Faculty at Stanford Business School did a study of the “Freemium” business model which is trending now-a-days to understand more deeper layers associated with the said model.
In the “freemium” model for digital goods, a base version of a product is offered for free, while premium features are available to paying users only. The success of this model depends on converting free users to paying ones profitably, often through price promotions or “sales.” However, the impact of exposing consumers to inter-temporal price variation is uncertain. Although sales can increase short-term conversion rates, they may be harmful in the long run if consumers delay purchases until prices are low or view them as a sign of low product quality.
Researchers worked with a seller of a free-to-play video game to study the impact of promotions for in-game purchases on user behavior. The researchers randomly assigned entering cohorts of users to treatment and control conditions where promotions were turned on or off, and monitored user behavior for six months, including purchases and consumption of in-game goods. They found that conversion and revenue improved in the treatment group, and they did not observe evidence of harmful inter-temporal substitution or negative inferences about quality from exposure to price variation. The researchers suggest that the zero price of the base product, combined with the complementarity between the base product and premium features, may explain these positive results. These findings may have broader implications for the positive effects of promotions in freemium contexts.