Creating Value Through the Freemium Business Model: A Consumer Perspective

This paper develops a consumer-centric framework for creating value through the freemium business model. Goods that are commercialized through the freemium business model offer basic functionality for free and monetize users for extended use or complementary features. Compared to premium goods, freemium goods have lower barriers to adoption and allow end-users to accurately assess and act on their willingness to pay. On the other hand, convincing users to spend money on freemium goods is complicated by the positive relationship between price and perceived quality, and by the cognitive effort that is required to map willingness to pay to a menu of micro-transactions. Hypotheses are tested on a novel dataset of 391 PC games launched on the online Steam platform in 2014. Results show that freemium games enjoy 274% higher adoption rates than premium games, but yield 43% lower use rates and 94% less revenues. Revenues are positively moderated by variety in freemium games’ price menu.