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Freemium pricing: Evidence from a large-scale field experiment

Author

Listed:
  • Julian Runge,

    (School of Business and Economics, Humboldt University Berlin)

  • Stefan Wagner

    (ESMT European School of Management and Technology)

  • Jörg Claussen

    (School of Business Administration, Ludwig-Maximilians-University Munich)

  • Daniel Klapper

    (School of Business and Economics, Humboldt University Berlin)

Abstract

Firms commonly run field experiments to improve their freemium pricing schemes. However, they often lack a framework for analysis that goes beyond directly measurable outcomes and focuses on longer term profit. We aim to fill this gap by structuring existing knowledge on freemium pricing into a stylized framework. We apply the proposed framework in the analysis of a field experiment that contrasts three variations of a freemium pricing scheme and comprises about 300,000 users of a software application. Our findings indicate that a reduction of free product features increases conversion as well as viral activity, but reduces usage – which is in line with the framework’s predictions. Additional back-of-the-envelope profit estimations suggest that managers were overly optimistic about positive externalities from usage and viral activity in their choice of pricing scheme, leading them to give too much of their product away for free. Our framework and its exemplary application can be a remedy.

Suggested Citation

  • Julian Runge, & Stefan Wagner & Jörg Claussen & Daniel Klapper, 2016. "Freemium pricing: Evidence from a large-scale field experiment," ESMT Research Working Papers ESMT-16-06, ESMT European School of Management and Technology.
  • Handle: RePEc:esm:wpaper:esmt-16-06
    as

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    File URL: http://static.esmt.org/publications/workingpapers/ESMT-16-06.pdf
    File Function: First version, 2016
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    References listed on IDEAS

    as
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    4. Arthur Campbell, 2013. "Word-of-Mouth Communication and Percolation in Social Networks," American Economic Review, American Economic Association, vol. 103(6), pages 2466-2498, October.
    5. Klaus M. Schmidt & Martin Spann & Robert Zeithammer, 2015. "Pay What You Want as a Marketing Strategy in Monopolistic and Competitive Markets," Management Science, INFORMS, vol. 61(6), pages 1217-1236, June.
    6. Hilary, Gilles & Hsu, Charles & Segal, Benjamin & Wang, Rencheng, 2016. "The bright side of managerial over-optimism," Journal of Accounting and Economics, Elsevier, vol. 62(1), pages 46-64.
    7. Sinan Aral & Dylan Walker, 2011. "Creating Social Contagion Through Viral Product Design: A Randomized Trial of Peer Influence in Networks," Management Science, INFORMS, vol. 57(9), pages 1623-1639, February.
    8. Chiou, Lesley & Tucker, Catherine, 2013. "Paywalls and the demand for news," Information Economics and Policy, Elsevier, vol. 25(2), pages 61-69.
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    Keywords

    freemium; pricing; digitization; field experimentation;

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