Freemium strategy in the mobile app market
This study analysed whether the launch of a free version of an app helps or hurts the demand for an existing paid version.
The challenge:
Digital platforms have enabled businesses to access audiences and markets in unprecedented ways, and the “freemium” business model, a blend of a “free” and a “premium” version of a product, has gained considerable traction in the digital space. But does a free version help or hurt sales of the paid-for version, and how should developers design freemium apps to increase conversion rates?
This study analysed whether the launch of a free version of an app helps or hurts the demand for an existing paid version.
The challenge:
Digital platforms have enabled businesses to access audiences and markets in unprecedented ways, and the “freemium” business model, a blend of a “free” and a “premium” version of a product, has gained considerable traction in the digital space. But does a free version help or hurt sales of the paid-for version, and how should developers design freemium apps to increase conversion rates?
The analysis:
We used a comprehensive dataset on game apps from Apple’s App Store that tracked the launch of both the paid and the free versions of individual apps on a daily basis. We focus on apps that first had a paid version and the date when they launched the free version. That way, we can identify the effect of the launch of the free version on the paid version, that is whether a freemium strategy stimulates or hurts demand for an existing paid version. As we do not observe downloads, we use the number of ratings an app received as a proxy for demand.
The impact:
We found that, on average, across the many apps we studied, the launch of the free version did not hurt but in fact increased demand for the paid version. Accounting for app-level differences, the launch of the free version led to an 8.9% increase in the daily number of ratings. We also looked in greater detail at the factors that drive tthe success of a freemium app. We find that this hinges on striking the right balance between free and premium features. Developers must ensure that the free version remains useful and engaging while offering a compelling incentive for users to upgrade. There are three main takeaways for digital firms and app developers: a freemium strategy can increase demand for the paid version of a product; strategies are most effective for products that prior users evaluated as moderately good; and to truly benefit from a freemium strategy, firms must ensure a sufficiently large difference between the value consumers receive from the free and the paid versions to induce upgrades. In pursuit of this goal, developers should carefully consider which features should be made available for free.
