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Kannan Kannan

Selling the Premium in the Freemium: Impact of Product Line Extensions

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Sometimes we desire change, a break from the same, or an opportunity to fulfill different aspects of our needs. Noting that consumers seek variety, several approaches have been developed to diversify items recommended by personalized recommender systems. However, current diversification strategies operate under a one-shot paradigm–without considering the evolution of preferences due to recent consumption. Therefore, such methods often sacrifice accuracy. In the context of online media consumption, we show that by recognizing that consumption in a session is the result of a sequence of utility maximizing selections from various categories, one can increase recommendation accuracy by dynamically tailoring the diversity of suggested items to the diversity sought by the consumer. Our approach is based on a multi-category utility model that captures a consumer’s preference for different categories of content, how quickly she satiates with one category and wishes to substitute it with another, and how she trades off her own costly search efforts with selecting from a recommended list to discover new content. Taken together, these three elements allow us to characterize how an individual selects a diverse set of items to consume over the course of a session, and how likely she is to click on content recommended to her. We estimate the model using a clickstream dataset from a large media outlet and apply it to determine the most relevant content to recommend at different stages of an online session. We find that our approach generates recommendations that are on average about 10% more accurate than optimized alternatives and about 25% more accurate than those diversified using existing diversification strategies. Moreover, the proposed method recommends content with diversity that more closely matches the diversity sought by readers—exhibiting the lowest concentration-diversification bias when compared to other personalized recommender systems. Using a policy simulation, we estimate that recommending content using the proposed approach would result in visitors reading 23% additional articles at the studied website and deriving 35% higher utility. This could lead to immediate gain in revenue for the publisher and longer-term improvements in customer satisfaction and retention at the site.

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