Understanding the Freemium Business Model

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Understanding Freemium Business Model
Senior Year B.Tech Project Report
Author: Tarkeshwar Singh
Department of Electrical Engineering, IIT Gandhinagar
Project Advisor: Prof. Krishna Prasad Miyapuram
Department of Computer Science and Engineering, IIT Gandhinagar
This document has been divided into three sections: Section 1 forms the final report for
the B.Tech Project done by Mr. Tarkeshwar Singh, Final Year Undergraduate Student at
IIT Gandhinagar, Section 2 consists the detailed Literature Review done regarding the
project. Section 3 contains the questions asked as a part of the survey done for the
project.

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Section 1
Table of Contents
Acknowledgement............................................................................................................................. 0
Abstract............................................................................................................................................. 3
I. Introduction............................................................................................................................... 3
II. Literature Review ...................................................................................................................... 4
A. Definition and Types of Freemium......................................................................................... 4
B. Factors supporting Freemium................................................................................................. 5
C. Why study Freemium Model? ................................................................................................ 6
III. Applying Behavioral Economics to understand Freemium Model........................................... 7
IV. Framework for Decision Making on Freemium Model Adoption............................................ 9
V. Comparing Freemium with Two Platform Models.................................................................... 10
A. Experiment Structure ........................................................................................................... 10
B. Analysis of Data .................................................................................................................. 12
C. Inference.............................................................................................................................. 14
VI. Conclusion........................................................................................................................... 15
VII. Future areas of research ....................................................................................................... 16
References:...................................................................................................................................... 17

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Abstract
This paper serves as a Bachelor of Technology Project Report for the Senior Year project of Mr.
Tarkeshwar Singh, Final Year Student of IIT Gandhinagar, in the domain of business models around
the World Wide Web. The focus of this paper has been specifically towards understanding Freemium
business models.
Rigorous analysis of Freemium business models has not been taken up in course of academic research
till date. The aim of this paper is to evaluate Freemium business models with conventional marketing
and behavioral economics knowledge. Some of the most common and mystified facts about
Freemium have been explained as a part of the work being presented here. The work presented here
also develops a framework for better decision making on freemium model adoption by firms. The
paper further takes up the comparison of Freemium and Two platform models from the perspective of
users and determines the attractiveness of each towards end users.
I. Introduction
With the Apple App Store crossing 40 billion downloads in January, 2013[14]
it has become
increasingly important to understand the business models that seem to work in this less than half a
decade old industry. The number of apps on the Apple App Store and Google Play is expected to be a
million each by the end of 2013[15]
. Most of these applications do not have an established business
model and a lot of the companies around them go bankrupt even after having a lot of users. The most
common business model that these companies/products use is Freemium business model. Freemium
as a business model has seen a very rapid adoption in the last few decades. It can be looked upon as
the most prevalent business model among the software and mobile/web application companies.
Freemium as a business model has not been studied using a traditional framework and hence is among
the most misunderstood business models. There lies a high sense of obscurity about the pricing and
the type of freemium to use. Similarly, there has not been any research on understanding and
improving the Free-to-Premium Conversion rate for the freemium model. The aim of this paper is to
study Freemium model and its different forms. The paper further tries to use conventional sales
promotion concepts to better explain different facts about freemium and to suggest improvements in
the model. The paper also looks into the question of whether users prefer Two Platform Business
Model1
over Freemium Model for similar products.
1
Two Platform Business Model can be understood as a business model in which a product has two
customers(generally Advertisers and normal users) and one of the customer types(advertiser) pays for the
other(normal user). Ex. Google Search, Online News, etc.

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The subsequent part of the paper has been divided into five sections: Section II contains the literature
review for the paper and explains the basics of freemium model in detail along with establishing the
importance of studying them; Section III uses traditional behavioral economics understanding to
explain the observations pertaining to freemium model. It especially invokes the existing research
around the concept of free and price based sales promotions; Section IV contains a theoretical
decision framework for freemium model adoption by a company/product; Section V takes up the
comparison between Two Platform Model and Freemium business model; Section VI contains the
conclusion about freemium models drawn on the basis of the literature review and the experiment
performed; Section VII contains the future areas of research that can be taken up regarding freemium
model.
II. Literature Review
A. Definition and Types of Freemium
The word ‘Freemium’ is made up of the words ‘Free’ and ‘Premium’. It represents a new kind of
pricing model where a version of the product is offered for free and premium version of the same
product is offered at a very high cost. The term ‘Freemium’ was coined by Fred Wilson, a Silicon
Valley Venture Capitalist in a blog post. Chris Anderson, the curator of TED2
, proposes that, “At the
beginning of the twenty-first century, we are inventing a new form of free, which is not a
gimmick, a trick to shift money from one pocket to another, Instead, it is driven by an extraordinary
new ability to lower the costs of goods and services close to zero.”[16]
The 21st
century has seen the
marginal costs of web and software products falling so low that the many companies decided to offer
the product for free. Offering the product for free leads to quick adoption by a large number of users
and hence the product itself becomes a marketing tool. Some of the most common Freemium products
are Skype, Gmail, Flickr, WhatsApp, etc.
One of the major misconceptions regarding Freemium is confusing it with the ‘Two Platform Model’.
The ‘Two Platform Model’ is majorly advertisement oriented where the product has two customers
and one of the customer types pays for the other. The most common example of this business model is
Google Search. Freemium on the other hand is about having some of the users pay for a premium
version of the product and these users typically pay off for the rest of the users in the same customer
type. However a lot of the current high tech products use both the Freemium and Two Platform Model
simultaneously for the same product.
2
TED is the company that organizes and supports TED talks throughout the world.

