Optimal Pricing of Virtual Goods with Conspicuous Features in a Freemium Model

ABSTRACT

In a freemium business model, the pricing of virtual goods with conspicuous features is a key challenge, because firms face a trade-off between increasing the total installed base and maintaining scarcity. In this study, we establish a model to facilitate this trade-off by considering a reference-based utility shift related to conspicuous consumption, and we offer the optimal pricing strategy for a monopoly firm, given different levels of snobbery. In addition, we provide guidelines for the firm on the conditions of introducing a freemium model. Our results reveal that the firm earns a growing profit by ratcheting up the premium price as the intensity of snobbery increases beyond a certain threshold, and in mild configurations, the firm earns a higher profit if it increases value discrepancy between the free and premium versions. This study contributes to theories of pricing virtual goods and may help practitioners who sell virtual goods with conspicuous features.

KEY WORDS AND PHRASES:

• Conspicuous consumption
• freemium
• online pricing
• network externality
• premium versioning
• virtual goods

Acknowledgments

We are grateful to Dr. Vladimir Zwass, the Editor-in-Chief, and the two anonymous reviewers for their valuable and constructive comments and suggestions on this paper. We appreciate the support of the National Natural Science Foundation of China under Grants 71572155 and 71490722.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China: [Grant Number 71490722, 71572155].

Notes on contributors

Wei Geng

WEI GENG ([email protected]; corresponding author) is an associate professor at the School of Economics and Management, Southwest Jiaotong University, China. He received his Ph.D. in Management Science and Engineering from the Department of Industrial Engineering, Tsinghua University, China. His research interests include network economics and human mobility. His papers have appeared in Scientific Reports, Omega, International Journal of Production Economics, and other journals.

Zuguang Chen

ZUGUANG CHEN ([email protected]) is a Ph.D. candidate at the School of Economics and Management, Southwest Jiaotong University. He received his master’s degree from the School of Public Affairs, Chongqing University, China. His research interests include the design and pricing of freemium information goods, and network economics.