Converting freemium customers from free to premium—the role of the perceived premium fit in the case of music as a serviceElectronic Markets

About

Authors
Thomas M. Wagner, Alexander Benlian, Thomas Hess
Year
2014
DOI
10.1007/s12525-014-0168-4
Subject
Computer Science Applications / Economics and Econometrics / Business and International Management / Management of Technology and Innovation / Marketing

Text

SPECIALTHEME

Converting freemium customers from free to premium—the role of the perceived premium fit in the case of music as a service

Thomas M. Wagner & Alexander Benlian & Thomas Hess

Received: 30 May 2013 /Accepted: 1 October 2014 /Published online: 29 October 2014 # Institute of Information Management, University of St. Gallen 2014

Abstract Freemium seems to be a promising solution for content providers to earn money now that Web 2.0 users feel entitled to free services and content services like Spotify generally accept this concept. Providers using freemium offer their service in free basic and paid premium versions. To prompt users to pay, a free version has fewer functions.

However, no studies have yet investigated whether limiting features is the best strategy for converting users into paying customers, and, if so, how many functional differences there should be between free and premium versions. Therefore, our study aims to measure whether a free service’s limitations impact the evaluation of free and premium versions.

Drawing on the Dual Mediation Hypothesis and the

Elaboration Likelihood Model, we examined 317 freemium users’ survey responses. Our results indicate that companies providing freemium services can increase the probability of user conversion by providing a strong functional fit between their free and premium services.

Keywords Freemium . Feature limitations . Conversion .

Dual mediation hypothesis

JEL classification L11 . L82

Introduction

The freemium concept dates back to the 1980s when software firms like Adobe started to publish software in “light” versions. These sharewares, or cripplewares, did not include all the functionalities and were free of charge. A registration key was required to gain access to all the features. Today, various internet services are based on the freemiummodel: In the early 2000s, freemail providers, such as Yahoo, offered users a free email service that was financed by advertisements. For a monthly fee, the service was advertisement-free and provided almost unlimited online storage space. In 2007, Spotify, a music as a service (MaaS) provider based in Sweden started off using the freemium revenue model. User can listen to almost every song available by using the basic, free version of the service. However, acoustic and visual commercials interrupt the music. Paying customers have several advantages: no advertising, a better sound quality, and the service is available on (offline) mobile devices (Dörr et al. 2010; IFPI 2012). In the communication market, providers such as Skype also offer freemium services: Skype users can use the program’s basic features, such as voice over IP for video and audio calls free of charge. Nevertheless, users can also pay for premium features, such as phone calls, conference calls, or

SMSs. Cloud storages, like Dropbox, offer users two gigabytes of online storage space for free; paying customers can use up to 500 gigabytes. Even the gaming industry has discovered that freemium is a promising revenue model. In

Free2Play games, users can play a game for free, but have to buy virtual currency during their games to acquire time advantages, to purchase items to build a more sophisticated character, or access other features that increase the game experience. All the services and products described limit their free version to just the core features, while the full list of features is available at a fee. However, today’s software industry providers specifically follow a different approach to attract users: they are offered a free trial period to test software

Responsible Editors: Jan Marco Leimeister and Hubert Österle

T. M. Wagner (*)

Ludwigstr. 28, 80539 Munich, Germany e-mail: thomas.wagner@bwl.lmu.de

A. Benlian

Information Systems & E-Services, Technische Universität

Darmstadt, Hochschulstraße 1, 64289 Darmstadt, Germany e-mail: benlian@ise.tu-darmstadt.de

T. Hess

Institute for Information Systems and New Media, University of

Munich, Ludwigstr. 28, 80539 Munich, Germany

Electron Markets (2014) 24:259–268

DOI 10.1007/s12525-014-0168-4 products like Adobe Photoshop or Microsoft Office that include the entire set of features. When the free trial period expires (e.g., after 30 or 60 days), the software is locked and the users have to purchase a registration key to gain further access. This kind of product sampling is aimed at countering the experimental good character of information products and to create awareness of these products (Shapiro and Varian 1998a, b).

Freemium has gained popularity over the past few years and seems to be the long-awaited answer to the question of how to earn money from content on the internet. As part of a business model, freemium is a revenue model for internet services that are either free of charge, or a paid version of the service allows access to premium content or features (Veit et al. 2014). Unlike the well-known software sampling strategies, the freemium model allows both free and premium versions to coexist. This differentiates freemium also from established pricing strategies of retail business like the “razor and blade” concept of Gillette, product bundles (buy one, get one for free) or freebies (buy one, get promotional materials for free). While a free razor without corresponding blades is useless for the customer, the free version of a freemium service may be sufficient for the user. This emphasizes freemium’s exclusive relatedness to internet services.

The main concept of freemium is that the paying premium users finance the non-paying users. However, several service providers also use advertisements to subsidize the free version (Anderson 2009; Dörr et al. 2010). Many freemium providers run their businesses in markets with direct network effects. In these markets, free users are of enormous value because they build the critical mass to enable these network effects.

Especially on social network sites and online games, these free users cause almost no marginal costs. In the music industry, a large customer base is able to create and share playlists over the network and therefore increases the value of the service. However, providers have to pay royalties to the music license holder for every song that a free user plays. Therefore, it is very important for music services to improve their conversion rates. In other industries, too, freemium providers have to finance their free users, which the payments of the premium users alone do not usually cover. Therefore, these providers are also interested in high conversion rates. As the examples show, the extent to which the free version’s functions are similar to that of the premium version seems to be the most critical lever for freemium providers to persuade users to the switch from the free to the premium version. However, as the examples also show, providers follow different strategies and sometimes change their strategy completely within their lifecycle. It is therefore obvious that freemium providers are still in an experimental phase with their offers and the number of free features changing over time. To our knowledge, no empirical research has yet explored the impact of free versions’ feature limitations on the evaluation of freemium services’ free and premium versions. Consequently, we pose the following question: What is the role of a free version’s premium fit in the conversion process of free users? By focusing on feature limitations’ influence on the evaluation of freemium services’ free and premium versions, we want to gain new insights into the conversion process of freemium users and derive implications for the design of freemium services’ revenue models.