Download - A Detailed Study on Freemium Model and understanding it using the lens of Behavioural Economucs
Understanding Freemium Business Model Senior Year B.Tech Project Report
Author: Tarkeshwar Singh
Department of Electrical Engineering, IIT Gandhinagar
Project Advisor: Prof. Krishna Prasad Miyapuram Department of Computer Science and Engineering, IIT Gandhinagar
This document has been divided into three sections: Section 1 forms the final report for
the B.Tech Project done by Mr. Tarkeshwar Singh, Final Year Undergraduate Student at
IIT Gandhinagar, Section 2 consists the detailed Literature Review done regarding the
project. Section 3 contains the questions asked as a part of the survey done for the
project.
1 | P a g e
Section 1
Table of Contents
Abstract .................................................................................................................................................. 2
I. Introduction ..................................................................................................................................... 2
II. Literature Review ........................................................................................................................... 3
A. Definition and Types of Freemium ............................................................................................ 3
B. Factors supporting Freemium ..................................................................................................... 4
C. Why study Freemium Model? .................................................................................................... 5
III. Applying Behavioral Economics to understand Freemium Model ............................................... 6
IV. Framework for Decision Making on Freemium Model Adoption ................................................ 8
V. Comparing Freemium with Two Platform Models ........................................................................ 9
A. Experiment Structure ................................................................................................................. 9
B. Analysis of Data ....................................................................................................................... 11
C. Inference ................................................................................................................................... 13
VI. Conclusion .................................................................................................................................. 14
VII. Future areas of research ............................................................................................................. 15
References: ........................................................................................................................................... 16
2 | P a g e
Abstract
This paper serves as a Bachelor of Technology Project Report for the Senior Year project of Mr.
Tarkeshwar Singh, Final Year Student of IIT Gandhinagar, in the domain of business models around
the World Wide Web. The focus of this paper has been specifically towards understanding Freemium
business models.
Rigorous analysis of Freemium business models has not been taken up in course of academic research
till date. The aim of this paper is to evaluate Freemium business models with conventional marketing
and behavioral economics knowledge. Some of the most common and mystified facts about
Freemium have been explained as a part of the work being presented here. The work presented here
also develops a framework for better decision making on freemium model adoption by firms. The
paper further takes up the comparison of Freemium and Two platform models from the perspective of
users and determines the attractiveness of each towards end users.
I. Introduction
With the Apple App Store crossing 40 billion downloads in January, 2013[14] it has become
increasingly important to understand the business models that seem to work in this less than half a
decade old industry. The number of apps on the Apple App Store and Google Play is expected to be a
million each by the end of 2013[15]. Most of these applications do not have an established business
model and a lot of the companies around them go bankrupt even after having a lot of users. The most
common business model that these companies/products use is Freemium business model. Freemium
as a business model has seen a very rapid adoption in the last few decades. It can be looked upon as
the most prevalent business model among the software and mobile/web application companies.
Freemium as a business model has not been studied using a traditional framework and hence is among
the most misunderstood business models. There lies a high sense of obscurity about the pricing and
the type of freemium to use. Similarly, there has not been any research on understanding and
improving the Free-to-Premium Conversion rate for the freemium model. The aim of this paper is to
study Freemium model and its different forms. The paper further tries to use conventional sales
promotion concepts to better explain different facts about freemium and to suggest improvements in
the model. The paper also looks into the question of whether users prefer Two Platform Business
Model1 over Freemium Model for similar products.
1 Two Platform Business Model can be understood as a business model in which a product has two customers(generally Advertisers and normal users) and one of the customer types(advertiser) pays for the other(normal user). Ex. Google Search, Online News, etc.
3 | P a g e
The subsequent part of the paper has been divided into five sections: Section II contains the literature
review for the paper and explains the basics of freemium model in detail along with establishing the
importance of studying them; Section III uses traditional behavioral economics understanding to
explain the observations pertaining to freemium model. It especially invokes the existing research
around the concept of free and price based sales promotions; Section IV contains a theoretical
decision framework for freemium model adoption by a company/product; Section V takes up the
comparison between Two Platform Model and Freemium business model; Section VI contains the
conclusion about freemium models drawn on the basis of the literature review and the experiment
performed; Section VII contains the future areas of research that can be taken up regarding freemium
model.
