Freemium design: Optimal tier differentiation models for content platforms

Abstract

The freemium business strategy has been widely embraced by content platforms. We develop an analytical model to explore the optimal freemium strategy for a monopolistic content platform. We identify three common strategies for releasing freemium: differentiation only by content (OC model), differentiation only by advertising (OA model), and differentiation by both content and advertising (CA model). Under OC, consumers can access limited content in the free tier and full content in the paid tier while being required to view ads in both tiers. Under OA, consumers can access full content in both tiers but do not see ads in the paid tier. Under CA, consumers can access full content and remove ads in the paid tier while only being able to access limited content and being required to view ads in the free tier. Consumers are heterogeneous in the amount of content they want to consume and in the nuisance cost they perceive from viewing ads. Several factors, such as the ad revenue rate and the proportion of consumers with a high nuisance cost, have crucial effects on the optimal design of the freemium strategies. When the ad revenue rate is moderate, the equilibrium advertising intensity, subscription fee, and the amount of content in the free tier show nonmonotonic changes.