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The division between the premium and the free product in the Freemium Model can be based on
several different factors like time, feature, customer types, etc. On the basis of the literature search
done, Freemium Model can be divided primarily into five categories:
i. Time Based Freemium: In this form of Freemium, users are allowed to use the product free of
any cost for a small initial period of time and are then asked to pay for the premium version of
the product to continue using. Time based freemium is the most common and is probably the
first type of freemium ever seen. The simplest manifestation of this is in the concept of having
trial versions of products. However the last few years have seen a lot of products having a
trial version as long as 6 months to 1 year. This amount of time is sufficient for any user to
get hooked onto a product.
ii. Feature based Freemium: The major advantage of the evolution of the World Wide Web is
the ability to serve the long tail where every user has its own needs. Feature based freemium
model has seen its rise in this ability. In feature based freemium, companies offer the product
for free with few (sometimes sufficient) features to basic users and charges the users if they
need advance features. One of the most common examples of this is Skype. The major
assumption in this business model is that users once they start using the product will want the
premium features as well and that the free product will create a value perception about the
product.
iii. Customer Type Freemium: Customer type freemium generally divides the users into two
categories: basic(individual) users and enterprise users. The basic users get the product for
free whereas the enterprise users pay for the product. The basic users in this model act as a
channel of networking and marketing of the product.
iv. Seat Limited Freemium: Seat limited freemium model limits the number of accesses each user
can have. This can be understood mostly simply with the IEEE business model where
institutions can buy as many number of accesses as they want.
v. Bundling Oriented Freemium: In this kind of model, one of the products(mostly software) is
generally sold with another kind of product for free. Sometimes one of the products is offered
at a selling price lower than the cost which is then recovered by later purchases in the product.
One of the most popular products which use this model is Amazon Kindle which is sold at a
discount and is then compensated by the sales that occur through the device.
B. Factors supporting Freemium
After having laid the basic foundation about Freemium and its different types, It becomes important to
study the factors that have led to the development of the Freemium Model in the past decade.

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i. Negligible Marginal Costs: As technology advanced, the marginal cost of developing and
maintaining a software product has gone down drastically. The lower costs make it ineffective
to price the product at the marginal cost and this allows companies to be profitable with only
2-3% of users paying for the product.
ii. Low Bandwidth and Storage Cost: The cost of bandwidth usage has decreased rapidly with
the adoption of newer technologies. The storage cost has also decreased rapidly allowing the
marginal costs for most software products to go down rapidly.
iii. Lack of Marketing/Promotion Costs: One of the major components of cost for a software
product until the last decade was the marketing cost. However the launch of Apple App Store
revolutionized the way users can be reached. Users now have a known platform where they
can look for different kinds of applications/tools that they need. The pricing structure of the
App Store supported by growth of social media has reduced the cost of marketing to zero.
iv. Growth of Smart Connected Devices: The growth of smart mobile devices with large
processing power has become the backbone of the entire software industry.
C. Why study Freemium Model?
The final question that the literature review tries to address is: Why is there a need to Study Freemium
Business Model? This question can be best answered by looking at some of the statistics related to the
growth of Mobile devices and App Stores. Most of the apps developed for the mobile devices use
Freemium Model and this entire industry has been growing at a very quick rate, hence it becomes
important to study them to create a better understanding.
Growth of Smart Mobile Devices:
Smartphones shipments formed 35% of all the mobile devices shipped in the last year.
Worldwide mobile broadband subscriptions have exceeded 1 billion out of a total of 2 billion
broadband users worldwide[17]
.
Mobile data traffic has been expected to grow with a CAGR of 60% from 2011 to 2016.18]
An average user uses 1-2Gb data on his mobile computers followed by around 800 Mb and
600 Mb on his Tablet and smartphone respectively.[19]
Online video and web browsing together contribute the most traffic coming from the mobile
devices. Together these contribute more than 50% of the entire traffic.[19]
The number of mobile internet users have exceeded desktop users in both India and U.S
Almost 40% of the smartphone users use their phones even before getting out of their
beds.[19]
The average time users spend on their smartphones has been found to be around 2.5 hours a
day[20]
.

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Growth of App Stores:
The total number of apps available for download on Apple App Store and Google play is
700,000 each with expected addition of 435,000 to Apple’s App Store in 2013.[21]
The total no. of downloads for both the platforms collectively has exceeded 75 billion with
app store contributing 40 billion while Google Play contributed another 35 billion.[22]
An average iPhone user downloads more than 80 apps to add to the pre-installed 20 apps
with more than 50% of these apps being absolutely free.
The total market for paid smartphone apps has exceeded $8 billion. The average revenue for
paid apps has been found to be around $19,560.[23]
The total revenue generated from smartphone and tablet apps(including advertisements and
in app purchases) has exceeded $25 billion out of which App Store contributes around 65%
followed by Google Play which contributes around 27%.[24]
Average price of a paid app was found to be $2.82.[24]
III. Applying Behavioral Economics to understand Freemium Model
Freemium as a pricing model can be looked upon as an extension of Price based Sales Promotions, the
discount in this case being extended to a limit where the product becomes free. Free or Zero as a price
is treated very differently than any other price in Behavioral Economics because of the kind of
responses it evokes from the users. Hence to understand Freemium fully, it is important to understand
the power of Free as a selling tool. However, there are several other hypotheses as well, that have
been derived from traditional price based sales promotions and which can be applied to understand
freemium better. Some of the most important general observations about freemium have been
mentioned below and subsequently they have been explained with traditional knowledge about
behavioral economics and Price based Sales Promotions:
i. High Adoption Rate: All Freemium based products have seen very high number of
downloads. Google Play Store and Apple App Store both have seen together more than 75
billion downloads in the last 5 years. There are currently around 1 billion active smart mobile
devices in the world[25]
. This means that every smart mobile device users has downloaded
roughly around 80 mobile apps. This phenomenon of high adoption rate for freemium
products can be best understood from the Concept of Zero Price. Renowned behavioral
economist Dan Ariely in his paper ‘Zero as a special price: The true value of free products’[26]
demonstrates how offering a product at a zero price can alter user buying behavior drastically.
The paper rigorously proves that equal amount of discounts evoke different responses if the
end result of one discount is a zero price. Whenever a user gets a product for free then the