II. Literature Review
A. Definition and Types of Freemium
The word ‘Freemium’ is made up of the words ‘Free’ and ‘Premium’. It represents a new kind of
pricing model where a version of the product is offered for free and premium version of the same
product is offered at a very high cost. The term ‘Freemium’ was coined by Fred Wilson, a Silicon
Valley Venture Capitalist in a blog post. Chris Anderson, the curator of TED2, proposes that, “At the
beginning of the twenty-first century, we are inventing a new form of free, which is not a
gimmick, a trick to shift money from one pocket to another, Instead, it is driven by an extraordinary
new ability to lower the costs of goods and services close to zero.”[16] The 21st century has seen the
marginal costs of web and software products falling so low that the many companies decided to offer
the product for free. Offering the product for free leads to quick adoption by a large number of users
and hence the product itself becomes a marketing tool. Some of the most common Freemium products
are Skype, Gmail, Flickr, WhatsApp, etc.
One of the major misconceptions regarding Freemium is confusing it with the ‘Two Platform Model’.
The ‘Two Platform Model’ is majorly advertisement oriented where the product has two customers
and one of the customer types pays for the other. The most common example of this business model is
Google Search. Freemium on the other hand is about having some of the users pay for a premium
version of the product and these users typically pay off for the rest of the users in the same customer
type. However a lot of the current high tech products use both the Freemium and Two Platform Model
simultaneously for the same product.
2 TED is the company that organizes and supports TED talks throughout the world.
4 | P a g e
The division between the premium and the free product in the Freemium Model can be based on
several different factors like time, feature, customer types, etc. On the basis of the literature search
done, Freemium Model can be divided primarily into five categories:
i. Time Based Freemium: In this form of Freemium, users are allowed to use the product free of
any cost for a small initial period of time and are then asked to pay for the premium version of
the product to continue using. Time based freemium is the most common and is probably the
first type of freemium ever seen. The simplest manifestation of this is in the concept of having
trial versions of products. However the last few years have seen a lot of products having a
trial version as long as 6 months to 1 year. This amount of time is sufficient for any user to
get hooked onto a product.
ii. Feature based Freemium: The major advantage of the evolution of the World Wide Web is
the ability to serve the long tail where every user has its own needs. Feature based freemium
model has seen its rise in this ability. In feature based freemium, companies offer the product
for free with few (sometimes sufficient) features to basic users and charges the users if they
need advance features. One of the most common examples of this is Skype. The major
assumption in this business model is that users once they start using the product will want the
premium features as well and that the free product will create a value perception about the
product.
iii. Customer Type Freemium: Customer type freemium generally divides the users into two
categories: basic(individual) users and enterprise users. The basic users get the product for
free whereas the enterprise users pay for the product. The basic users in this model act as a
channel of networking and marketing of the product.
iv. Seat Limited Freemium: Seat limited freemium model limits the number of accesses each user
can have. This can be understood mostly simply with the IEEE business model where
institutions can buy as many number of accesses as they want.
v. Bundling Oriented Freemium: In this kind of model, one of the products(mostly software) is
generally sold with another kind of product for free. Sometimes one of the products is offered
at a selling price lower than the cost which is then recovered by later purchases in the product.
One of the most popular products which use this model is Amazon Kindle which is sold at a
discount and is then compensated by the sales that occur through the device.
B. Factors supporting Freemium
After having laid the basic foundation about Freemium and its different types, It becomes important to
study the factors that have led to the development of the Freemium Model in the past decade.
5 | P a g e
i. Negligible Marginal Costs: As technology advanced, the marginal cost of developing and
maintaining a software product has gone down drastically. The lower costs make it ineffective
to price the product at the marginal cost and this allows companies to be profitable with only
2-3% of users paying for the product.
ii. Low Bandwidth and Storage Cost: The cost of bandwidth usage has decreased rapidly with
the adoption of newer technologies. The storage cost has also decreased rapidly allowing the
marginal costs for most software products to go down rapidly.
iii. Lack of Marketing/Promotion Costs: One of the major components of cost for a software
product until the last decade was the marketing cost. However the launch of Apple App Store
revolutionized the way users can be reached. Users now have a known platform where they
can look for different kinds of applications/tools that they need. The pricing structure of the
App Store supported by growth of social media has reduced the cost of marketing to zero.
iv. Growth of Smart Connected Devices: The growth of smart mobile devices with large
processing power has become the backbone of the entire software industry.
