Understanding Freemium Business Model Senior Year B.Tech Project Report

Author: Tarkeshwar Singh

Department of Electrical Engineering, IIT Gandhinagar

Project Advisor: Prof. Krishna Prasad Miyapuram Department of Computer Science and Engineering, IIT Gandhinagar

   This document has been divided into three sections: Section 1 forms the final report for

the B.Tech Project done by Mr. Tarkeshwar Singh, Final Year Undergraduate Student at

IIT Gandhinagar, Section 2 consists the detailed Literature Review done regarding the

project. Section 3 contains the questions asked as a part of the survey done for the

project.

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Section  1  

Table of Contents  

Abstract  ..................................................................................................................................................  2  

I.   Introduction  .....................................................................................................................................  2  

II.   Literature Review  ...........................................................................................................................  3  

A.   Definition and Types of Freemium  ............................................................................................  3  

B.   Factors supporting Freemium  .....................................................................................................  4  

C.   Why study Freemium Model?  ....................................................................................................  5  

III.   Applying Behavioral Economics to understand Freemium Model  ...............................................  6  

IV.   Framework for Decision Making on Freemium Model Adoption  ................................................  8  

V.   Comparing Freemium with Two Platform Models  ........................................................................  9  

A.   Experiment Structure  .................................................................................................................  9  

B.   Analysis of Data  .......................................................................................................................  11  

C.   Inference  ...................................................................................................................................  13  

VI.   Conclusion  ..................................................................................................................................  14  

VII.   Future areas of research  .............................................................................................................  15  

References:  ...........................................................................................................................................  16  

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Abstract

This paper serves as a Bachelor of Technology Project Report for the Senior Year project of Mr.

Tarkeshwar Singh, Final Year Student of IIT Gandhinagar, in the domain of business models around

the World Wide Web. The focus of this paper has been specifically towards understanding Freemium

business models.

Rigorous analysis of Freemium business models has not been taken up in course of academic research

till date. The aim of this paper is to evaluate Freemium business models with conventional marketing

and behavioral economics knowledge. Some of the most common and mystified facts about

Freemium have been explained as a part of the work being presented here. The work presented here

also develops a framework for better decision making on freemium model adoption by firms. The

paper further takes up the comparison of Freemium and Two platform models from the perspective of

users and determines the attractiveness of each towards end users.

I. Introduction

With the Apple App Store crossing 40 billion downloads in January, 2013[14] it has become

increasingly important to understand the business models that seem to work in this less than half a

decade old industry. The number of apps on the Apple App Store and Google Play is expected to be a

million each by the end of 2013[15]. Most of these applications do not have an established business

model and a lot of the companies around them go bankrupt even after having a lot of users. The most

common business model that these companies/products use is Freemium business model. Freemium

as a business model has seen a very rapid adoption in the last few decades. It can be looked upon as

the most prevalent business model among the software and mobile/web application companies.

Freemium as a business model has not been studied using a traditional framework and hence is among

the most misunderstood business models. There lies a high sense of obscurity about the pricing and

the type of freemium to use. Similarly, there has not been any research on understanding and

improving the Free-to-Premium Conversion rate for the freemium model. The aim of this paper is to

study Freemium model and its different forms. The paper further tries to use conventional sales

promotion concepts to better explain different facts about freemium and to suggest improvements in

the model. The paper also looks into the question of whether users prefer Two Platform Business

Model1 over Freemium Model for similar products.

                                                                                                                         1   Two   Platform   Business   Model   can   be   understood   as   a   business   model   in   which   a   product   has   two  customers(generally   Advertisers   and   normal   users)   and   one   of   the   customer   types(advertiser)   pays   for   the  other(normal  user).  Ex.  Google  Search,  Online  News,  etc.  

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The subsequent part of the paper has been divided into five sections: Section II contains the literature

review for the paper and explains the basics of freemium model in detail along with establishing the

importance of studying them; Section III uses traditional behavioral economics understanding to

explain the observations pertaining to freemium model. It especially invokes the existing research

around the concept of free and price based sales promotions; Section IV contains a theoretical

decision framework for freemium model adoption by a company/product; Section V takes up the

comparison between Two Platform Model and Freemium business model; Section VI contains the

conclusion about freemium models drawn on the basis of the literature review and the experiment

performed; Section VII contains the future areas of research that can be taken up regarding freemium

model.

