Abstract
The software industry is increasingly adopting a feature-limited freemium business model that combines “free” and “premium” contents in one product, to sell its products. How to determine the optimal product quality differences between the free and premium versions of software is a central business problem facing many software vendors. In this paper, we study the optimal feature-limited freemium software strategy design, as well as the associated pricing strategies based on consumer learning and network externality effects. We propose a new consumer learning framework induced by cross-module synergies that contains both direct and indirect learning processes. By employing a two-stage mathematical theoretical model and a numerical analysis method, we gained some insights regarding the feature-limited free trial strategy design and associated pricing strategies while considering the associated trade-off between the benefits and costs of the free trial strategy. In our modeling and numerical results, consumers’ prior beliefs about the quality of premium content before the free trial, network effect intensity, and indirect learning intensity were found to be three conditions that need to be studied to examine software vendors’ management decisions. For the software industry, the quality difference between free and premium functionality or the service and price strategy for a feature-limited free trial model can be designed while considering these factors, which will provide some useful guidelines for the industry.
Highlights
Feature-limited freemium business models can be considered a special form of commercial versioning. We extended these studies by combining software versioning with the freemium business model to explore optimal software versioning and optimal freemium strategy design
By employing a two-period framework with network effects, experience-based learning, and cross-module synergies to inspect how consumer valuation learning affect the freemium strategy, this study offers a significant contribution to the existing literature on freemium business models
When the the networkeffect ef∗ ; when is weak enough, a smaller indirect learning intensity δ leads to a higher q fect is weak enough, a smaller indirect learning intensity δ leads to a higher q∗ ; the network effect is stronger than a certain threshold, a larger δ leads to a higher q∗
Summary
Publisher’s Note: MDPI stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. The software industry has grown rapidly over the past few decades. With such a development of information technology, software products are becoming more diverse and the number of users is increasing. The valuation of the global software industry went from $265.4 billion in 2010 to $356.7 billion in 2015 [1]. The development of the PC and mobile phone market has further promoted the development of the software industry
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