover, additional qualitative research could shed more light on the theoretical mechanisms we explained in our study.…”

“…Our study provides a complement and extension to studies such as Kim and Min () that have focused on the supply side. Because business models emphasize customer‐facing relationships (e.g., Ahuja & Novelli, ; Chesbrough & Rosenbloom, ; Rietveld, ; Teece, ), we anticipate that viewing the phenomenon from a demand‐side perspective offers promise in understanding BMD benefits. Demand‐side research represents a growing literature stream, and it is characterized by several distinct features.…”

“…Most definitions of the business model concept take “customers and consumers explicitly into account, for example, by referring to the customer value proposition” (Demil, Lecocq, Ricart, & Zott, : 4), suggesting that demand factors may be especially relevant in the context of this form of diversification. Following Rietveld's (: 172) observation that “business models create value when they increase the benefits that consumers perceive from consuming a firm's products and services,” we anticipate that BMD may increase customer willingness to pay and therefore create value. More specifically, we argue that a customer places higher value on the firm's products/services when that customer can engage with the firm using multiple, different business models.…”

“…This extension seems particularly appropriate when examining BMD because of the emphasis on customer‐facing relationships in the business model literature (e.g., Chesbrough & Rosenbloom, ; Rietveld, ; Teece, ). Viewing the BMD phenomenon from the customer perspective is also consistent with research that has begun to examine how product diversification might involve demand‐side synergies associated with increases in consumer willingness to pay—the maximum price a consumer will pay for one unit of a product or service (e.g., Ye, Priem, & Alshwer, )…”

The zero‐price effect in freemium business models: The moderating effects of free mentality and price–quality inference

“…The explaining theoretical approaches show variety as well. Most frequently, zero-price effects (Hüttel et al, 2018;Niemand et al, 2015;Papies, Eggers, & Wlömert, 2011), the ladder of participation (a concept of increasing activity in a social network ranging from passive to active contribution, (Bründl, 2018;Oestreicher-Singer & Zalmanson, 2012), prospect theory (Koch & Benlian, 2017;Rietveld, 2018), and the theory of planned behavior and its variants (Lin, Hsu, & Chen, 2013;Papies et al, 2011;Schreiner & Hess, 2015) are used.…”