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NOTHING IS FREE: Data-driven optimisation unlocks freemium business models’ real potential

September 18, 2018 • STRATEGY & MANAGEMENT, INNOVATION, Finance & Economics, Business Model

By Stefan Wagner and Julian Runge

In today’s digital era when the marginal cost of (re)production and distribution of products and services tend to be close to zero, freemium strategy is becoming more appealing among companies as going freemium can be an effective strategy for customer acquisition and the monetisation of their digital products. Stefan Wagner and Julian Runge present an effective approach to designing freemium business models that would maximise the business impact of a product or service.

 

Digitisation has a tremendous impact on the conduct and the economics of business as it has the power to transform virtually every step in the value chain of almost every industry. Most visibly to the public, digitisation has transformed consumer software in video and content-related industries including publishing of text, music, and videos. In particular, long-established pricing schemes are being overturned by distributing content in a digital fashion via the internet and through mobile applications (apps). Digital content and products more generally are characterised by high cost to produce the first copy or version. The marginal cost of (re)production and distribution then tend to be close to zero, however. This particular cost structure has given rise to freemium business models, i.e., hybrid pricing schemes that combine the virtues “free” and “premium”: customers are allowed to use a basic version of a product for free without any time restriction but have to pay an access fee if they want to access premium features.

 

Freemium is ubiquitous

Freemium business models are appealing for consumers. Compared to the traditional buy/sell system model, freemium allows consumers to sample a product not only for a limited period (as test versions in the buy/sell model typically do) but perpetually.

The exact specification of freemium pricing schemes depends on the product context and different examples abound. Media companies frequently implement freemium models to monetise their content on the internet. In 2011, the New York Times moved from publishing their content online for free to a freemium business model using paywalls; users exceeding the limit of 20 articles per month were required to pay for a subscription. Voice-over-IP (VoIP) services such as Skype offer VoIP calls for free but charge for premium features such as voicemail, messaging, or calling (mobile) phones. Cloud-based data storage services such as Dropbox offer a limited amount of storage for free but charge subscription fees for increased volumes. In 2015, Microsoft released apps of its MS Office Suite that allow consumers to use a set of features for free while access to the full functionality requires a subscription.



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About the Authors

Stefan Wagner is Associate Professor of Strategy and Director of PhD Studies at ESMT Berlin. Previously he was an assistant professor in the Institute of Innovation Research, Technology Management, and Entrepreneurship (INNO-tec) at the Ludwig Maximilian University of Munich, Germany. Stefan received his Habilitation in 2010 and his Doctorate in Management (summa cum laude) in 2005 from LMU.

Julian Runge is a Ph.D. candidate in business economics at Humboldt University Berlin, Germany, and was a visiting doctoral researcher at Stanford’s Graduate School of Business in 2016 and in 2017. Prior to his Ph.D., he headed the analytics and data science team of Wooga, a Berlin based mobile game developer. His research focuses on consumer behaviour in technology products, related strategic choices of firms, and predictive modelling.

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