Spillover Effects and Freemium Strategy in the Mobile App Market

Management Science

51 Pages Posted: 26 Mar 2018 Last revised: 13 Apr 2022

See all articles by Yiting Deng

Yiting Deng

University College London

Anja Lambrecht

London Business School

Yongdong Liu

University College London - School of Management

Date Written: April 12, 2022

Abstract

“Freemium” whereby a basic service level is provided free of charge but consumers are charged for more advanced features has become a popular business model for firms selling digital goods. However, it is not clear whether the launch of a free version helps or hurts the demand of an existing paid version. The free version may allow consumers to sample the product before making a purchase decision and subsequently increase demand of the paid version, but it may also cannibalize demand of the paid version. We use a comprehensive data set on game apps from Apple's App Store that tracks the launch of both the paid and the free versions of individual apps on a daily level, to identify whether a freemium strategy stimulates or hurts demand of an existing paid version. We estimate the spillover effects between the free version and the paid version of the same app under a difference-in-difference framework, relying on the fact that app developers cannot predict the exact launch date of the free version of the app due to Apple’s review and approval of apps prior to release and accounting for app-level product heterogeneity. We find that the launch of a free version increases demand of the paid version of the same app. Under the main specification, if the daily number of ratings before the free version's launch is at the mean, then all else equal, the launch of the free version leads to an 8.9% increase in the daily number of ratings. We then describe multiple robustness checks. Finally, we present evidence that the results are driven by consumers sampling the free version as well as enhanced app discovery, and explore the relative importance of the two mechanisms.

Keywords: Freemium, Mobile App, Spillover Effect, Cannibalization, Sampling, Discovery

JEL Classification: C21, D12, L15, M31

Suggested Citation

Deng, Yiting and Lambrecht, Anja and Liu, Yongdong, Spillover Effects and Freemium Strategy in the Mobile App Market (April 12, 2022). Management Science, Available at SSRN: https://ssrn.com/abstract=3149550 or http://dx.doi.org/10.2139/ssrn.3149550

Yiting Deng (Contact Author)

University College London ( email )

Level 38, 1 Canada Square
London, Please Select E14 5AA
United Kingdom
2031086081 (Phone)

Anja Lambrecht

London Business School ( email )

Regent's Park
London, NW1 4SA
United Kingdom

Yongdong Liu

University College London - School of Management ( email )

Gower Street
London, WC1E 6BT
United Kingdom

HOME PAGE: http://yongdong.liu@ucl.ac.uk

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