II. Literature Review

A. Definition and Types of Freemium

The word ‘Freemium’ is made up of the words ‘Free’ and ‘Premium’. It represents a new kind of

pricing model where a version of the product is offered for free and premium version of the same

product is offered at a very high cost. The term ‘Freemium’ was coined by Fred Wilson, a Silicon

Valley Venture Capitalist in a blog post. Chris Anderson, the curator of TED2, proposes that, “At the

beginning of the twenty-first century, we are inventing a new form of free, which is not a

gimmick, a trick to shift money from one pocket to another, Instead, it is driven by an extraordinary

new ability to lower the costs of goods and services close to zero.”[16] The 21st century has seen the

marginal costs of web and software products falling so low that the many companies decided to offer

the product for free. Offering the product for free leads to quick adoption by a large number of users

and hence the product itself becomes a marketing tool. Some of the most common Freemium products

are Skype, Gmail, Flickr, WhatsApp, etc.

One of the major misconceptions regarding Freemium is confusing it with the ‘Two Platform Model’.

The ‘Two Platform Model’ is majorly advertisement oriented where the product has two customers

and one of the customer types pays for the other. The most common example of this business model is

Google Search. Freemium on the other hand is about having some of the users pay for a premium

version of the product and these users typically pay off for the rest of the users in the same customer

type. However a lot of the current high tech products use both the Freemium and Two Platform Model

simultaneously for the same product.

                                                                                                                         2  TED  is  the  company  that  organizes  and  supports  TED  talks  throughout  the  world.  

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The division between the premium and the free product in the Freemium Model can be based on

several different factors like time, feature, customer types, etc. On the basis of the literature search

done, Freemium Model can be divided primarily into five categories:

i. Time Based Freemium: In this form of Freemium, users are allowed to use the product free of

any cost for a small initial period of time and are then asked to pay for the premium version of

the product to continue using. Time based freemium is the most common and is probably the

first type of freemium ever seen. The simplest manifestation of this is in the concept of having

trial versions of products. However the last few years have seen a lot of products having a

trial version as long as 6 months to 1 year. This amount of time is sufficient for any user to

get hooked onto a product.

ii. Feature based Freemium: The major advantage of the evolution of the World Wide Web is

the ability to serve the long tail where every user has its own needs. Feature based freemium

model has seen its rise in this ability. In feature based freemium, companies offer the product

for free with few (sometimes sufficient) features to basic users and charges the users if they

need advance features. One of the most common examples of this is Skype. The major

assumption in this business model is that users once they start using the product will want the

premium features as well and that the free product will create a value perception about the

product.

iii. Customer Type Freemium: Customer type freemium generally divides the users into two

categories: basic(individual) users and enterprise users. The basic users get the product for

free whereas the enterprise users pay for the product. The basic users in this model act as a

channel of networking and marketing of the product.

iv. Seat Limited Freemium: Seat limited freemium model limits the number of accesses each user

can have. This can be understood mostly simply with the IEEE business model where

institutions can buy as many number of accesses as they want.

v. Bundling Oriented Freemium: In this kind of model, one of the products(mostly software) is

generally sold with another kind of product for free. Sometimes one of the products is offered

at a selling price lower than the cost which is then recovered by later purchases in the product.

One of the most popular products which use this model is Amazon Kindle which is sold at a

discount and is then compensated by the sales that occur through the device.

B. Factors supporting Freemium

After having laid the basic foundation about Freemium and its different types, It becomes important to

study the factors that have led to the development of the Freemium Model in the past decade.

