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What is the optimal combination of quality and price for free and paid versions of a digital good?

We propose a framework to examine how a profit-maximizing firm selects the quality of the free version and the price of the premium version.

Many web-enabled services, digital games, and applications for tablet computers and smartphones are available in both free and premium versions. The free version generates trial for the premium version, and both versions may be used by the firm to show third-party advertisements to consumers. We propose a framework and a model to examine how a profit-maximizing firm might optimally select the quality of the free version and the price of the premium version. The model assumes that consumer adoption and use of the free version increase with its quality and that the switching rate to the premium version is a concave function of the quality of the free version. Our analysis shows that the optimal free version has the higher of two quality levels at which the firm can achieve a target switching rate. The optimal quality of the free version is higher when it features advertising and when consumers are more price sensitive, have a higher usage rate for the free version and have a lower usage rate for the premium version. The optimal price of the premium version is lower if it carries advertising, but it is higher if the free version carries advertising and if the switchers from the free version are more price sensitive.

Why we like this project: Interesting project for apps makers looking to decide on monetization strategy for free and premium versions of the same product. It would be good to provide both funding and data for application to your apps.

Ideal fit for: App publishers willing to share data on sales performance of their apps.

Me Too26 People want to see this project happen

About the researcher
Yena Kim
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