Toward Sustainable Freemium Software: The Roles of User Satisfaction and Use Context

By Kim, Jongbum; Lee, Jeongho et al. | Journal of Electronic Commerce Research, January 1, 2018 | Go to article overview

Toward Sustainable Freemium Software: The Roles of User Satisfaction and Use Context


Kim, Jongbum, Lee, Jeongho, Zo, Hangjung, Journal of Electronic Commerce Research


1.Introduction

In past decades, information technology (IT) business models have been developed in parallel with the advancement of IT. With the emergence of the World Wide Web, companies who had sold software applications changed their strategy and began to provide free applications to attract users and gain revenue from advertisers. This business model was prevalent among software providers in the early 2000s. However, low advertising revenues and difficulties in retaining users and maintaining services rendered the business model difficult to sustain [Lin et al. 2013]. Software providers began to consider the possibility of charging users.

A new business model, "freemium" emerged as an alternative [Anderson 2009]. Freemium, a combination of "free" and "premium," is a business model that provides free basic features and charges for premium features. Users can access basic services without paying and can then upgrade to premium services. Software provides value that users cannot recognize until it is experienced [Shapiro and R.Varian 1999]. Therefore, offering free versions is appropriate to provide users the opportunity to experience and value software applications. Basic versions of software applications attract users who then recognize the need to use premium features [Halbheer et al. 2014]. Although freemium models focus on converting free users to paid users, providers can sustain services with less than 5 to 10% of paid users [Lyons et al. 2012]. Additionally, free users have their own role to play in the freemium model. Additional sources of advertising revenue in some freemium software applications exist, and an increased number of users cause network externality expanding the opportunities for user interactions. Companies provide referral bonuses to users to attract others who may possibly convert to paid users.

The freemium model has been adopted by most software providers and has prevailed as a leading business model. Most mobile applications using the freemium model provide various services including cloud storage, music streaming, and free-to-play games. The freemium model seems to be a long-awaited solution for software providers suffering from a sustainability problem [Wagner et al. 2014]. However, despite its popularity and suitability in the software industry, the freemium model is still challenged. For many start-ups, the model fails because of low conversion rates to paying users [Kumar 2014; Teece 2010]. This could be because some users do not want to pay for software applications. Users are accustomed to free software [Lyons et al. 2012], and some consider that all online software should be free [Lin et al. 2013]. Some companies fail to optimize their free offerings and are forced to adjust their strategy. Evernote, a note-taking software application, limited the maximum number of devices used by a user to two for the basic plan when there had been no limitation previously. The New York Times decreased the number of free articles provided on the web from 20 per month to 10 per month.

To solve the freemium model sustainability problem, researchers have investigated optimal strategies for companies and the potential factors affecting user intention to pay for premium services. Previous studies include optimal levels of free offerings [Halbheer et al. 2014; Niculescu and Wu 2014; Thomes 2013], the effect of user-touser interaction or community participation [Li et al. 2014; Oestreicher-singer and Zalmanson 2013], the effect of software service quality [Hamari et al. 2017; Hsiao and Chen 2016], the effect of differences or similarities between free and premium versions [Koch and Benlian 2016; Wagner et al. 2014], and the effect of users' mentality with respect to the freemium model [Lin et al. 2013]. However, these studies focused on a few factors instead of carefully considering the context in which users use software applications. According to the usage environment, personal characteristics, and task characteristics, a user's usage experience and its value are completely different [Chellappa and Shivendu 2005]. …

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