The Freemium Pricing Strategy and the Opportunity Cost of Time

Abstract

Firms are using freemium pricing strategies in many industries, including software, mobile apps, games, and streaming music and video. Freemium combines free services supported by advertising with premium services supported by subscriptions. We obtain the firm's optimal pricing strategy when consumers have private information about their opportunity costs of time. We provide conditions under which the firm will choose free only, premium only, or a combination of free and premium. With freemium, consumers choose among pricing policies. We show that both monopolists and competitive firms employ freemium pricing strategies. Competitive firms serve more customers than does a monopolist.

Keywords: Freemium, Opportunity cost of time, Pricing, Strategy, Asymmetric information, Optimal mechanism, Monopoly, Competition

JEL Classification: D4, D82, L1, L86