Freemium Pricing: Evidence from a Large-scale Field Experiment

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes.You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. licence. www.econstor.eu ISSN 1866-3494 Copyright 2016 by ESMT European School of Management and Technology GmbH, Berlin, Germany, www.esmt.org. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicatedAll rights reserved. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means -electronic, mechanical, photocopying, recording, or otherwise -without the permission of ESMT.Find more ESMT working papers at ESMT faculty publications, SSRN, RePEc, and EconStor. 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 Against this backdrop, we structure relevant literature into a stylized framework of freemium pricing, and use the framework to analyze a large-scale field experiment. The randomize...

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

“…I argue and find that the freemium model harms consumers' perceptions of value and that the model's temporally decoupled transaction structure reduces consumers' WTP for priced items such as added functionality or extra content. These findings add a competitive lens to studies in marketing and information systems, which focused mostly on converting free users to paying consumers through products' design features (Lee et al, ; Pauwels & Weiss, ; Runge et al, ; Voigt & Hinz, ; Wagner et al, ), freemium as a driver of adoption (Arora et al, ; Liu et al, ), and the effect of freemium on network externalities (Jiang & Sarkar, ). Knowing how the freemium business model competes with other digital business models clearly holds managerial relevance, as firms do not operate in a vacuum.…”

“…Despite its impact on the entrepreneurial landscape, however, we know very little about how the freemium business model affects firms' value creation and value capture or how it competes with other business models in the digital economy. This article links with studies in the fields of marketing (Arora, ter Hofstede, & Mahajan, ; Lee, Kumar, & Gupta, ; Pauwels & Weiss, ) and information systems (Jiang & Sarkar, ; Liu, Au, & Choi, ; Runge, Wagner, Claussen, & Klapper, ; Voigt & Hinz, ; Wagner, Benlian, & Hess, ) on the micro dynamics of the freemium business model. It adds to these bodies of work by analyzing the freemium business model through a competitive dynamics lens.…”

Customer Lifetime Value Prediction in Non-Contractual Freemium Settings: Chasing High-Value Users Using Deep Neural Networks and SMOTE

“…They allow for repeat purchases, the number and monetary value of which is at the users' discretion (compare to [10,16]). Only a small subset of users, usually in the single digit percent space [1,9], ever make a purchase. Data are hence highly imbalanced [25] and there is abundant non-purchase related data that describe user behavior in depth and that can be valuable for prediction [1].…”

“…[2] further find them to perform well for user behavior prediction in freemium games. [4,9,30,31] all highlight the relevance of social interaction for engagement, monetization and virality in freemium games and products more generally. While we deem it highly relevant to investigate how social interaction shapes users' LTV in freemium settings and how one can reasonably quantify positive externalities such as viral activity to include them in LTV, the focus of the present study is on monetary LTV.…”

“…While we deem it highly relevant to investigate how social interaction shapes users' LTV in freemium settings and how one can reasonably quantify positive externalities such as viral activity to include them in LTV, the focus of the present study is on monetary LTV. In line with managerial literature [5,8], we aim at predicting users' undiscounted cumulative spend until day 360 of product use 2 and we disregard cost as it is virtually zero at the margin [9,10].…”