Freemium Killer Apps

Freemium products must attract a disproportionately large user base to capture value, but they are often “hit or miss”. Which freemium products are best positioned to becoming a killer app, and under what conditions? Drawing on freemium’s distinguishing features of low adoption barriers and rapid diffusion via word-of-mouth, we argue that freemium products that incorporate social functionality and are released on a platform with a large installed base have a higher probability of becoming a killer app than freemium products without such functionality and similar products that are paid. We test our hypotheses on a sample of 9,700 products released on Steam, the market-leading distribution platform for digital PC games. Our findings contribute to the literatures on business models, network effects, and digital strategy.

[1]  L. Jeppesen,et al.  Unpaid Crowd Complementors: The Platform Network Effect Mirage , 2014 .

[2]  J. Eckhardt.  Welcome contributor or no price competitor? The competitive interaction of free and priced technologies , 2016 .

[3]  M. Haenlein,et al.  Seeding as Part of the Marketing Mix: Word-of-Mouth Program Interactions for Fast-Moving Consumer Goods , 2018, Journal of Marketing.

[4]  D. Jain,et al.  Modeling the Evolution of Markets with Indirect Network Externalities: An Application to Digital Television , 1999 .

[5]  Sang Pil Han,et al.  Estimating Demand for Mobile Applications in the New Economy , 2014, Manag. Sci..

[6]  D. Teece.  Business Models, Business Strategy and Innovation , 2010 .

[7]  Bennet A. Zelner.  Using simulation to interpret results from logit, probit, and other nonlinear models , 2009 .

[8]  R. Casadesus-Masanell,et al.  Business Model Innovation and Competitive Imitation: The Case of Sponsor-Based Business Models , 2013 .

[9]  J. Heckman.  Dummy Endogenous Variables in a Simultaneous Equation System , 1977 .

[10]  Ramon Casadesus-Masanell,et al.  Strategies to Fight Ad-Sponsored Rivals , 2010 .

[11]  Harikesh S. Nair,et al.  Empirical Analysis of Indirect Network Effects in the Market for Personal Digital Assistants , 2004 .

[12]  C. Shapiro,et al.  Systems Competition and Network Effects , 1994 .

[13]  Melissa A. Schilling.  Technological Lockout: An Integrative Model of the Economic and Strategic Factors Driving Technology Success and Failure , 1998 .

[14]  G. Tellis,et al.  Growing, Growing, Gone: Cascades, Diffusion, and Turning Points in the Product Life Cycle , 2004 .

[15]  Michael A. Cusumano,et al.  Services and the Business Models of Product Firms: An Empirical Analysis of the Software Industry , 2013, Manag. Sci..

[16]  Vineet Kumar,et al.  Making "freemium" work , 2014 .

[17]  R. Amit,et al.  The fit between product market strategy and business model: implications for firm performance , 2008 .

[18]  Vijay Mahajan,et al.  The Implications of Offering Free Versions for the Performance of Paid Mobile Apps , 2017 .

[19]  E. Rogers,et al.  Diffusion of innovations , 1964, Encyclopedia of Sport Management.

[20]  Jason P. Davis,et al.  Entrepreneurial Innovation: Killer Apps in the Iphone Ecosystem , 2014 .

[21]  B. Bayus.  Forecasting sales of new contingent products: An application to the compact disc market , 1987 .

[22]  Amiya K. Basu,et al.  Indirect Network Externality Effects on Product Attributes , 2003 .

[23]  Baohong Sun,et al.  Product Strategy for Innovators in Markets with Network Effects , 2004 .

[24]  G. King,et al.  Cem: Coarsened Exact Matching in Stata , 2009 .

[25]  Samuel D. Bond,et al.  Speaking for “Free”: Word of Mouth in Free- and Paid-Product Settings , 2018, Journal of Marketing Research.

[26]  Erik Brynjolfsson,et al.  Research Commentary - Long Tails vs. Superstars: The Effect of Information Technology on Product Variety and Sales Concentration Patterns , 2010, Inf. Syst. Res..

[27]  Stefan Stremersch,et al.  The Effect of Superstar Software on Hardware Sales in System Markets , 2009 .

[28]  C. Shapiro,et al.  Network Externalities, Competition, and Compatibility , 1985 .

[29]  John T. Gourville,et al.  Payment Depreciation: The Behavioral Effects of Temporally Separating Payments from Consumption , 1998 .