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conscious decision making of buying/adopting the product is changed. Especially in the
mobile and PC world this becomes more prominent as there are negligible costs of
adoption(generally the network bandwidth cost). This result in users downloading a free
product instead of a better product charged at any other price.
ii. Low Conversion Rate: Freemium model has been criticized the most for having an extremely
small conversion rate to premium user. This can be explained by the following hypotheses
developed from Price Promotions:
a) ‘Permanent Effects of price promotions are almost negligible and they fail to bring
about a change in user behavior’[27]
;
b) ‘The price consumers expect to pay for a brand also decreases with an increase in the
observed depth of price discounts of the brand’;[28]
c) ‘There is a positive relation between advertised selling and reference price and
buyers’ internal reference price.’[29]
The above mentioned hypotheses clearly demonstrate that offering a discount does not lead to
alterations in user behavior. Further the reference price or perceived value of the product goes
down with the amount of discount offered. In case of freemium products, users expect it to be
free and because of the complexity of the product there is no clear way of creating an internal
reference price for a product. This explains why most freemium products cite extremely low
conversion rates of 2-3%[30]
.
iii. High Attrition Rate: The freemium products apart from an extremely small conversion rate
have a very high attrition rate. According to latest findings, more than 26% of apps
downloaded are used just once.[31]
This can be explained from the fact that the users have far
too many alternatives for every product offered in the software world. Also most of the
current products being made allow users to export their data across platforms and software
tools at ease which brings down the cost of shifting to zero. Even apart from the initial drop in
number of users, most of these products see high fluctuations in the userbase. This can be
explained from the hypothesis that: ‘Price based promotions increase the non-loyal segments
of the user base and in the long run reduce the brand loyalty and value.’[28]
.
iv. Falling Average Price per Paid app: One of the major disadvantages of having continuous
price promotions is the reduction in the price perception of the entire product category.[29]
This makes the process of offering price promotions a self-defeating exercise. This has been
the exact observation in the case of freemium based products where offering a large number
of products for free has led to reduction of overall price of the paid apps as well over the last
few years.
v. In App Purchases forming the largest chunk: One of the most positive observations made
about the Freemium model in the last few years is the growing share of in app purchases both

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in relative and absolute terms.[32]
In App purchases can be understood as buying access to
more features of a product once the user likes the basic version. The In App Purchases benefit
from the fact that they don’t suffer from price promotions of the app as they don’t fall in the
same category. Further the user develops a price perception of the product based on the
features over a fairly long period of time and then decides to buy them.
IV. Framework for Decision Making on Freemium Model Adoption
One of the key areas of freemium model research that has been untouched is the layout of a
framework that can help business decide whether freemium is the right pricing model for their
product. In this section, the required necessary attributes for a product to be able to adopt Freemium
Model has been laid out. It is important to note that the decision making factors laid out here form the
necessary but not sufficient conditions for the success of a product using Freemium model.
i. Marginal Cost of serving every free and paid user: The most important decision factor for
adoption of Freemium model is the marginal cost of serving every free and paid user. If the
marginal cost of serving every free user is not close to zero, then Freemium is not the right
pricing model for the business. Another important factor to watch out for is the cost of serving
every paid user. If the profit margin of serving every paid user is not extremely high then it
will take a very large time for the company to recover the fixed costs for the product.
ii. Complication and Newness of the Product: The major historical reason behind adoption of
Freemium model was the complete newness of the products. Most users have never seen any
product similar to the ones that were being launched and hence convincing them to pay a
price for a product was very difficult. Therefore to gain adoption by a large number of users
the companies decided to offer the product for free. However this resulted in very few users
willing to pay for the product even after using it for a long time. Hence, while adopting a
freemium model for a product a company must try to ascertain the newness of the product. If
the targeted consumer is already familiar with the product category then the company might
be better off using an upfront pricing scheme.
iii. Market Size: Freemium Model goes with the assumption that only few of the customers will
shift to being a premium user. Hence to recover the fixed costs the product must have a very
large targeted customer base.
iv. Marketing Tool: Offering a product for free has always been considered a marketing
gimmick. In the case of Freemium Model, this may not be completely true but the offered
product for free is still considered to be a marketing channel. If the company can access the
market through any other channel which can lead to product adoption by a large number of
users then adopting Freemium model might lead to loss of potential revenue.

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v. Change in delivered value with every additional user: Freemium model is most effective
when there is a value gain to every user with addition of next free or paid user. The value
gained can be in terms of Network Effect(Skype, Facebook), Increasing Conversion
Rate(Evernote), Access to enterprise customers(Gmail) and Increased sales of related
products(Amazon Kindle Fire). If there is no value addition for every new free user addition
then the cost of serving the free user will exceed the benefits resulting in the insolvency of the
company.
vi. Change in delivered value with time: Most of the successful freemium products have an
increasing value for the user with time. The free users are made to convert to paid users by
forcing them to add more value to the product for themselves and others. This decreases the
attrition rate by creating a barrier for exit for the user. Further this leads to user increasing the
internal price perception for the product and hence some of them start to shift to the paid
version of the product.
vii. Correlation between Cost Structure and Price Structure of the product: While fixing up on
the pricing frequency for a freemium model it is important to look at the cost structure of the
product. If the product has a recurring cost every fixed interval for every user, then having a
fixed one time pricing for features(or premium product) will create profitability issues in the
long run.
V. Comparing Freemium with Two Platform Models
Freemium and Two Platform Models are among the most common business models in the domain of
web and mobile application products. Both the business models have their own pros and cons and
there still has not been a clear winner among the two models. The parameters on the basis of which
these models can be compared are Average Revenue per Download, Average Lifetime Value of a
User and Average number of downloads that a product receives in each of the categories. In the scope
of the research made for this paper, only the parameter about the Average number of downloads for
the two models have been compared. The parameter Average Number of Downloads has been
translated to mean the overall likeability of the product which implies higher the user preference for a
product higher will be the number of downloads. The subsequent subsections take up in detail the
structure of the experiment and the analysis of the results.
A. Experiment Structure
To estimate the user preference between the Two Platform Model and the Freemium Model, users
were asked to rate seven different categories of products. Each of the product categories were
represented in three different forms viz. Feature based Freemium, Time Based Freemium and the Two

