Value Creation from the Freemium Business

The freemium business model has been praised by scholars and practitioners for its value creation potential. Offering initial use of digital goods free of charge, while monetizing extended use or complementary features through micro-transactions reduces barriers to adoption and allows heterogeneous consumer segments to act on their willingness-to-pay. Extant analysis of this new way of doing business has been limited and anecdotal at best. Using the consumer perspective on value creation as theoretical lens, the paper formulates a set of hypotheses on how freemium affects the adoption, usage, and monetization of digital goods (vis-à-vis premium goods). Hypotheses are tested on a novel dataset of 391 online PC games released on the Steam platform in 2014. Results from a generalized Structural Equation Model (GSEM) show that freemium has a positive direct effect on games’ downloads, and negative direct effects on games’ usage and revenues. The effect of freemium on revenues is positively moderated by the variety in the number of priced items in the game. The total effect of freemium on revenues is negative. The study makes contributions to the literatures on demand-side perspectives in strategic management and business model research.