C. Why study Freemium Model?
The final question that the literature review tries to address is: Why is there a need to Study Freemium
Business Model? This question can be best answered by looking at some of the statistics related to the
growth of Mobile devices and App Stores. Most of the apps developed for the mobile devices use
Freemium Model and this entire industry has been growing at a very quick rate, hence it becomes
important to study them to create a better understanding.
Growth of Smart Mobile Devices:
• Smartphones shipments formed 35% of all the mobile devices shipped in the last year.
• Worldwide mobile broadband subscriptions have exceeded 1 billion out of a total of 2 billion
broadband users worldwide[17].
• Mobile data traffic has been expected to grow with a CAGR of 60% from 2011 to 2016.18]
• An average user uses 1-2Gb data on his mobile computers followed by around 800 Mb and
600 Mb on his Tablet and smartphone respectively.[19]
• Online video and web browsing together contribute the most traffic coming from the mobile
devices. Together these contribute more than 50% of the entire traffic.[19]
• The number of mobile internet users have exceeded desktop users in both India and U.S
• Almost 40% of the smartphone users use their phones even before getting out of their
beds.[19]
• The average time users spend on their smartphones has been found to be around 2.5 hours a
day[20].
6 | P a g e
Growth of App Stores:
• The total number of apps available for download on Apple App Store and Google play is
700,000 each with expected addition of 435,000 to Apple’s App Store in 2013.[21]
• The total no. of downloads for both the platforms collectively has exceeded 75 billion with
app store contributing 40 billion while Google Play contributed another 35 billion.[22]
• An average iPhone user downloads more than 80 apps to add to the pre-installed 20 apps
with more than 50% of these apps being absolutely free.
• The total market for paid smartphone apps has exceeded $8 billion. The average revenue for
paid apps has been found to be around $19,560.[23]
• The total revenue generated from smartphone and tablet apps(including advertisements and
in app purchases) has exceeded $25 billion out of which App Store contributes around 65%
followed by Google Play which contributes around 27%.[24]
• Average price of a paid app was found to be $2.82.[24]
III. Applying Behavioral Economics to understand Freemium Model
Freemium as a pricing model can be looked upon as an extension of Price based Sales Promotions, the
discount in this case being extended to a limit where the product becomes free. Free or Zero as a price
is treated very differently than any other price in Behavioral Economics because of the kind of
responses it evokes from the users. Hence to understand Freemium fully, it is important to understand
the power of Free as a selling tool. However, there are several other hypotheses as well, that have
been derived from traditional price based sales promotions and which can be applied to understand
freemium better. Some of the most important general observations about freemium have been
mentioned below and subsequently they have been explained with traditional knowledge about
behavioral economics and Price based Sales Promotions:
i. High Adoption Rate: All Freemium based products have seen very high number of
downloads. Google Play Store and Apple App Store both have seen together more than 75
billion downloads in the last 5 years. There are currently around 1 billion active smart mobile
devices in the world[25]. This means that every smart mobile device users has downloaded
roughly around 80 mobile apps. This phenomenon of high adoption rate for freemium
products can be best understood from the Concept of Zero Price. Renowned behavioral
economist Dan Ariely in his paper ‘Zero as a special price: The true value of free products’[26]
demonstrates how offering a product at a zero price can alter user buying behavior drastically.
The paper rigorously proves that equal amount of discounts evoke different responses if the
end result of one discount is a zero price. Whenever a user gets a product for free then the
7 | P a g e
conscious decision making of buying/adopting the product is changed. Especially in the
mobile and PC world this becomes more prominent as there are negligible costs of
adoption(generally the network bandwidth cost). This result in users downloading a free
product instead of a better product charged at any other price.