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Platform Model3
. To make the products look similar to each other, the two platform model was made
to appear as a Freemium where apart from the products supported by advertisement there was another
version of the product without advertisement which required the user to pay an upfront cost. For the
feature based freemium products, the features were designed in such a way that they were sufficient
for an average user. The users were presented with a total of 21 questions regarding rating a product
and were asked to rate every product on a scale of 1 to 5 where 5 was the highest rating for any
product. The seven different categories were:
i. Office Tools
ii. Dictionary
iii. Online Storage
iv. Email Client
v. Music Player
vi. Text Messaging Tool
vii. Mobile Games
All the three forms for every product category had identical features to ensure that the decision
making only happens on the pricing model. In order to remove the price perception factor from
decision making, all the products were given the same price. Each of the twenty one products was
given a random fictitious name to remove the brand effects from decision making. The questions were
shuffled completely for every user to remove any kind of anchoring effect. The following is a sample
product description for each types:
Time based Freemium:
Azure Office tools Software
Word processor, Spreadsheet, Presentation Tool along with ability to sync, edit and store data
online for 1 phone, 1 tablet and 1 PC:
Free trial for 30 days
Rs 200 a year after that
Feature based Freemium:
Office Tools Software
Word processor, spreadsheet , presentation tool along with ability to sync, edit and store data
online for 1 phone, 1 tablet and 1 PC
Free without the features of sync and online storage and available for only 1 device
3
The reason behind adoption of only feature and time based freemium model is because they are the only
ones who target common users directly. The other three types either require enterprise users(Seat Limited
and Customer Type) or there is a need to observe user behavior for a longer period of time(bundling oriented).

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Rs 200 a year for the full package
Two Platform Model:
Office Tools Software
Word processor, spreadsheet , presentation tool along with ability to sync, edit and store data
online for 1 phone, 1 tablet and 1 PC
Free with Advertisement
Rs 200 a year without advertisments
B. Analysis of Data
The survey deployed with the above structure and questions received 45 responses. The data collected
was analyzed in different ways to come up with different interpretations of it:
i. Popularity of the different forms:
The ratings collected for the seven different categories for each of the three different pricing
forms were averaged to come up with the following responses:
The most popular pricing form based on the average ratings was found to be Two Platform
Model followed by Feature based Freemium and Time Based Freemium Respectively. If the
Time and Feature based Freemium products are clubbed together to form one single
Freemium Category then the difference between the ratings of Two Platform and Freemium
Models becomes higher.
2.48
3.17
2.72
0
1
2
3
4
Time based Two Platform
Model
Feature Based
AverageRating
Average Rating of each Pricing
Form
Series1

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ii. Popularity of each form for each product category:
The average of the ratings collected for each of the three forms of pricing has been displayed
in the table below:
The general trend observable from the data is that Two Platform Model has received the
highest rating followed by Feature based Freemium and Time based Freemium respectively.
The data presented above has three anomalies: a) For Office Tools product category, Time
based Freemium has a higher rating than Feature based; b) For Game product category, Time
based Freemium has a higher rating than the Feature based Freemium; c) In the Text Message
product category, Feature based Freemium and Two platform model have similar ratings. The
3.17
2.6
0
1
2
3
4
Two Platform Model Freemium Model
AverageRating
Average Rating of Freemium
and Two Platform Model
3.1
3
2.2 2.2
2.4
2.5
2.3
2.5
3.1
2.4
2.6
2.8
2.3
3.2
3.6
3.5
4
2.6
3.2
2.9
3.1
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
Office Tools Online
Storage
Music Player Email Client Dictionary Game Text Message
AverageRating
Average Rating for Each Product
TimeBased Freemium
Feature Based Freemium
Two Platform Model

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first anomaly can be credited to the fact that it was the first question users faced during the
survey which may have resulted in a bias of awarding higher ratings. The second anomaly can
be explained with the inherent assumption that most users complete(or can complete) all
stages of a game within the first 30 days. The third anomaly is present as the perceived
difference for the users between the two products was insignificant.
iii. Popularity of the different Categories:
While designing the experiment, a predicted probable error was that some of the categories
will intrinsically have lower ratings because of the users’ inherent anchoring effect with the
products they use frequently. Hence it is important to look at the average ratings of each of
the seven different product categories:
As can be seen from the data presented above, the products display a very wide range of
average ratings. Product categories like Game, Email Client and Music Player have the lowest
ratings which can be explained from the fact that these products are currently available for
free in the market and hence the lower ratings show the inherent bias against payment for
such products.
C. Inference
The analysis of the data presented above results into validation of following hypothesis:
i. Two platform model is more attractive to users in comparison to Freemium model
The above hypothesis answers a very important question about monetization strategy for
products. A completely free product shall attract more consumers and hence should be adopted by
products which have a large target userbase. However, for the products that has a much smaller
target userbase, instead of adopting time based freemium, feature oriented freemium should be
used to gain a large amount of market share.
3.1
3.2
2.6
2.5
2.8
2.6
2.9
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Office Tools Online Storage Music Player Email Client Dictionary Game Text Message
AverageRating
Average Rating of Each Product Category

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ii. Advertisements sold alongside products do not act as a potential adoption barrier for users.
A major point of debate between marketers and product developers is whether users see
advertisement offered along with product as a barrier to adoption for products. Even though the
experiment does not establish the optimum level of advertisement for a product or the type of
advertisements that go best with products without alienating users; It establishes the fact that users
do not get alienated by just the notion of advertisement with a product. However, the exact level
and forms of the same need to be determined by a future experiment.
iii. Time based freemium products are the least attractive among the three forms presented.
Users perceive time based freemium as the worst form of products; given all other features are the
same. Hence a company should avoid going with a time based freemium or have a longer trial
period. Another potential way of looking at this is to avoid explicitly mentioning the duration of
the trial period which some existing products like WhatsApp4
do. A further area of research along
this hypothesis can be focused on determining the optimum duration fo trial period different
product types.
iv. Users are generally unwilling to pay for the products that are traditionally sold completely
free of cost.
This is a continuation form the hypothesis built from research on Price Promotions which states
that continuous price promotions reduce the price perception of users. The findings from this
experiment support this hypothesis. Products like webmail client, games and music players are
sold for free and hence they receive an inherent low rating from users.
VI. Conclusion
The work presented in this paper has been primarily focused on finding the answers of some of the
broad questions about freemium business model. Prior to this work, Freemium Business Model had
never been analyzed using the traditional behavioral economics and marketing knowledge. A lot of
the work presented in this paper has been directed towards explaining and demystifying facts and
statistics about freemium business model. The theoretical framework that has been developed to assist
the freemium model adoption decision making is expected to have a lot of practical implications. Due
to lack of time and resources, the framework could not be validated during the course of the work
presented here. The practical validation of the framework shall also help in making the framework
exhaustive to include all possibilities.
4
WhatsApp is one of the largest text messaging app for smartphones and is available across all popular
smartphone platforms. It has more than 100 million users worldwide.

