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Abstract
This paper examines the effect of the freemium strategy on Google Play, an online marketplace for Android mobile applications. By analyzing a large panel data set consisting of 711 ranked mobile apps, we found that the freemium strategy is positively associated with increased sales of the paid mobile apps. Positive trial experience as represented by high review rating of the free version of a mobile app leads to higher sales of its paid version, whereas high visibility of the free version of a mobile app as represented by its product rank does not have a significant impact on the sales of its paid version. This finding suggests that although offering a free trial version is a viable way to improve the visibility of a mobile app, offering a quality free app is more important in boosting sales of the paid app. Moreover, we found that the impact of review rating is reduced when the free version is offered, or when the mobile app is a hedonic app, because consumers have the ability to experience the app themselves before purchase. These findings extend understanding of the freemium business model to include a market characterized by simultaneous intramarket competition for both the freemium and paid products and demonstrate how such dynamics may influence sales of the paid products.
Key words and phrases:
Notes
1. Mobile web refers to access to the World Wide Web from a handheld mobile device, such as a smartphone, using browser-based Internet services.
2. Google Play also offers thousands of songs, books, and movies for download; but our study focuses only on its mobile apps.
3. According to Android research site AppBrain, approximately 20,000 new apps were rolled out every month in 2012.
4. Note that the rank variable in H4b focuses on capturing the effect of product visibility (the advertising effect), and not on other consumers’ downloading behavior (because app rank is not solely dependent on the number of downloads).
5. The mobile app market is a very dynamic and competitive market; hence, we believe that a two-month period is long enough to capture the variation in our key variables without constructing a data set that is too large to analyze.
6. Note that these 704 top-grossing apps may include some of the 1,567 paid apps that made it to the top of the paid ranking list during our sample period.
7. We manually examined all 1,567 of these paid apps to determine whether they offered a free version or not.
8. Note that this is not a balanced panel, due to the fact that not all apps continuously made it to the ranking lists throughout our sample period.
9. Of these 711 apps, 489 were computed using data collected from AppBrain.com, 93 were computed from the download data published on the developers’ websites, and 129 were computed using data collected in a pilot data set.
10. We also estimated a fixed effects model. Our main results still hold. However, a fixed effects specification results in excessive collinearity (many of the control variables are dropped in a fixed effects model). Therefore, we adopted the GLS estimator.
11. Note that the data set used to test Model 2 only includes paid apps that offer a free version.
Additional information
Notes on contributors
Charles Zhechao Liu
Charles Zhechao Liu is an associate professor of information systems at the University of Texas at San Antonio. He received his Ph.D. in management information systems from the Katz Graduate School of Business, University of Pittsburgh. His research interests include the economics of information systems, technology adoption and diffusion, and standards competition in IT markets. Liu’s research has been presented at ICIS, AMCIS, WISE, and INFORMS conferences and published in such journals as MIS Quarterly, Information Systems Research, Communications of the AIS, and Communications of the ACM.
Yoris A. Au
Yoris A. Au is an associate professor of information systems and chair of the Department of Information Systems and Cyber Security at the University of Texas at San Antonio. He received his Ph.D. in information and decision sciences from the Carlson School of Management at the University of Minnesota. His research areas include the economics of information systems, information technology adoption, information systems security, mobile applications (including mobile payments), online social networks, and open source software. His research has been published in a number of leading information systems journals and presented at several conferences.
Hoon Seok Choi
Hoon Seok Choi is a fourth-year Ph.D. student in the Department of Information Systems and Cyber Security at the University of Texas at San Antonio. He received a B.A. in journalism and advertising and a B.Sc. in chemical engineering from Dankook University, South Korea, and an M.A. in advertising and marketing from the University of Leeds, United Kingdom. His research interests include mobile applications, online gaming, social media, cybersecurity (software piracy, security-related user behavior), and human-computer interaction (usability testing on prototyped IS products).