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i. Negligible Marginal Costs: As technology advanced, the marginal cost of developing and

maintaining a software product has gone down drastically. The lower costs make it ineffective

to price the product at the marginal cost and this allows companies to be profitable with only

2-3% of users paying for the product.

ii. Low Bandwidth and Storage Cost: The cost of bandwidth usage has decreased rapidly with

the adoption of newer technologies. The storage cost has also decreased rapidly allowing the

marginal costs for most software products to go down rapidly.

iii. Lack of Marketing/Promotion Costs: One of the major components of cost for a software

product until the last decade was the marketing cost. However the launch of Apple App Store

revolutionized the way users can be reached. Users now have a known platform where they

can look for different kinds of applications/tools that they need. The pricing structure of the

App Store supported by growth of social media has reduced the cost of marketing to zero.

iv. Growth of Smart Connected Devices: The growth of smart mobile devices with large

processing power has become the backbone of the entire software industry.

C. Why study Freemium Model?

The final question that the literature review tries to address is: Why is there a need to Study Freemium

Business Model? This question can be best answered by looking at some of the statistics related to the

growth of Mobile devices and App Stores. Most of the apps developed for the mobile devices use

Freemium Model and this entire industry has been growing at a very quick rate, hence it becomes

important to study them to create a better understanding.

Growth of Smart Mobile Devices:

• Smartphones shipments formed 35% of all the mobile devices shipped in the last year.

• Worldwide mobile broadband subscriptions have exceeded 1 billion out of a total of 2 billion

broadband users worldwide[17].

• Mobile data traffic has been expected to grow with a CAGR of 60% from 2011 to 2016.18]

• An average user uses 1-2Gb data on his mobile computers followed by around 800 Mb and

600 Mb on his Tablet and smartphone respectively.[19]

• Online video and web browsing together contribute the most traffic coming from the mobile

devices. Together these contribute more than 50% of the entire traffic.[19]

• The number of mobile internet users have exceeded desktop users in both India and U.S

• Almost 40% of the smartphone users use their phones even before getting out of their

beds.[19]

• The average time users spend on their smartphones has been found to be around 2.5 hours a

day[20].

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Growth of App Stores:

• The total number of apps available for download on Apple App Store and Google play is

700,000 each with expected addition of 435,000 to Apple’s App Store in 2013.[21]

• The total no. of downloads for both the platforms collectively has exceeded 75 billion with

app store contributing 40 billion while Google Play contributed another 35 billion.[22]

• An average iPhone user downloads more than 80 apps to add to the pre-installed 20 apps

with more than 50% of these apps being absolutely free.

• The total market for paid smartphone apps has exceeded $8 billion. The average revenue for

paid apps has been found to be around $19,560.[23]

• The total revenue generated from smartphone and tablet apps(including advertisements and

in app purchases) has exceeded $25 billion out of which App Store contributes around 65%

followed by Google Play which contributes around 27%.[24]

• Average price of a paid app was found to be $2.82.[24]

III. Applying Behavioral Economics to understand Freemium Model

Freemium as a pricing model can be looked upon as an extension of Price based Sales Promotions, the

discount in this case being extended to a limit where the product becomes free. Free or Zero as a price

is treated very differently than any other price in Behavioral Economics because of the kind of

responses it evokes from the users. Hence to understand Freemium fully, it is important to understand

the power of Free as a selling tool. However, there are several other hypotheses as well, that have

been derived from traditional price based sales promotions and which can be applied to understand

freemium better. Some of the most important general observations about freemium have been

mentioned below and subsequently they have been explained with traditional knowledge about

behavioral economics and Price based Sales Promotions:

i. High Adoption Rate: All Freemium based products have seen very high number of

downloads. Google Play Store and Apple App Store both have seen together more than 75

billion downloads in the last 5 years. There are currently around 1 billion active smart mobile

devices in the world[25]. This means that every smart mobile device users has downloaded

roughly around 80 mobile apps. This phenomenon of high adoption rate for freemium

products can be best understood from the Concept of Zero Price. Renowned behavioral

economist Dan Ariely in his paper ‘Zero as a special price: The true value of free products’[26]

demonstrates how offering a product at a zero price can alter user buying behavior drastically.