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Finally, the hypothesis developed from the experiments on comparing Freemium with Two Platform
model form an important basis for decision making among them. It is expected to have more practical
impact as more and more advertisement money shifts from traditional media to internet and mobile
advertisement world.
VII. Future areas of research
Freemium Business Models are one of the least researched business models and hence there exists a
wide possibility for future research. This paper has taken up a very small subsection of the probable
research that can be done in this domain. Some of the most important research topics that can be
explored regarding freemium business models are:
i. Sweet Spot of Price: One of the key areas of research for any product and business model is
the determination of sweet spot of price. As more and more apps get launched, the fcus shall
shift towards finding the sweet spot of price for the products to gain maximum conversion
rates and/or user adoption
ii. Improving the price perception of users: Most of the software products/mobile applications
have been offered for free till now and this has brought down the overall price perception of
the users. Research on improvement of the price perception will be promising and important
for the growing mobile and web applications industry.
iii. Factors affecting conversion rate: Conversion rate is one of the key points of worry for any
startup venturing in the domain of freemium software. Most of the products have adoption
rates as low as 1-2%, if this can be just increased to 4-5% then that shall bring a major change
in the company’s bottom-line.
iv. Handling the high attrition rate: High attrition rate has become a major problem for the
software industry. The reducing barriers against migration are expected to increase the
attrition rate even further. Most products currently adopt an approach of hit-and-trial to
handle this problem which leads to potential revenue loss and user alienation.
v. Comparison of Freemium and Upfront pricing models: A comparison between Freemium
pricing model and Upfront pricing schemes has become imminent as more and more apps
shift from freemium and two platform models to completely paid versions.
vi. Impact of freemium as a marketing tool: Freemium has always been looked upon as a
marketing tool but the effects of freemium on product marketing have never been quantified.
vii. Analyzing in App purchases as a subsection of freemium: As mentioned in the literature
survey, In App Purchases have become the largest revenue contributors for mobile apps in the
recent years. Even though In App Purchases are generally clubbed together with Feature

17 | P a g e
based freemium, they are an altogether different area of research as these purchases are not
just mere up-gradation of the product.
References:
[1] D. Kahneman, ‘Prospect Theory: An Analysis of decision under risk’; The Econometric Society, 1979.
[2] D. Ariely, ‘Predictably Irrational’, Harper Collins Publishers, 2009.
[3] N. Pujol, ‘Freemium: Attributes of an emerging business model’, Pujol Enterprises LLC, December
2010.
[4] N. Pujol, ‘Challenges specific to Freemium and Two Sided markets’, Pujol Enterprises LLC, December
2011.
[5] C. Anderson, ‘Free! Why $0.00 is the future of business’, Wired Magazine, 2008
[6] M. Butler, ‘Android: Changing the Mobile Landscape’, IEEE CS
[7] J. Laugesen, Y. Yuan, ‘What factors contributed to success of Apple’s iPhone’, Ninth Global Mobility
Roundtable, 2010
[8] U. Shmilovici, ‘ The Complete Guide to Freemium Business Models’, Source:
http://techcrunch.com/2011/09/04/complete-guide-freemium/
[9] J. Maltz, D. Barney, ‘Should your startup go Freemium’, November 2012, Source:
http://techcrunch.com/2012/11/04/should-your-startup-go-freemium/
[10] Y. Liu, P. Yuan, G. Zhou, ‘A Study of Pricing Strategy for Mobile Internet Service using Clickstream
Data’, IEEE, 2010.
[11] K.J Bekkelund, ‘Succeeding with Freemium’, March 2011
[12] L.Murphy, ‘The Reality of Freemium in SaaS’, 16 Ventures
[13] C. Shapiroa, ‘Optimal Pricing of Experience Goods’, Bell Journal of Economics, Vol 2, No. 14, 1983
[14] Apple Inc , ‘App Store tops 40 billion downloads with almost half in 2012’, Source:
http://www.apple.com/in/pr/library/2013/01/07App-Store-Tops-40-Billion-Downloads-with-Almost-Half-
in-2012.html
[15] J. Koetsier, ‘Google Play will hit a million apps in June (probably sooner than the iOS app store)’
Source:http://venturebeat.com/2013/01/04/google-play-will-hit-a-million-apps-in-2013-probably-sooner-
than-the-ios-app-store/
[16] C. Anderson, ‘Free: The future of a radical price’, Hyperon Publishers, 2010.
[17] ‘Internet Users in the world’, Source: ‘http://www.internetworldstats.com/stats.htm’ and Ericsson,
‘Traffic and Market Report Data’, November 2011
[18] Ericsson, ‘Traffic and Market Report Data’, November 2011.
[19] Team NextBig What, ‘Smartphone Users In India Now Spend More Time On Content Than Voice OR
SMS’, Source: http://www.nextbigwhat.com/smartphone-users-in-india-297/
[20] D. Etherington, ‘New Reports Claim The iOS App Store Will Gain 435K New Apps In 2013, But Most
Apps Go Unnoticed’ , Source: www.techcrunch.com/2013/01/22/new-reports-claim-the-ios-app-store-
will-gain-435k-new-apps-in-2013-but-most-apps-go-unnoticed/

