Freemium Strategy in Competitive App Markets: Maintaining Profitability with Product Fit Uncertainty

Abstract

Today’s app market is highly competitive and rapidly growing. This study considers two app developers with substitutable apps and a continuum of consumers with heterogeneous preferences. Each developer decides between offering a paid app and offering a free basic app with in-app purchases. Because of product fit uncertainty, consumers are not sure about the degree of misfit between the app and their preferences, and that uncertainty can be reduced by trying the free basic app. Using a game-theoretic modeling framework, we analyze how product fit uncertainty affects competing developers’ profits and examine the scenario in which each developer offers a paid app or a free basic app with in-app purchases in a duopoly setting. The analytical results suggest that the developer can offer a free basic app for consumer learning even if the app is not underestimated. When either developer offers a free trial, the developer with the higher-quality app will prefer higher product fit uncertainty, but the one with the lower-quality app will favor lower product fit uncertainty. Additionally, as the app quality increases or consumer preferences become stronger, developers may switch the strategy depending on the reduction in product fit uncertainty caused by the free trial. Our study establishes the usefulness of the freemium strategy beyond the contexts analyzed in the literature. The results explain empirical observations of the app market and provide recommendations about the information disclosure of fit attributes in a competitive market.