The paper rigorously proves that equal amount of discounts evoke different responses if the

end result of one discount is a zero price. Whenever a user gets a product for free then the

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conscious decision making of buying/adopting the product is changed. Especially in the

mobile and PC world this becomes more prominent as there are negligible costs of

adoption(generally the network bandwidth cost). This result in users downloading a free

product instead of a better product charged at any other price.

ii. Low Conversion Rate: Freemium model has been criticized the most for having an extremely

small conversion rate to premium user. This can be explained by the following hypotheses

developed from Price Promotions:

a) ‘Permanent Effects of price promotions are almost negligible and they fail to bring

about a change in user behavior’[27];

b) ‘The price consumers expect to pay for a brand also decreases with an increase in the

observed depth of price discounts of the brand’;[28]

c) ‘There is a positive relation between advertised selling and reference price and

buyers’ internal reference price.’[29]

The above mentioned hypotheses clearly demonstrate that offering a discount does not lead to

alterations in user behavior. Further the reference price or perceived value of the product goes

down with the amount of discount offered. In case of freemium products, users expect it to be

free and because of the complexity of the product there is no clear way of creating an internal

reference price for a product. This explains why most freemium products cite extremely low

conversion rates of 2-3%[30].

iii. High Attrition Rate: The freemium products apart from an extremely small conversion rate

have a very high attrition rate. According to latest findings, more than 26% of apps

downloaded are used just once.[31] This can be explained from the fact that the users have far

too many alternatives for every product offered in the software world. Also most of the

current products being made allow users to export their data across platforms and software

tools at ease which brings down the cost of shifting to zero. Even apart from the initial drop in

number of users, most of these products see high fluctuations in the userbase. This can be

explained from the hypothesis that: ‘Price based promotions increase the non-loyal segments

of the user base and in the long run reduce the brand loyalty and value.’[28].

iv. Falling Average Price per Paid app: One of the major disadvantages of having continuous

price promotions is the reduction in the price perception of the entire product category.[29]

This makes the process of offering price promotions a self-defeating exercise. This has been

the exact observation in the case of freemium based products where offering a large number

of products for free has led to reduction of overall price of the paid apps as well over the last

few years.

v. In App Purchases forming the largest chunk: One of the most positive observations made

about the Freemium model in the last few years is the growing share of in app purchases both

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in relative and absolute terms.[32] In App purchases can be understood as buying access to

more features of a product once the user likes the basic version. The In App Purchases benefit

from the fact that they don’t suffer from price promotions of the app as they don’t fall in the

same category. Further the user develops a price perception of the product based on the

features over a fairly long period of time and then decides to buy them.

IV. Framework for Decision Making on Freemium Model Adoption

One of the key areas of freemium model research that has been untouched is the layout of a

framework that can help business decide whether freemium is the right pricing model for their

product. In this section, the required necessary attributes for a product to be able to adopt Freemium

Model has been laid out. It is important to note that the decision making factors laid out here form the

necessary but not sufficient conditions for the success of a product using Freemium model.

i. Marginal Cost of serving every free and paid user: The most important decision factor for

adoption of Freemium model is the marginal cost of serving every free and paid user. If the

marginal cost of serving every free user is not close to zero, then Freemium is not the right

pricing model for the business. Another important factor to watch out for is the cost of serving

every paid user. If the profit margin of serving every paid user is not extremely high then it

will take a very large time for the company to recover the fixed costs for the product.

ii. Complication and Newness of the Product: The major historical reason behind adoption of

Freemium model was the complete newness of the products. Most users have never seen any

product similar to the ones that were being launched and hence convincing them to pay a

price for a product was very difficult. Therefore to gain adoption by a large number of users

the companies decided to offer the product for free. However this resulted in very few users

willing to pay for the product even after using it for a long time. Hence, while adopting a

freemium model for a product a company must try to ascertain the newness of the product. If

the targeted consumer is already familiar with the product category then the company might

be better off using an upfront pricing scheme.

iii. Market Size: Freemium Model goes with the assumption that only few of the customers will

shift to being a premium user. Hence to recover the fixed costs the product must have a very

large targeted customer base.

iv. Marketing Tool: Offering a product for free has always been considered a marketing

gimmick. In the case of Freemium Model, this may not be completely true but the offered

product for free is still considered to be a marketing channel. If the company can access the

market through any other channel which can lead to product adoption by a large number of

users then adopting Freemium model might lead to loss of potential revenue.

