Competing on freemium: Digital competition with network effects

Abstract

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.

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

“…How do our findings replicate to these different platforms and social features? A study by Boudreau et al (2020) documents dynamics similar to ours in the context of Apple's App Store: An increase in market‐level network effects benefitted freemium market leaders more than paid market leaders. Thus, in line with our arguments, they document that network effects are more beneficial to freemium than paid superstars.…”

“…In so doing, we contribute to our understanding of when the freemium business model works (Kumar, 2014), and how freemium strategies differ from strategies for paid products (Bapna et al, 2018; Bond et al, 2019; Eckhardt, 2016; Lee & Csaszar, 2020; Pauwels & Weiss, 2008; Rietveld, 2018; Shi et al, 2019; Tidhar & Eisenhardt, 2020). 1 Our research relates to work by Boudreau, Jeppesen, and Miric (2020) who study how a change in market‐level network effects impacts the performance of freemium versus paid market leaders. We complement their work by identifying product design features as an important—and strategic—predictor of which freemium products become market leaders.…”

Does imitation increase or decrease demand for an original product? Understanding the opposing effects of discovery and substitution

“…For instance, in the market of software or mobile apps, many products within the same niche have a similar set of prices. Indeed, in the mobile apps markets where the majority of products are free and among those that are non‐zero price, the differences in price are relatively trivial (e.g., $0.99 difference) (Boudreau, Jeppesen, & Miric, 2022). In such instances, demand is not shaped by price as much as taste‐based features or quality (Reimers & Waldfogel, 2021).…”

Platformizers, Orchestrators, and Guardians: Three Types of B2B Platform Business Models

“…Thus far, the literature on platforms and platform business models has been dominated by B2C examples, so the main theoretical arguments fit best with B2C contexts (Cennamo, 2021;Rietveld and Schilling, 2021). B2B platforms are likely to include some similar features acknowledged in the existing platform literature, such as the existence of network effects in relation to the quality and heterogeneity of complementors (Boudreau et al, 2022;McIntyre and Srinivasan, 2017), the distinctive role of a platform owner (or orchestrator) (Thomas and Ritala, 2022), and the generative value of the B2B platform and associated ecosystem (Thomas and Tee, 2022). However, there are also major differences between the two contexts.…”