ii. Low Conversion Rate: Freemium model has been criticized the most for having an extremely
small conversion rate to premium user. This can be explained by the following hypotheses
developed from Price Promotions:
a) ‘Permanent Effects of price promotions are almost negligible and they fail to bring
about a change in user behavior’[27];
b) ‘The price consumers expect to pay for a brand also decreases with an increase in the
observed depth of price discounts of the brand’;[28]
c) ‘There is a positive relation between advertised selling and reference price and
buyers’ internal reference price.’[29]
The above mentioned hypotheses clearly demonstrate that offering a discount does not lead to
alterations in user behavior. Further the reference price or perceived value of the product goes
down with the amount of discount offered. In case of freemium products, users expect it to be
free and because of the complexity of the product there is no clear way of creating an internal
reference price for a product. This explains why most freemium products cite extremely low
conversion rates of 2-3%[30].
iii. High Attrition Rate: The freemium products apart from an extremely small conversion rate
have a very high attrition rate. According to latest findings, more than 26% of apps
downloaded are used just once.[31] This can be explained from the fact that the users have far
too many alternatives for every product offered in the software world. Also most of the
current products being made allow users to export their data across platforms and software
tools at ease which brings down the cost of shifting to zero. Even apart from the initial drop in
number of users, most of these products see high fluctuations in the userbase. This can be
explained from the hypothesis that: ‘Price based promotions increase the non-loyal segments
of the user base and in the long run reduce the brand loyalty and value.’[28].
iv. Falling Average Price per Paid app: One of the major disadvantages of having continuous
price promotions is the reduction in the price perception of the entire product category.[29]
This makes the process of offering price promotions a self-defeating exercise. This has been
the exact observation in the case of freemium based products where offering a large number
of products for free has led to reduction of overall price of the paid apps as well over the last
few years.
v. In App Purchases forming the largest chunk: One of the most positive observations made
about the Freemium model in the last few years is the growing share of in app purchases both
8 | P a g e
in relative and absolute terms.[32] In App purchases can be understood as buying access to
more features of a product once the user likes the basic version. The In App Purchases benefit
from the fact that they don’t suffer from price promotions of the app as they don’t fall in the
same category. Further the user develops a price perception of the product based on the
features over a fairly long period of time and then decides to buy them.
IV. Framework for Decision Making on Freemium Model Adoption
One of the key areas of freemium model research that has been untouched is the layout of a
framework that can help business decide whether freemium is the right pricing model for their
product. In this section, the required necessary attributes for a product to be able to adopt Freemium
Model has been laid out. It is important to note that the decision making factors laid out here form the
necessary but not sufficient conditions for the success of a product using Freemium model.
i. Marginal Cost of serving every free and paid user: The most important decision factor for
adoption of Freemium model is the marginal cost of serving every free and paid user. If the
marginal cost of serving every free user is not close to zero, then Freemium is not the right
pricing model for the business. Another important factor to watch out for is the cost of serving
every paid user. If the profit margin of serving every paid user is not extremely high then it
will take a very large time for the company to recover the fixed costs for the product.
ii. Complication and Newness of the Product: The major historical reason behind adoption of
Freemium model was the complete newness of the products. Most users have never seen any
product similar to the ones that were being launched and hence convincing them to pay a
price for a product was very difficult. Therefore to gain adoption by a large number of users
the companies decided to offer the product for free. However this resulted in very few users
willing to pay for the product even after using it for a long time. Hence, while adopting a
freemium model for a product a company must try to ascertain the newness of the product. If
the targeted consumer is already familiar with the product category then the company might
be better off using an upfront pricing scheme.
iii. Market Size: Freemium Model goes with the assumption that only few of the customers will
shift to being a premium user. Hence to recover the fixed costs the product must have a very
large targeted customer base.
iv. Marketing Tool: Offering a product for free has always been considered a marketing
gimmick. In the case of Freemium Model, this may not be completely true but the offered
product for free is still considered to be a marketing channel. If the company can access the
market through any other channel which can lead to product adoption by a large number of
users then adopting Freemium model might lead to loss of potential revenue.