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v. Change in delivered value with every additional user: Freemium model is most effective

when there is a value gain to every user with addition of next free or paid user. The value

gained can be in terms of Network Effect(Skype, Facebook), Increasing Conversion

Rate(Evernote), Access to enterprise customers(Gmail) and Increased sales of related

products(Amazon Kindle Fire). If there is no value addition for every new free user addition

then the cost of serving the free user will exceed the benefits resulting in the insolvency of the

company.

vi. Change in delivered value with time: Most of the successful freemium products have an

increasing value for the user with time. The free users are made to convert to paid users by

forcing them to add more value to the product for themselves and others. This decreases the

attrition rate by creating a barrier for exit for the user. Further this leads to user increasing the

internal price perception for the product and hence some of them start to shift to the paid

version of the product.

vii. Correlation between Cost Structure and Price Structure of the product: While fixing up on

the pricing frequency for a freemium model it is important to look at the cost structure of the

product. If the product has a recurring cost every fixed interval for every user, then having a

fixed one time pricing for features(or premium product) will create profitability issues in the

long run.

V. Comparing Freemium with Two Platform Models

Freemium and Two Platform Models are among the most common business models in the domain of

web and mobile application products. Both the business models have their own pros and cons and

there still has not been a clear winner among the two models. The parameters on the basis of which

these models can be compared are Average Revenue per Download, Average Lifetime Value of a

User and Average number of downloads that a product receives in each of the categories. In the scope

of the research made for this paper, only the parameter about the Average number of downloads for

the two models have been compared. The parameter Average Number of Downloads has been

translated to mean the overall likeability of the product which implies higher the user preference for a

product higher will be the number of downloads. The subsequent subsections take up in detail the

structure of the experiment and the analysis of the results.

A. Experiment Structure

To estimate the user preference between the Two Platform Model and the Freemium Model, users

were asked to rate seven different categories of products. Each of the product categories were

represented in three different forms viz. Feature based Freemium, Time Based Freemium and the Two

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Platform Model3. To make the products look similar to each other, the two platform model was made

to appear as a Freemium where apart from the products supported by advertisement there was another

version of the product without advertisement which required the user to pay an upfront cost. For the

feature based freemium products, the features were designed in such a way that they were sufficient

for an average user. The users were presented with a total of 21 questions regarding rating a product

and were asked to rate every product on a scale of 1 to 5 where 5 was the highest rating for any

product. The seven different categories were:

i. Office Tools

ii. Dictionary

iii. Online Storage

iv. Email Client

v. Music Player

vi. Text Messaging Tool

vii. Mobile Games

All the three forms for every product category had identical features to ensure that the decision

making only happens on the pricing model. In order to remove the price perception factor from

decision making, all the products were given the same price. Each of the twenty one products was

given a random fictitious name to remove the brand effects from decision making. The questions were

shuffled completely for every user to remove any kind of anchoring effect. The following is a sample

product description for each types:

Time based Freemium: Azure Office tools Software

• Word processor, Spreadsheet, Presentation Tool along with ability to sync, edit and store data

online for 1 phone, 1 tablet and 1 PC:

• Free trial for 30 days

• Rs 200 a year after that

Feature based Freemium:

Office Tools Software

• Word processor, spreadsheet , presentation tool along with ability to sync, edit and store data

online for 1 phone, 1 tablet and 1 PC

• Free without the features of sync and online storage and available for only 1 device                                                                                                                          3  The   reason  behind  adoption  of  only   feature  and   time  based   freemium  model   is  because   they  are   the  only  ones  who   target   common  users   directly.   The  other   three   types   either   require   enterprise   users(Seat   Limited  and  Customer  Type)  or  there  is  a  need  to  observe  user  behavior  for  a  longer  period  of  time(bundling  oriented).  

