Creating and capturing value from freemium business models: A demand‐side perspective

Abstract

Research Summary: While it has long been recognized that the business model can be a source of performance heterogeneity, less is known about how the business model affects consumers' perceptions about a firm's products and services. By taking a demand‐side perspective, I argue that business models create and capture value when the elements that compose a business model improve how consumers perceive a firm's products and better enable heterogeneous consumers to act on their willingness‐to‐pay. I develop theory on how the freemium business model competes with the premium business model and test hypotheses in the market for digital PC games. Results show that freemium games are played less and generate less revenues and that greater variety in games' menus of paid items is associated with higher revenues. Managerial Summary: Freemium business models are increasingly prevalent in the digital economy, yet very little is known about how freemium affects consumers' perceptions of value and their willingness‐to‐pay. In this article, I study how the freemium business model competes with the premium business model in the market for digital PC games. Results show that freemium games are played less and generate less revenues than premium games and that greater variety in games' menus of paid items is associated with higher revenues. This implies that in order to achieve competitive parity with firms operating the premium business model, firms operating the freemium business model need to create more value (e.g., through improved product quality, income from advertisements, or unlocking network externalities) or operate at lower costs.