9 | P a g e
v. Change in delivered value with every additional user: Freemium model is most effective
when there is a value gain to every user with addition of next free or paid user. The value
gained can be in terms of Network Effect(Skype, Facebook), Increasing Conversion
Rate(Evernote), Access to enterprise customers(Gmail) and Increased sales of related
products(Amazon Kindle Fire). If there is no value addition for every new free user addition
then the cost of serving the free user will exceed the benefits resulting in the insolvency of the
company.
vi. Change in delivered value with time: Most of the successful freemium products have an
increasing value for the user with time. The free users are made to convert to paid users by
forcing them to add more value to the product for themselves and others. This decreases the
attrition rate by creating a barrier for exit for the user. Further this leads to user increasing the
internal price perception for the product and hence some of them start to shift to the paid
version of the product.
vii. Correlation between Cost Structure and Price Structure of the product: While fixing up on
the pricing frequency for a freemium model it is important to look at the cost structure of the
product. If the product has a recurring cost every fixed interval for every user, then having a
fixed one time pricing for features(or premium product) will create profitability issues in the
long run.
V. Comparing Freemium with Two Platform Models
Freemium and Two Platform Models are among the most common business models in the domain of
web and mobile application products. Both the business models have their own pros and cons and
there still has not been a clear winner among the two models. The parameters on the basis of which
these models can be compared are Average Revenue per Download, Average Lifetime Value of a
User and Average number of downloads that a product receives in each of the categories. In the scope
of the research made for this paper, only the parameter about the Average number of downloads for
the two models have been compared. The parameter Average Number of Downloads has been
translated to mean the overall likeability of the product which implies higher the user preference for a
product higher will be the number of downloads. The subsequent subsections take up in detail the
structure of the experiment and the analysis of the results.
A. Experiment Structure
To estimate the user preference between the Two Platform Model and the Freemium Model, users
were asked to rate seven different categories of products. Each of the product categories were
represented in three different forms viz. Feature based Freemium, Time Based Freemium and the Two
10 | P a g e
Platform Model3. To make the products look similar to each other, the two platform model was made
to appear as a Freemium where apart from the products supported by advertisement there was another
version of the product without advertisement which required the user to pay an upfront cost. For the
feature based freemium products, the features were designed in such a way that they were sufficient
for an average user. The users were presented with a total of 21 questions regarding rating a product
and were asked to rate every product on a scale of 1 to 5 where 5 was the highest rating for any
product. The seven different categories were:
i. Office Tools
ii. Dictionary
iii. Online Storage
iv. Email Client
v. Music Player
vi. Text Messaging Tool
vii. Mobile Games
All the three forms for every product category had identical features to ensure that the decision
making only happens on the pricing model. In order to remove the price perception factor from
decision making, all the products were given the same price. Each of the twenty one products was
given a random fictitious name to remove the brand effects from decision making. The questions were
shuffled completely for every user to remove any kind of anchoring effect. The following is a sample
product description for each types:
Time based Freemium: Azure Office tools Software
• Word processor, Spreadsheet, Presentation Tool along with ability to sync, edit and store data
online for 1 phone, 1 tablet and 1 PC:
• Free trial for 30 days
• Rs 200 a year after that
Feature based Freemium:
Office Tools Software
• Word processor, spreadsheet , presentation tool along with ability to sync, edit and store data
online for 1 phone, 1 tablet and 1 PC
• Free without the features of sync and online storage and available for only 1 device 3 The reason behind adoption of only feature and time based freemium model is because they are the only ones who target common users directly. The other three types either require enterprise users(Seat Limited and Customer Type) or there is a need to observe user behavior for a longer period of time(bundling oriented).
11 | P a g e
• Rs 200 a year for the full package
Two Platform Model:
Office Tools Software
• Word processor, spreadsheet , presentation tool along with ability to sync, edit and store data
online for 1 phone, 1 tablet and 1 PC
• Free with Advertisement
• Rs 200 a year without advertisments
B. Analysis of Data
The survey deployed with the above structure and questions received 45 responses. The data collected
was analyzed in different ways to come up with different interpretations of it:
i. Popularity of the different forms:
The ratings collected for the seven different categories for each of the three different pricing
forms were averaged to come up with the following responses:
The most popular pricing form based on the average ratings was found to be Two Platform
Model followed by Feature based Freemium and Time Based Freemium Respectively. If the
Time and Feature based Freemium products are clubbed together to form one single
Freemium Category then the difference between the ratings of Two Platform and Freemium
Models becomes higher.