18 | P a g e
[21] Z. Lutz, ‘Google Play hits 25 billion app downloads, holds celebratory yard sale with $0.25 games’,
Source: http://www.engadget.com/2012/09/26/google-play-hits-25-billion-app-downloads/
[22] R. Empson, ‘Report: Market For Paid Apps Hits $8B In 2012, While Average Revenue Per App Drops
27%’ , Source: http://techcrunch.com/2013/01/22/report-market-for-paid-apps-hits-8b-in-2012-while-
average-revenue-per-app-drops-27/
[23] N. Lomas , ‘ABI: Tablets Will Take A 35%, $8.8BN App Revenue Share This Year — Passing
Smartphones By 2018’ , Source: http://techcrunch.com/2013/03/12/abi-tablets-will-take-a-35-8-8bn-
app-revenue-share-this-year-passing-smartphones-by-2018/?source=email_rt_mc_body
[24] R. Empson, ‘Report: Market For Paid Apps Hits $8B In 2012, While Average Revenue Per App Drops
27%’ , Source: http://techcrunch.com/2013/01/22/report-market-for-paid-apps-hits-8b-in-2012-while-
average-revenue-per-app-drops-27/
[25] S. Dover, ‘Study: Number of smartphone users tops 1 billion’, CBS News, Source:
http://www.cbsnews.com/8301-205_162-57534583/study-number-of-smartphone-users-tops-1-billion/
[26] K. Shampan’er and D. Ariely, ‘Zero as a special price: The true value of free products’ , MIT
[27] K. Pauwels, D.M Hanssens, S. Siddharth; ‘The Long term effects of price promotion on Category
Incidence, Brand Choice and Purchase Quantity’; Journal of Marketing Research, Vol. 39, Nov. 2002.
[28] M.U. Kalwani, C.K Yim; ‘Consumer Price and Promotion Expectations: An experimental study’;
Journal of Marketing Research, Vol. 29, Feb 1992.
[29] D. Grewal, K.B Monroe, R. Krishnan; ’The effects of price comparison advertising on buyers’
perception of Acquisition Value, Transaction Value and Behavioral Intentions’, Journal of Marketing,
Vol. 62, American Marketing Association, April 1998.
[30] S.E Needleman, ‘When Freemium Fails’, Wall Street Journal,
Source:http://online.wsj.com/article/SB10000872396390443713704577603782317318996.html
[31] T.V Agten, ‘The Impact Of Price Changes’ , Distimo Publication, January 2013
[32] S. Perez, ‘In-App Purchase Revenue Hits Record High: Accounts For 76% Of U.S. iPhone App
Revenue, 90% In Asian Markets’, Source: http://techcrunch.com/2013/03/28/in-app-purchase-revenue-
hits-record-high-accounts-for-76-of-u-s-iphone-app-revenue-90-in-asian-markets/

Section 2
Literature Review
Business Models around ‘Free’ in the Web Space
Author: Tarkeshwar Singh
Advisor: Prof. Krishna Prasad Miyapuram

Table of Contents
Section 2 ....................................................................................................................................................... 0
1. Introduction ........................................................................................................................................... 2
2. History................................................................................................................................................... 2
2.1. The Netscape Era ........................................................................................................................... 2
2.1.1. Netscape Navigator Business Model ........................................................................................... 2
2.1.2. Yahoo and the Banner Advertising ............................................................................................. 3
2.2. The Google Era .............................................................................................................................. 4
2.2.1. Search engine war....................................................................................................................... 4
2.2.2. Webmail Client War................................................................................................................... 5
2.2.3. Google and Search oriented advertising ...................................................................................... 5
2.2.4. YouTube and the world of videos ............................................................................................... 7
2.2.5. Wikipedia and growth of Semantic Web ..................................................................................... 7
2.2.6. Growth of Open Source Software ............................................................................................... 8
2.3. Social Networking Era or the Post Facebook Era ............................................................................ 8
2.3.1. Growth of Social Networks......................................................................................................... 9
2.3.2. Smart Mobile Devices .............................................................................................................. 10
2.3.3. Growth of dedicated application stores...................................................................................... 11
3. Prevalent Business Models of each Era ................................................................................................ 12
3.1. Netscape Era: ............................................................................................................................... 12
3.2. Search Era:................................................................................................................................... 12
3.3. Social Networking Era: ................................................................................................................ 13
4. Freemium Business Model................................................................................................................... 13
4.1 Definition and Types of Freemium ............................................................................................... 13
4.2 Factors supporting Freemium ....................................................................................................... 15
4.3 Why study Freemium Model?....................................................................................................... 15
5. Traditional Price based Sales Promotions ............................................................................................. 16
6. Appendix:............................................................................................................................................ 19
6.1. Advertising Trends:.......................................................................................................................... 19

1. Introduction
The rapid growth of the semiconductor industry towards the end of the 20th
century ushered in the era of the
internet. The usage of internet became common place in most parts of the developed world by the dawn of the
21st
century. The growth of internet supported by drastically reducing costs of storage and increasing
bandwidth introduced a period which saw a dynamic shift in many industries. Some of the major sectors that
have been permanently altered due to this revolution are Entertainment, retail, publishing and advertising. The
marginal zero costs have allowed for ‘Free’ distribution of products on the internet. The initial and the
simplest business model around free involved distributing information for free and earning revenue from
selling simple advertisements. However, the later business models have become much more complicated
especially after the ‘Dot Com’ bubble of 2000, but all of these models have been designed keeping in mind
the western consumers which is a reason why most of the revenue for these firms come from the developed
nations. The rapid development of BRIC nations has created a need to tailor these business models to suit the
developing nations. Some of the existing firms like Alibabai
and Baiduii
have become immensely successful in
their local markets by doing this.
2. History
As is the case with every industry, the business models in the web have gradually evolved over the last 20
years since the arrival of Netscape Navigator browseriii
in 1994. A historic overview of the industry shall help
in understanding the way the industry has matured and thus predict the possible future models. The entire
history of the internet can be divided in three eras: The Netscape or the Pre Dot Com era, the Search Engine
Era and the Social Networking era. The subsequent sections talk about each of these eras and the greatest
success and failures of that era along with the reasons behind them.
2.1. The Netscape Era
2.1.1. Netscape Navigator Business Model
The arrival and rapid growth of Netscape had caught all the businesses by surprise including software giants
like Microsoft. The first version of the browser Netscape Navigator was launched in December, 1994. The
business model of Netscape though primarily similar to Microsoft in terms of earning revenue, is called
Hybrid Ideal Business Modeliv
. Under this business model, a firm uses existing public knowledge to develop
software which it then licenses to users and enterprises. The major problem with this business model had been
identified as the inability to create secrecy around the technology. Netscape however was the first effort in
having an open R&D instead of the earlier in house R&D models of Microsoft.
The partnerships with Sun Microsystems servers made Netscape browser a possible alternative to operating
systems based model. In response to the threatv
from Netscape, Microsoft started tied its browser Internet
Explorer for free with its operating system. Following the launch of Internet Explorer, the browser market