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• Rs 200 a year for the full package

Two Platform Model:

Office Tools Software

• Word processor, spreadsheet , presentation tool along with ability to sync, edit and store data

online for 1 phone, 1 tablet and 1 PC

• Free with Advertisement

• Rs 200 a year without advertisments

B. Analysis of Data

The survey deployed with the above structure and questions received 45 responses. The data collected

was analyzed in different ways to come up with different interpretations of it:

i. Popularity of the different forms:

The ratings collected for the seven different categories for each of the three different pricing

forms were averaged to come up with the following responses:

The most popular pricing form based on the average ratings was found to be Two Platform

Model followed by Feature based Freemium and Time Based Freemium Respectively. If the

Time and Feature based Freemium products are clubbed together to form one single

Freemium Category then the difference between the ratings of Two Platform and Freemium

Models becomes higher.

2.48  3.17  

2.72  

0  

1  

2  

3  

4  

Time  based     Two  PlaYorm  Model  

Feature  Based  

Average  Ra

)ng  

Average  Ra)ng  of  each  Pricing  Form  

Series1  

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ii. Popularity of each form for each product category:

The average of the ratings collected for each of the three forms of pricing has been displayed

in the table below:

The general trend observable from the data is that Two Platform Model has received the

highest rating followed by Feature based Freemium and Time based Freemium respectively.

The data presented above has three anomalies: a) For Office Tools product category, Time

based Freemium has a higher rating than Feature based; b) For Game product category, Time

based Freemium has a higher rating than the Feature based Freemium; c) In the Text Message

product category, Feature based Freemium and Two platform model have similar ratings. The

3.17  2.6  

0  

1  

2  

3  

4  

Two  PlaYorm  Model   Freemium  Model  

Average  Ra

)ng  

Average  Ra)ng  of  Freemium  and  Two  Pla8orm  Model  

3.1   3  

2.2   2.2  2.4   2.5  

2.3  2.5  

3.1  

2.4  2.6  

2.8  

2.3  

3.2  

3.6   3.5  

4  

2.6  

3.2  

2.9  3.1  

0  

0.5  

1  

1.5  

2  

2.5  

3  

3.5  

4  

4.5  

Office  Tools   Online  Storage  

Music  Player   Email  Client   Dic\onary   Game   Text  Message  

Average  Ra

)ng  

Average  Ra)ng  for  Each  Product  TimeBased  Freemium  Feature  Based  Freemium  Two  PlaYorm  Model  

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first anomaly can be credited to the fact that it was the first question users faced during the

survey which may have resulted in a bias of awarding higher ratings. The second anomaly can

be explained with the inherent assumption that most users complete(or can complete) all

stages of a game within the first 30 days. The third anomaly is present as the perceived

difference for the users between the two products was insignificant.

iii. Popularity of the different Categories:

While designing the experiment, a predicted probable error was that some of the categories

will intrinsically have lower ratings because of the users’ inherent anchoring effect with the

products they use frequently. Hence it is important to look at the average ratings of each of

the seven different product categories:

As can be seen from the data presented above, the products display a very wide range of

average ratings. Product categories like Game, Email Client and Music Player have the lowest

ratings which can be explained from the fact that these products are currently available for

free in the market and hence the lower ratings show the inherent bias against payment for

such products.

C. Inference The analysis of the data presented above results into validation of following hypothesis:

i. Two platform model is more attractive to users in comparison to Freemium model

The above hypothesis answers a very important question about monetization strategy for

products. A completely free product shall attract more consumers and hence should be adopted by

products which have a large target userbase. However, for the products that has a much smaller

target userbase, instead of adopting time based freemium, feature oriented freemium should be

used to gain a large amount of market share.

3.1   3.2  

2.6   2.5  2.8  

2.6  2.9  

0.0  

0.5  

1.0  

1.5  

2.0  

2.5  

3.0  

3.5  

Office  Tools   Online  Storage  Music  Player   Email  Client   Dic\onary   Game   Text  Message  

Average  Ra

)ng  

Average  Ra)ng  of  Each  Product  Category  

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ii. Advertisements sold alongside products do not act as a potential adoption barrier for users.