2.48 3.17
2.72
0
1
2
3
4
Time based Two PlaYorm Model
Feature Based
Average Ra
)ng
Average Ra)ng of each Pricing Form
Series1
12 | P a g e
ii. Popularity of each form for each product category:
The average of the ratings collected for each of the three forms of pricing has been displayed
in the table below:
The general trend observable from the data is that Two Platform Model has received the
highest rating followed by Feature based Freemium and Time based Freemium respectively.
The data presented above has three anomalies: a) For Office Tools product category, Time
based Freemium has a higher rating than Feature based; b) For Game product category, Time
based Freemium has a higher rating than the Feature based Freemium; c) In the Text Message
product category, Feature based Freemium and Two platform model have similar ratings. The
3.17 2.6
0
1
2
3
4
Two PlaYorm Model Freemium Model
Average Ra
)ng
Average Ra)ng of Freemium and Two Pla8orm Model
3.1 3
2.2 2.2 2.4 2.5
2.3 2.5
3.1
2.4 2.6
2.8
2.3
3.2
3.6 3.5
4
2.6
3.2
2.9 3.1
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
Office Tools Online Storage
Music Player Email Client Dic\onary Game Text Message
Average Ra
)ng
Average Ra)ng for Each Product TimeBased Freemium Feature Based Freemium Two PlaYorm Model
13 | P a g e
first anomaly can be credited to the fact that it was the first question users faced during the
survey which may have resulted in a bias of awarding higher ratings. The second anomaly can
be explained with the inherent assumption that most users complete(or can complete) all
stages of a game within the first 30 days. The third anomaly is present as the perceived
difference for the users between the two products was insignificant.
iii. Popularity of the different Categories:
While designing the experiment, a predicted probable error was that some of the categories
will intrinsically have lower ratings because of the users’ inherent anchoring effect with the
products they use frequently. Hence it is important to look at the average ratings of each of
the seven different product categories:
As can be seen from the data presented above, the products display a very wide range of
average ratings. Product categories like Game, Email Client and Music Player have the lowest
ratings which can be explained from the fact that these products are currently available for
free in the market and hence the lower ratings show the inherent bias against payment for
such products.
C. Inference The analysis of the data presented above results into validation of following hypothesis:
i. Two platform model is more attractive to users in comparison to Freemium model
The above hypothesis answers a very important question about monetization strategy for
products. A completely free product shall attract more consumers and hence should be adopted by
products which have a large target userbase. However, for the products that has a much smaller
target userbase, instead of adopting time based freemium, feature oriented freemium should be
used to gain a large amount of market share.
3.1 3.2
2.6 2.5 2.8
2.6 2.9
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Office Tools Online Storage Music Player Email Client Dic\onary Game Text Message
Average Ra
)ng
Average Ra)ng of Each Product Category
14 | P a g e
ii. Advertisements sold alongside products do not act as a potential adoption barrier for users.
A major point of debate between marketers and product developers is whether users see
advertisement offered along with product as a barrier to adoption for products. Even though the
experiment does not establish the optimum level of advertisement for a product or the type of
advertisements that go best with products without alienating users; It establishes the fact that users
do not get alienated by just the notion of advertisement with a product. However, the exact level
and forms of the same need to be determined by a future experiment.
iii. Time based freemium products are the least attractive among the three forms presented.
Users perceive time based freemium as the worst form of products; given all other features are the
same. Hence a company should avoid going with a time based freemium or have a longer trial
period. Another potential way of looking at this is to avoid explicitly mentioning the duration of
the trial period which some existing products like WhatsApp4 do. A further area of research along
this hypothesis can be focused on determining the optimum duration fo trial period different
product types.
iv. Users are generally unwilling to pay for the products that are traditionally sold completely free of cost.
This is a continuation form the hypothesis built from research on Price Promotions which states
that continuous price promotions reduce the price perception of users. The findings from this
experiment support this hypothesis. Products like webmail client, games and music players are
sold for free and hence they receive an inherent low rating from users.
VI. Conclusion
The work presented in this paper has been primarily focused on finding the answers of some of the
broad questions about freemium business model. Prior to this work, Freemium Business Model had
never been analyzed using the traditional behavioral economics and marketing knowledge. A lot of
the work presented in this paper has been directed towards explaining and demystifying facts and
statistics about freemium business model. The theoretical framework that has been developed to assist
the freemium model adoption decision making is expected to have a lot of practical implications. Due
to lack of time and resources, the framework could not be validated during the course of the work
presented here. The practical validation of the framework shall also help in making the framework
exhaustive to include all possibilities.
