Freemium Pricing: Evidence from a Large-scale Field Experiment

Abstract

AcknowledgementsWe wish to thank Michaela Draganska for helpful comments. We are further grateful for helpful discussions with: Art Owen, Stephan Seiler, Udo Wagner, Eric Seufert, participants of the Conference on Digital Experimentation at MIT, participants of the Media Economics Workshop at ETH Zuerich and seminar participants at the Institute of Marketing of Humboldt University Berlin and at the Institute for Strategy, Technology and Organization of Ludwig-Maximilians-University Munich. Finally, we wish to extend our heartfelt gratitude to Wooga for data access and highly fruitful cooperation; in particular, we wish to thank Maija Marincenko, Timothy Frohner, Cedrik Neumann and Anton Troynikov.Electronic copy available at: https://ssrn.com/abstract=2888471 2 AbstractFirms commonly run field experiments to improve their freemium pricing schemes. However, they often lack a framework for analysis that goes beyond directly measurable outcomes and focuses on longer term profit. We aim to fill this gap by structuring existing knowledge on freemium pricing into a stylized framework. We apply the proposed framework in the analysis of a field experiment that contrasts three variations of a freemium pricing scheme and comprises about 300,000 users of a software application.Our findings indicate that a reduction of free product features increases conversion as well as viral activity, but reduces usage -which is in line with the framework's predictions.Additional back-of-the-envelope profit estimations suggest that managers were overly optimistic about positive externalities from usage and viral activity in their choice of pricing scheme, leading them to give too much of their product away for free. Our framework and its exemplary application can be a remedy.Keywords: Freemium, pricing, digitization, experimentation 3 Digital products are characterized by high cost to produce the first copy and very low marginal cost of reproduction (Arrow 1962). This particular cost structure has given rise to freemium pricing -i.e., a hybrid pricing scheme that combines free use of a basic version of the product in perpetuity, with premium upgrades that require the payment of a fee (Anderson 2009;Pauwels and Weiss 2008). Early indications that such pricing strategies are promising were presented by Scott (1976) and more recently by Bawa and Shoemaker (2004).Freemium pricing is widely adopted by technology companies for their software applications as it allows them to acquire a large number of users at low cost (Lee, Kumar and Gupta 2015). Despite the widespread use of freemium pricing, many firms find it Firms therefore regularly run field experiments ('A/B tests') to improve their pricing scheme (Levitt et al. 2016;Seufert 2014;Wedel and Kannan 2016). In evaluating these experiments -due to the aforementioned complexities -managers are rarely guided by an assessment of (multi-period) profit, but mostly base their evaluation on performance indicators that are directly measurable (Seufert 2014). The scientific literature on 4 freemium p...

Spillover Effects and Freemium Strategy in Mobile App Market

“…First, it relates to a nascent stream of empirical research on freemium pricing when firms offer both a free and a paid version of a digital product. Existing research has demonstrated the effect of providing a free version in various contexts such as software (Chen et al, 2017;Lee and Tan, 2013;Runge et al, 2016), cloud storage (Lee et al, 2017), digital TV service (Foubert and Gijsbrechts, 2016) and on-demand dramas (Hoang and Kauffman, 2018). For apps on Google Play, Liu et al (2014) find that paid apps with a free counterpart receive more sales than those that do not have a free counterpart.…”