A major point of debate between marketers and product developers is whether users see

advertisement offered along with product as a barrier to adoption for products. Even though the

experiment does not establish the optimum level of advertisement for a product or the type of

advertisements that go best with products without alienating users; It establishes the fact that users

do not get alienated by just the notion of advertisement with a product. However, the exact level

and forms of the same need to be determined by a future experiment.

iii. Time based freemium products are the least attractive among the three forms presented.

Users perceive time based freemium as the worst form of products; given all other features are the

same. Hence a company should avoid going with a time based freemium or have a longer trial

period. Another potential way of looking at this is to avoid explicitly mentioning the duration of

the trial period which some existing products like WhatsApp4 do. A further area of research along

this hypothesis can be focused on determining the optimum duration fo trial period different

product types.

iv. Users are generally unwilling to pay for the products that are traditionally sold completely free of cost.

This is a continuation form the hypothesis built from research on Price Promotions which states

that continuous price promotions reduce the price perception of users. The findings from this

experiment support this hypothesis. Products like webmail client, games and music players are

sold for free and hence they receive an inherent low rating from users.

VI. Conclusion

The work presented in this paper has been primarily focused on finding the answers of some of the

broad questions about freemium business model. Prior to this work, Freemium Business Model had

never been analyzed using the traditional behavioral economics and marketing knowledge. A lot of

the work presented in this paper has been directed towards explaining and demystifying facts and

statistics about freemium business model. The theoretical framework that has been developed to assist

the freemium model adoption decision making is expected to have a lot of practical implications. Due

to lack of time and resources, the framework could not be validated during the course of the work

presented here. The practical validation of the framework shall also help in making the framework

exhaustive to include all possibilities.

                                                                                                                         4  WhatsApp  is  one  of  the  largest  text  messaging  app  for  smartphones  and  is  available  across  all  popular  smartphone  platforms.  It  has  more  than  100  million  users  worldwide.  

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Finally, the hypothesis developed from the experiments on comparing Freemium with Two Platform

model form an important basis for decision making among them. It is expected to have more practical

impact as more and more advertisement money shifts from traditional media to internet and mobile

advertisement world.

VII. Future areas of research

Freemium Business Models are one of the least researched business models and hence there exists a

wide possibility for future research. This paper has taken up a very small subsection of the probable

research that can be done in this domain. Some of the most important research topics that can be

explored regarding freemium business models are:

i. Sweet Spot of Price: One of the key areas of research for any product and business model is

the determination of sweet spot of price. As more and more apps get launched, the fcus shall

shift towards finding the sweet spot of price for the products to gain maximum conversion

rates and/or user adoption

ii. Improving the price perception of users: Most of the software products/mobile applications

have been offered for free till now and this has brought down the overall price perception of

the users. Research on improvement of the price perception will be promising and important

for the growing mobile and web applications industry.

iii. Factors affecting conversion rate: Conversion rate is one of the key points of worry for any

startup venturing in the domain of freemium software. Most of the products have adoption

rates as low as 1-2%, if this can be just increased to 4-5% then that shall bring a major change

in the company’s bottom-line.

iv. Handling the high attrition rate: High attrition rate has become a major problem for the

software industry. The reducing barriers against migration are expected to increase the

attrition rate even further. Most products currently adopt an approach of hit-and-trial to

handle this problem which leads to potential revenue loss and user alienation.

v. Comparison of Freemium and Upfront pricing models: A comparison between Freemium

pricing model and Upfront pricing schemes has become imminent as more and more apps

shift from freemium and two platform models to completely paid versions.

vi. Impact of freemium as a marketing tool: Freemium has always been looked upon as a

marketing tool but the effects of freemium on product marketing have never been quantified.

vii. Analyzing in App purchases as a subsection of freemium: As mentioned in the literature

survey, In App Purchases have become the largest revenue contributors for mobile apps in the

recent years. Even though In App Purchases are generally clubbed together with Feature

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based freemium, they are an altogether different area of research as these purchases are not

just mere up-gradation of the product.

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