[30]  Hoon Seok Choi,et al.  Effects of Freemium Strategy in the Mobile App Market: An Empirical Study of Google Play , 2014, J. Manag. Inf. Syst..

[31]  J. P. Eggers,et al.  Demand Heterogeneity in Platform Markets: Implications for Complementors , 2017, Organ. Sci..

[32]  D. J. Wu,et al.  Engineering Optimal Network Effects via Social Media Features and Seeding in Markets for Digital Goods and Services , 2013, Inf. Syst. Res..

[33]  R. Amit,et al.  Value creation in E‐business , 2001 .

[34]  G. Chow.  Tests of equality between sets of coefficients in two linear regressions (econometrics voi 28 , 1960 .

[35]  Gökhan Yildirim,et al.  App Popularity: Where in the World are Consumers Most Sensitive to Price and User Ratings? , 2018, Journal of Marketing.

[36]  Gary L. Lilien,et al.  First in, First out? The Effects of Network Externalities on Pioneer Survival , 2004 .

[37]  Fernando F. Suarez.  Battles for Technological Dominance: An Integrative Framework , 2004 .

[38]  Matthew T. Clements,et al.  Indirect Network Effects and the Product Cycle: Video Games in the U.S., 1994-2002 , 2004 .

[39]  D. J. Wu,et al.  Strategic Intellectual Property Sharing: Competition on an Open Technology Platform Under Network Effects , 2018, Inf. Syst. Res..

[40]  Kathleen M. Eisenhardt,et al.  Get Rich or Die Trying: Unpacking Revenue Model Choice Using Machine Learning and Multiple Cases , 2019, Academy of Management Proceedings.

[41]  Robert A. Peterson,et al.  Innovation Diffusion in a Dynamic Potential Adopter Population , 1978 .

[42]  Allen M. Weiss,et al.  Moving from Free to Fee: How Online Firms Market to Change Their business Model Successfully. , 2008 .

[43]  Anja Lambrecht,et al.  Spillover Effects and Freemium Strategy in the Mobile App Market , 2020, Management Sciences.

[44]  J. Nicholson,et al.  Business models and their relationship with marketing: A systematic literature review , 2013 .

[45]  Thomas R. Eisenmann,et al.  Strategies for Two Sided Markets , 2006 .

[46]  Kristina Shampanier,et al.  Zero as a Special Price: The True Value of Free Products , 2007 .

[47]  Ravi Bapna,et al.  Monetizing Freemium Communities: Does Paying for Premium Increase Social Engagement? , 2016, MIS Q..

[48]  P. K. Kannan,et al.  Selling the Premium in Freemium , 2018, Journal of Marketing.

[49]  Kevin J. Boudreau,et al.  Let a Thousand Flowers Bloom? An Early Look at Large Numbers of Software 'Apps' Developers and Patterns of Innovation , 2011, Organ. Sci..

[50]  G. Tellis,et al.  Strategic Bundling of Products and Prices: A New Synthesis for Marketing , 2002 .

[51]  P. K. Kannan,et al.  Branded Apps and Their Impact on Firm Value: A Design Perspective , 2019, Journal of Marketing Research.

[52]  Alexander Benlian,et al.  The effect of free sampling strategies on freemium conversion rates , 2017, Electron. Mark..

[53]  Harikesh S. Nair,et al.  Intertemporal price discrimination with forward-looking consumers: Application to the US market for console video-games , 2006 .

[54]  Hannes Datta,et al.  The Challenge of Retaining Customers Acquired with Free Trials , 2014 .

[55]  Kannan Srinivasan,et al.  Freemium as an Optimal Strategy for Market Dominant Firms , 2018, Mark. Sci..

[56]  Rahul Telang,et al.  Inferring App Demand from Publicly Available Data , 2013, MIS Q..

[57]  S. Stremersch,et al.  Indirect Network Effects in New Product Growth , 2007 .

[58]  Thomas E. Portegys,et al.  Technology Adoption in the Presence of Network Externalities: A Web-Based Classroom Game , 2007, INFORMS Trans. Educ..

[59]  J. Rietveld.  Creating and Capturing Value from Freemium Business Models: A Demand-Side Perspective , 2017 .

[60]  C. Bulte.  New Product Diffusion Acceleration: Measurement and Analysis , 2000 .

[61]  Geoffrey G. Parker,et al.  Two-Sided Network Effects: A Theory of Information Product Design , 2010, Manag. Sci..