4 WhatsApp is one of the largest text messaging app for smartphones and is available across all popular smartphone platforms. It has more than 100 million users worldwide.
15 | P a g e
Finally, the hypothesis developed from the experiments on comparing Freemium with Two Platform
model form an important basis for decision making among them. It is expected to have more practical
impact as more and more advertisement money shifts from traditional media to internet and mobile
advertisement world.
VII. Future areas of research
Freemium Business Models are one of the least researched business models and hence there exists a
wide possibility for future research. This paper has taken up a very small subsection of the probable
research that can be done in this domain. Some of the most important research topics that can be
explored regarding freemium business models are:
i. Sweet Spot of Price: One of the key areas of research for any product and business model is
the determination of sweet spot of price. As more and more apps get launched, the fcus shall
shift towards finding the sweet spot of price for the products to gain maximum conversion
rates and/or user adoption
ii. Improving the price perception of users: Most of the software products/mobile applications
have been offered for free till now and this has brought down the overall price perception of
the users. Research on improvement of the price perception will be promising and important
for the growing mobile and web applications industry.
iii. Factors affecting conversion rate: Conversion rate is one of the key points of worry for any
startup venturing in the domain of freemium software. Most of the products have adoption
rates as low as 1-2%, if this can be just increased to 4-5% then that shall bring a major change
in the company’s bottom-line.
iv. Handling the high attrition rate: High attrition rate has become a major problem for the
software industry. The reducing barriers against migration are expected to increase the
attrition rate even further. Most products currently adopt an approach of hit-and-trial to
handle this problem which leads to potential revenue loss and user alienation.
v. Comparison of Freemium and Upfront pricing models: A comparison between Freemium
pricing model and Upfront pricing schemes has become imminent as more and more apps
shift from freemium and two platform models to completely paid versions.
vi. Impact of freemium as a marketing tool: Freemium has always been looked upon as a
marketing tool but the effects of freemium on product marketing have never been quantified.
vii. Analyzing in App purchases as a subsection of freemium: As mentioned in the literature
survey, In App Purchases have become the largest revenue contributors for mobile apps in the
recent years. Even though In App Purchases are generally clubbed together with Feature
16 | P a g e
based freemium, they are an altogether different area of research as these purchases are not
just mere up-gradation of the product.
References:
[1] D. Kahneman, ‘Prospect Theory: An Analysis of decision under risk’; The Econometric Society, 1979.
[2] D. Ariely, ‘Predictably Irrational’, Harper Collins Publishers, 2009.
[3] N. Pujol, ‘Freemium: Attributes of an emerging business model’, Pujol Enterprises LLC, December
2010.
[4] N. Pujol, ‘Challenges specific to Freemium and Two Sided markets’, Pujol Enterprises LLC, December
2011.
[5] C. Anderson, ‘Free! Why $0.00 is the future of business’, Wired Magazine, 2008
[6] M. Butler, ‘Android: Changing the Mobile Landscape’, IEEE CS
[7] J. Laugesen, Y. Yuan, ‘What factors contributed to success of Apple’s iPhone’, Ninth Global Mobility
Roundtable, 2010
[8] U. Shmilovici, ‘ The Complete Guide to Freemium Business Models’, Source:
http://techcrunch.com/2011/09/04/complete-guide-freemium/
[9] J. Maltz, D. Barney, ‘Should your startup go Freemium’, November 2012, Source:
http://techcrunch.com/2012/11/04/should-your-startup-go-freemium/
[10] Y. Liu, P. Yuan, G. Zhou, ‘A Study of Pricing Strategy for Mobile Internet Service using Clickstream
Data’, IEEE, 2010.
