On The Likelihood of Acquiring a Premium Service Under Freemium and Paymium: Field and Experimental Evidence

AbstractThe freemium sales model, which offers consumers the use of a free-basic service that may later be converted to a paid-premium one, has been widely adopted in the online application industry. More recently, the alternative paymium sales method, which unlike freemium offers the basic service at a fee, has gained popularity. We examine the likelihood of acquiring the premium service under freemium and paymium by (a) analyzing real-world data (N=52,156) from a large online classified real estate service that changed its sales model from freemium to paymium, and (b) conducting a series of controlled experiments with real monetary incentives. We consistently find a greater likelihood of acquiring the premium service under paymium and premium-only methods, as compared to freemium. Examining the behavioral mechanism underlying our robust results, we find that people demand greater compensation for relinquishing a free (vs. non-free) service—beyond the trivial difference in services’ costs. Our findings advance the theoretical understanding of the role of zero (vs. non-zero) prices on consumers’ sequential choices and contribute to practical implementation of effective online sales methods.