share of Netscape went down from 85%+ to almost zero by the end of the 20th
Century. The tough
competition from Microsoft forced Netscape to launch an open source version of their browser called Mozilla
in 1998. Netscape was later bought for $10 billion by AOL in November, 1998vi
. AOL however had changed
the revenue model from licensing to Two Platform Model where advertisements become the source of the
revenue of the company.
2.1.2. Yahoo and the Banner Advertising
Yahoo Inc(Yet Another Hierarchical Officious Oracle), was one of the earliest efforts in organizing the world
wide web. As the name suggests, Yahoo was the guide to the World Wide Web, as cited by the management
of the firm in the 10-Q filing in 1996 with SECvii
. Yahoo initiated the first form of web based advertisement
which is called ‘Banner Advertising’. Yahoo was designed as a portal from where the user can reach the
different sections. A sample of a typical yahoo page has been shown below:
The portal structure initiated the Two Platform Model where the advertisements formed the revenue source of
the company but the users were its primary customers. Yahoo was also one of the first ones to initiate
personalization in the web. By early 2000, the userbase of Yahoo had exceeded 120 million unique users per
month. The portal structure allowed Yahoo to charge the advertisers on the basis of the rankings. Even today

Yahoo is the leader of the display advertising with a total market share of 17%viii
. Yahoo with its mail and
messenger service became one of the largest email web clients. Currently, the major portion of the revenue for
Yahoo comes from the Display advertising which forms 43% ($2.1 bn) of the total revenue whereas the text
advertising forms 37% ($1.8 bn) of the total revenue.
Current Facts and trends about Yahoo and its core business:
Advertising Revenuesix
: The Company had total revenue of $4.9 billion in 2011 out of which Display
advertisements contributed $2.1 billion, search related advertising contributed $1.8 billion and other
forms of revenue contributed the rest. Mobile ad revenue for Yahoo has been estimated to be around
$125 millionx
. On average, Yahoo earn 2.5 cents per searchxi
.
Yahoo had entered into a deal with Microsoft in 2009 which made bing the search engine for Yahoo.
According to this agreement Yahoo collects 88% of all the revenue collected from search related
advertisements
Yahoo Mail had 282 million unique usersxii
in 2011. Out of these the majority of the users are from
the United States.
Flickr, the online pho sharing service owned by Yahoo has around 80 million usersxiii
worldwide.
Roughly around 4.5 million photos are uploaded daily to Flickr. Interestingly, Flickr is among the
only Freemium model based product of Yahoo that has a significant no. of paid users. The paid users
pay $25 a year and its estimated that Yahoo earns roughly around $50 million annuallyxiv
through
these subscriptions. However, Yahoo also earns through advertisements displayed on Flickr which
hasn’t been taken into account here.
2.2.The Google Era
The Dotcom brought to the foray the disadvantages of the Cost per thousand impressions model. Further the
rapid growth in the number of websites made the portal structure used by firms like Yahoo ineffective. The
user around this time wanted the ability to be able to find the exact website themselves instead of being
suggested one based on genre by the Portal. This opened up the opportunity for search engines. The use of
search engines had become common place in 1996 when Netscape signed a deal of $5 million each with five
search firms whereby each acted as the search engine for the Netscape Navigator in rotation. These five search
engines were Yahoo, Excite, Infoseek, Lycos and Magellanxv
. Around 1998, Google came up with its
innovative page rank based search which transformed the web search forever. Most of the old search engines
were either abandoned or bought by other.
2.2.1. Search engine war
One of the major happenings of the era dominated by Google, was the search engine war. Around 2000,
Google started becoming the prominent search engine for the World Wide Web. Most of the prior search
engines like Yahoo and MSN(of Microsoft) either brought out smaller search engines or paid them a fixed
revenue. But the minimalistic nature of Google search engine in contrast to MSN and Yahoo’s portal structure

became more popular. Further the page rank technique used by Google came up with better results. Gradually
Google became a monopoly in this domain. Yahoo abandoned its own search and adopted Bing in 2009.
Microsoft stopped using third party services for its search engine MSN and rebranded it to bing. Despite, the
clear monopoly of Google as a search engine, few local players like Baidu in China developed a local edge
and became a market leader there. The current market share of the search engines arexvi
:
Google: 90.5%
Yahoo(Bing): 2.9%
Baidu: 0.63%
Bing: 3.2%
Yandex: 0.35%
Others: 2.47%
2.2.2. Webmail Client War
The steep drop in the data storage prices followed by a significant increase in bandwidth triggered a cut throat
competition among the email service providers. The webmail war started with the launch of Gmail which
offered a 1GB free usage which was in steep contrast to other providers like Yahoo Mail who charged $60 a
year for 100 MBxvii
. This brought a significant change in the way email service operated. Instead of premiums
collected from users, most webmail providers now collect revenue through contextual ads. Few like Gmail
and Yahoo Mail provided unlimited storage for free. The current email client market share worldwide isxviii
:
2.2.3. Google and Search oriented advertising
Google has been among the few firms which have revolutionized multiple components of the web space so
effectively and have help significant market share in all of them. Google was founded in 1998 at Menlo Park
in California. It was the outcome of the doctoral thesis of Larry Page and Seargey Brin at Standford
University. Some of the major product categories in which Google operates are Search Engine, Web Browser,
Maps and other niche search related activity, Webmail, Web and Mobile Advertisement platforms(Adsense,