[11] K.J Bekkelund, ‘Succeeding with Freemium’, March 2011
[12] L.Murphy, ‘The Reality of Freemium in SaaS’, 16 Ventures
[13] C. Shapiroa, ‘Optimal Pricing of Experience Goods’, Bell Journal of Economics, Vol 2, No. 14, 1983
[14] Apple Inc , ‘App Store tops 40 billion downloads with almost half in 2012’, Source:
http://www.apple.com/in/pr/library/2013/01/07App-Store-Tops-40-Billion-Downloads-with-Almost-Half-
in-2012.html
[15] J. Koetsier, ‘Google Play will hit a million apps in June (probably sooner than the iOS app store)’
Source:http://venturebeat.com/2013/01/04/google-play-will-hit-a-million-apps-in-2013-probably-sooner-
than-the-ios-app-store/
[16] C. Anderson, ‘Free: The future of a radical price’, Hyperon Publishers, 2010.
[17] ‘Internet Users in the world’, Source: ‘http://www.internetworldstats.com/stats.htm’ and Ericsson,
‘Traffic and Market Report Data’, November 2011
[18] Ericsson, ‘Traffic and Market Report Data’, November 2011.
[19] Team NextBig What, ‘Smartphone Users In India Now Spend More Time On Content Than Voice OR
SMS’, Source: http://www.nextbigwhat.com/smartphone-users-in-india-297/
[20] D. Etherington, ‘New Reports Claim The iOS App Store Will Gain 435K New Apps In 2013, But Most
Apps Go Unnoticed’ , Source: www.techcrunch.com/2013/01/22/new-reports-claim-the-ios-app-store-
will-gain-435k-new-apps-in-2013-but-most-apps-go-unnoticed/
17 | P a g e
[21] Z. Lutz, ‘Google Play hits 25 billion app downloads, holds celebratory yard sale with $0.25 games’,
Source: http://www.engadget.com/2012/09/26/google-play-hits-25-billion-app-downloads/
[22] R. Empson, ‘Report: Market For Paid Apps Hits $8B In 2012, While Average Revenue Per App Drops
27%’ , Source: http://techcrunch.com/2013/01/22/report-market-for-paid-apps-hits-8b-in-2012-while-
average-revenue-per-app-drops-27/
[23] N. Lomas , ‘ABI: Tablets Will Take A 35%, $8.8BN App Revenue Share This Year — Passing
Smartphones By 2018’ , Source: http://techcrunch.com/2013/03/12/abi-tablets-will-take-a-35-8-8bn-
app-revenue-share-this-year-passing-smartphones-by-2018/?source=email_rt_mc_body
[24] R. Empson, ‘Report: Market For Paid Apps Hits $8B In 2012, While Average Revenue Per App Drops
27%’ , Source: http://techcrunch.com/2013/01/22/report-market-for-paid-apps-hits-8b-in-2012-while-
average-revenue-per-app-drops-27/
[25] S. Dover, ‘Study: Number of smartphone users tops 1 billion’, CBS News, Source:
http://www.cbsnews.com/8301-205_162-57534583/study-number-of-smartphone-users-tops-1-billion/
[26] K. Shampan’er and D. Ariely, ‘Zero as a special price: The true value of free products’ , MIT
[27] K. Pauwels, D.M Hanssens, S. Siddharth; ‘The Long term effects of price promotion on Category
Incidence, Brand Choice and Purchase Quantity’; Journal of Marketing Research, Vol. 39, Nov. 2002.
[28] M.U. Kalwani, C.K Yim; ‘Consumer Price and Promotion Expectations: An experimental study’;
Journal of Marketing Research, Vol. 29, Feb 1992.
[29] D. Grewal, K.B Monroe, R. Krishnan; ’The effects of price comparison advertising on buyers’
perception of Acquisition Value, Transaction Value and Behavioral Intentions’, Journal of Marketing,
Vol. 62, American Marketing Association, April 1998.
[30] S.E Needleman, ‘When Freemium Fails’, Wall Street Journal,
Source:http://online.wsj.com/article/SB10000872396390443713704577603782317318996.html
[31] T.V Agten, ‘The Impact Of Price Changes’ , Distimo Publication, January 2013
[32] S. Perez, ‘In-App Purchase Revenue Hits Record High: Accounts For 76% Of U.S. iPhone App
Revenue, 90% In Asian Markets’, Source: http://techcrunch.com/2013/03/28/in-app-purchase-revenue-
hits-record-high-accounts-for-76-of-u-s-iphone-app-revenue-90-in-asian-markets/