On top of the game? The double‐edged sword of incorporating social features into freemium products

Research Summary “Freemium” product strategies—where a free basic version of a product is offered alongside a full “premium” paid version—are often used by companies to attempt to increase the size of their user base and benefit from network effects. However, there is limited empirical evidence of how using freemium strategies impacts firm revenues. We empirically investigate how the strengthening of network effects on the Apple App Store influenced product sales of firms using freemium strategies, contrasting the impacts on both market leaders and followers. We find that stronger network effects did not on their own lead to greater revenues for market leaders with respect to followers. However, in settings where freemium strategies were used, network effects greatly amplified the advantage of leaders over followers. Managerial Summary Freemium strategies are increasingly common as a way for firms to increase the number of users and benefit from network effects. However, there has not been much empirical investigation in this regard, particularly in cases where products using freemium strategies face competition. In this article, we investigate how a policy by Apple on the App Store that led to stronger network effects, impacted the performance of market leaders and followers depending on whether they used freemium or not. We find that it led to an increase in revenues of leaders over followers (effectively, market dominance) but only when freemium strategies were used. The analysis demonstrates an interplay the between business model and network effects. In addition, it shows how stronger network effects and freemium strategies only benefitted market leaders in our setting.

Section: Freemium Strategiesmentioning

confidence: 99%

Competing on freemium: Digital competition with network effects

Boudreau

Jeppesen

Miric

2021

“…By focusing on the network effects present in the complementors' products, the study also contributes to the prior work that has brought attention to product-level network effects (Boudreau et al, 2021;Rietveld & Ploog, 2022;Shankar & Bayus, 2003). While the prior work has demonstrated that the network effects are heterogeneous across products in the same industry and how they can facilitate product adoption and performance, the findings from the article highlight that the efficacy of the product-level network effects can be contingent on the firm's resources and market characteristics.…”

Section: Discussionmentioning

confidence: 97%

“…It is because multiple products may be used concurrently but none of them might have enough users to create a valuable experience for the users. In the context of multiplayer games, multiple products in the same segment may coexist while each has an active online userbase that is insufficient to ensure a smooth playing experience (Rietveld & Ploog, 2022). 5 Further, lower quality products may end up dominating the market when temporary fluctuations in the number of users may be amplified into irreversible positions due to high switching costs.…”

Section: Theoretical Framework and Hypothesesmentioning

confidence: 99%

“…We know relatively little about a key contingency potentially affecting how platforms manage adoption— complementor product direct network effects 2 . When products have positive direct network effects, the utility they create for any user will depend on whether they can create a sufficiently large installed base of users (Rietveld & Ploog, 2022; Shankar & Bayus, 2003). Promoting the adoption of promising products with direct network effects may help to achieve such a critical mass and lead to a momentum while creating a significant value for the users and the platform owner.…”

Section: Introductionmentioning

confidence: 99%

“…For example, the tension between adoption and dominance is salient in the context of video games. Multiplayer games (offered through a platform) such as Fortnite by developer Epic Games have strong direct network effects because the value of the game for each player critically depends on the number of other players (Boudreau, Jeppesen, & Miric, 2021; Rietveld & Ploog, 2022). Further, many video games like Fortnite are broadening their scope by offering not only a gaming experience but also social interactions (i.e., they are becoming “platforms within platforms”).…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Growing platforms within platforms: How platforms manage the adoption of complementor products in the presence of network effects?

Agarwal

Miller

Ganco

2023

Research Summary Platform owners often use endorsements to actively manage complementor firms. We argue that the direct network effects of complementors' products play a central role in the platform management by its owner. We test our predictions using data on the Apple's promotion of apps. We find that apps with network effects are more likely to receive an award. This likelihood increases when the app is introduced by a developer with a larger market share but declines when introduced in a concentrated segment. The likelihood decreases further if the app is introduced in a concentrated segment by a developer that holds a larger market share. Further, we observe that in concentrated segments, the “challenger” developer has a higher likelihood of receiving the award relative to the leader. Managerial Summary Many products offered through platforms have their own direct network effects. The value of the product for each user grows with the number of other consumers using the product. Many platform owners also actively manage their platforms to ensure platform growth and often use less traditional tools such as product endorsements to achieve this goal. In the context of video games listed in the iOS App Store and the Editors' Choice Awards as a form of product endorsement, we examine the tradeoffs that products with direct network effects (i.e., multiplayer video games) present to the platform owner (Apple). On the one hand, the platform owner may want to promote apps with direct network effects to help them achieve a momentum in terms of user growth. On the other hand, networked apps may become dominant in the segment with negative implications for future growth of the segment and the platform owner's profitability. We find evidence consistent with this tension and find that it critically depends on the complementor strength and market segment concentration. We also observe that in concentrated segments, the “challenger” developer has a higher likelihood of receiving the award relative to the leader.

Product digitization and differentiation strategy change: Evidence from the book publishing industry

Miller,

Wang

2024

Research SummaryWe study product digitization as an impetus for firm strategy change. Product digitization can erode a firm's ability to differentiate through physical product attributes and prompts them to increase emphasis on nonphysical product attributes to sustain their competitive advantage. We expect this effect is pronounced among firms that have pursued a physical differentiation strategy prior to the digital age. However, we expect that countervailing forces exist such that the internal supply cost of and the external market demand for the nonphysical differentiator mitigate this effect. Evidence from publishers in the Amazon Kindle e‐book ecosystem supports our hypotheses. This study bridges the growing digital strategy literature and the classical competitive strategy literature. We discuss how our findings are relevant to a range of industries.Managerial SummaryMany companies invest in superior physical product attributes to increase a customer's willingness‐to‐pay and entice purchase. However, when products become digitized—such as music streaming displacing CDs or e‐books replacing printed books—the effectiveness of physical product differentiation is diminished. We examine how book publishers manage this challenge at the advent of Amazon's Kindle e‐book technology. We find that publishers that have emphasized physical product attributes turn to emphasizing nonphysical product differentiation, namely, through offering more content. Yet, the extent of the strategy change is limited by the internal development cost of and the external demand for the nonphysical differentiator. We discuss how our findings are relevant to a range of settings, including both product and service companies.