Optimal Distinctiveness across Revenue Models: Differentiation of Paid and Free Mobile Apps

Abstract

A critical strategic choice facing firms is how to position products within market categories. The optimal distinctiveness literature highlights a fundamental trade-off in this choice: products should be distinct from other products in order to minimize competition, but similar to other products in order to build legitimacy. In an attempt to resolve mixed evidence about the optimal level of distinctiveness, research has recently begun to investigate how the distinctiveness-performance relationship varies across different contexts. We add to this debate as we link this literature with the business model literature to argue that the shape of the distinctiveness-performance relationship depends on products’ revenue models. More specifically, we argue that differences in revenue models affect customer expectations, and this leads us to predict that the distinctiveness-performance relationship varies fundamentally for paid versus free products. Within the class of free products, we further contend that the shape of the distinctiveness-performance relationship depends on whether the free product adopts a freemium revenue model. Hypotheses are tested in a sample of over 250,000 mobile apps from the Apple iOS App Store. We find an inverted U-shaped relationship for paid products and a U-shaped relationship for free products, which becomes flatter for free products using a freemium revenue model.