Consumer Claims to Space in the Politics of Consumer Identity

Dr. P.K Kannan, Professor, McDonough School of Business, Georgetown University

Synopses

Freemium is a widely adopted business model in which a basic version of product is provided free of charge in order to acquire a large group of customers, and a fraction of the customer base pays a price to access a premium version with a different and/or increased functionality. The objective of this paper is to investigate how to increase the demand for the premium version in the presence of the free product. Specifically, we examine the effectiveness of extending the product line on spurring demand for the existing premium version, and investigate the underlying drivers of the effects. We conduct a randomized field experiment with a content provider, the National Academies Press (NAP), which offers a free PDF format of book titles as well as sells a paperback format of the same titles online. Overall, we show that book titles assigned with an additional premium format, either an ebook or a hardcover format, have a higher sales of paperback than those in the control condition. Second, the positive impact on paperback sales is stronger for titles which are more popular or lower in price, and the effect of introducing the ebook format is higher when the ebook price is closer to the paperback price. Finally, and equally importantly, through analyzing customer choices at the individual level, we establish the existence of compromise effect and attraction effect in the empirical setting. Based on our findings we provide specific managerial recommendations to increase the sales of premium products when a free product is available for customers.