A recent paper authored by UCL School of Management professors Yiting Deng and Yongdong Liu, along with London Business School’s Anja Lambrecht, was selected as a featured article by INFORMS Management Science Review. This research offers valuable insights for digital firms and app developers, shedding light on the often-debated question: Can a free app truly fuel the success of its paid companion?
The paper, titled “Spillover Effects and Freemium Strategy in the Mobile App Market,” delves into the intriguing dynamics of freemium business models. This study, which leverages a comprehensive data set on game apps from Apple’s App Store that tracks the launch of both the paid and the free versions of individual apps on a daily level, unveils that the introduction of a free version indeed augments the demand for its paid counterpart. The authors then provide additional evidence supporting that the effect is indeed due to the launch of the free version and unlikely to be driven primarily by other marketing actions correlated with the launch of the free version.
The findings indicate an 8.9% increase in daily ratings for the paid version post its free counterpart’s launch, taken as a proxy for sales. Instead of cannibalizing the paid version’s sales, the free version serves a dual role: acting as a taster for prospective users (sampling mechanism) and enhancing the app’s visibility in the crowded app store (discovery mechanism). The sampling mechanism implies that the effect of launching the free version is most pronounced when the information available to consumers, for example in terms of star ratings, suggests the paid version to be of medium quality. Also in line with the sampling mechanism, the authors also demonstrate that this positive impact is particularly pronounced for apps where the paid version offers distinct additional benefits, such as extra game levels, enhanced functionalities, or a broader scope of social interactions.
While the study focused predominantly on apps with separate free and paid versions, its implications are relevant for apps offering in-app purchases and extend beyond the mobile app market. For digital firms and app developers, the study offers three salient takeaways: First, it confirms that a freemium strategy can indeed increase demand for the paid version of a product. Second, the results indicate that a freemium strategy is most effective for products that prior users evaluated as moderately good. Third, the findings demonstrate that to truly benefit from a freemium strategy, firms need to ensure that the difference in utility for consumer between the free product and the paid product is sufficiently high to induce upgrades. More generally, in the modern digital ecosystem, a well-executed freemium model can lead to mutual benefits for companies and consumers.
Read the full research paper, ”Spillover Effects and Freemium Strategy in the Mobile App Market”.