Selling the Premium in Freemium

Abstract

The success of a freemium model depends on the number of customers who purchase the premium version in the presence of the free version. The authors investigate the strategy of extending the premium product line to spur demand for the existing premium version. Extending the results of the standard product line model is insufficient in such cases because of the conceptual nuances in a freemium context. The authors conduct a randomized field experiment with an online content provider that offers book titles in a PDF version for free and sells the paperback version for a premium. The authors show that paperback titles accompanied by an additional premium version, either in e-book or hardcover format, have higher sales than those in the control condition. The positive impact on paperback sales is stronger for titles that are more popular or cheaper, and the effect of introducing the e-book version is higher when the e-book price is closer to the paperback price. By analyzing individual customer choices, the authors identify the existence of the compromise effect and the attraction effect in the extended product line setting, a significant contribution not only in the freemium context but also to the product line literature.