Designing Freemium : Strategic Balancing Growth and Monetization

The Freemium business model, commonly used in digital products, has both a perpetually free but limited version and a premium version with enhanced features that requires a fee. These firms often have a referral program in which current customers get additional benefits (e.g., extra storage space) for referring friends to the firm. While this strategy allows a firm to acquire large user base at low cost, it needs to be balanced against revenue, and we examine how attractive a referral offer should be in order to encourage users to bring in new customers without dissuading them from upgrading. Since the majority of freemium customers are “free,” i.e. they do not pay, it is crucial to understand their long run value, which results from their future upgrades or upgrades by those they refer. We develop an empirical model from microfoundations, including both discrete and continuous choices, and investigate the dynamics of consumers' plan choice, usage, and referral behavior using a novel panel data set from a leading cloud-based storage service. Using counterfactual analysis, we determine the optimal balance of growth and monetization, and quantify the value of free customers