Adwords and Admobi), Social Networks and smartphone operating systems. The primary source of income
for Google is advertisements; however there are several other revenue models which the firm applies to
specific products. Insights about Google:
The major products of Google are: Search(Web, Image, Voice, Map, Video, Books, Patents, etc),
Gmail, Google Drive, Google Chrome, Android, Google Plus, Google Play, Advertising solutions like
Adsense, Adwords and AdMobi.
Annual Revenue for Google for the year 2012 was $50.2 bn. Out of this, 95% of the revenue came
from advertisers. 71% of the entire advertising revenue came from Google Websites whereas the rest
29% came from Google Network Member websites. Google has the largest market share in all forms
of online advertising viz Display, Search and Mobile.
Google owns a market share of 15.4%($2.31 bn)xix
in display ads. The mobile ad run rate of Google is
$8 bn in 2012xx
. The rest of the advertisement revenue came from search based ads.
In the search space, Google holds a monopoly with a market share of more than 90%. As of 2011, the
number of Google searches made was 1.7 trillion per yearxxi
. This combines specific searches in the
domain of maps, images, videos, books, patents, etc.
Youtube, Google’s video sharing product, has 800 million unique visitors every month. These visiors
together view 4 billion hours of videos. 72 hours of youtube video are uploaded every minute. 25% of
the youtube views come from mobile phones and youtube app is available on 400 million devicesxxii
.
The annual revenue of Youtube has been estimated at $3.6 bn for the year 2012xxiii
.
Gmail, google’s web mail service has a total of 425 million users as claimed by Googlexxiv
. It has
become the single largest webmail service provider in the world.
Google Chrome is a web browser provided for free by Google. It has a market share of 33.8%xxv
which is more than all of its rivals.
Android, is a smartphone operating system, that was developed to rival the iOS used IPhones made by
Apple. It has been activated on more than 500 million devices by September 2012. It has a market of
69.7% worldwidexxvi
. The source code for Android is available under Free and Open Source
Softwares. However to use the Android trademark, device manufacturers have to obtain the
certification from Google.
Google Play is the digital application distribution platform of Android. Google gets a share(30%) of
the revenue earned by any app that is sold via the Play store. The total no. of apps on Google Play are
more than 700,000 and has over a total of 25 billion downloads.
Adsense and Adwords are the platforms that allow user to serve ads on Google Partner Network
websites and Google websites respectively. Both of these work on a system of auctioning where users
can bid for keywords. AdMobi is the platform using which users can display mobile ads.

2.2.4. YouTube and the world of videos
YouTube, the world’s largest video sharing website was founded in 2005 by three former PayPal employees
with the features of uploading video and sharing. In October 2005, Google purchased YouTube for $1.35
billion in stock. Until 2008, the revenue from YouTube was insignificant and Google was making losses on it.
But since 2010 onwards, YouTube forms a major chunk of Google’s annual revenues. The primary way of
monetization for YouTube has been the advertisement embedded in the videos and the banner ads shown on
the website. Another minor form of monetization for YouTube is the sponsored video content. Some of the
most interesting facts and figures about YouTube arexxviixxviiixxix
:
YouTube receives more than 1 billion unique users every month
More than 4 billion hours of video are watched every month.
YouTube users upload more than 72 hours of video every minute.
In 2011, YouTube has more than 1 trillion unique views.
25% of all YouTube views come from mobile devices.
More than 1 billion video views a day come from mobile.
YouTube has a strong partner program where users get paid via the AdSense model of Google. As of
2012, YouTube has more than 1 million unique partners.
Apart from videos, YouTube has recently forayed in the domain of Movie and T.V show renting and
now competes with Netflix in the movie renting business.
YouTube has been estimated to have earned more than $3.6 billion in 2012 out of which the partners
of YouTube earned roughly around $1.2 billion.
2.2.5. Wikipedia and growth of Semantic Web
One of the most prominent trends that emerged after the Dot Com bubble was the focus on knowledge and
information sharing. This was a sudden shift from the historic concept of authored content where few people
generated the world’s entire information and majority of the users were passive consumers. Users were now
creators of information and this has been the single largest success of the World Wide Web. This growth of
semantic web had created a trend where information is expected to be free and open to all. Wikipedia is
arguably the biggest success of the Semantic Web. There are several other projects that have benefited from
the semantic web like Google Maps, YouTube, Quora, About.com etc where majority of the users create
information for free for the benefit of fellow users. According to many agencies, more than 1% of the internet
users create content actively. To put the numbers in perspective, this implies that there are more than 200
million active content creators on the internet right now.
The impact of the semantic web can only be understood by looking at some statistics about its largest
component Wikipediaxxx
:
Wikipedia has the 6th
largest number of views among all the websites worldwide.

It attracts more than 470 million unique visitors every month which is roughly 25% of all the internet
users.
There are more than 77,000 active contributors on Wikipedia working on over 22 million articles in
285 languages.
There are roughly around 5 million articles in English on Wikipedia
Wikipedia has one of the most stringent criteria of referencing content and copyright.
It also has a tiered hierarchy of content creators.
2.2.6. Growth of Open Source Software
Open Source Software has been another important aspect of the Google Era. Open Source Software had its
origin around the same time as the internet itself. But the real lift to open source was given by the launch of
Linux operating system which was a free and open rival to the Microsoft’s operating systems. The success of
Linux among the advanced computer users led to a debate between proprietary and free software. The launch
of Netscape Navigator in 1997 as a free software was another big milestone in the development of open and
free software. The source code of Netscape Navigator still forms the basis of popular web browser Mozilla.
Apache, MySQL are some of the most popular open source softwares. The Google Era saw a large adoption
of free and open source software. The open source software industry also saw a major shift where companies
like RedHat used Open source as an advantage where they established themselves as the provider of stable,
tested,s ervice ready versions of available open source software, particularly Linux. Google later came up with
its open source mobile operating system Android. The primary advantage of keeping open source is that the
R&D of the product is now done on a much larger scale and the company can make significant gains from
that. However the primary risk that comes is the lack of secrecy around the product making it easier for any
rival to enter into the market and launch a better product. The recent years have further seen a divide in
between Open Source and Free software because of several profit making companies entering into Open
Source initiatives. Free software is about having every software product for free and its developers believe in
the ideals of the semantic web where information should be free to create, consume and share. Open Source
on the other hand is about having the source code open to all. Several licenses like Creative Commons have
been created around Open Source content and software in the recent years.
2.3. Social Networking Era or the Post Facebook Era
The Post Facebook Era which is roughly the last decade has seen enormous amount of innovation in the
webspace and some of the best products and the largest companies of the web space have been founded. The
growth of mobile technology coupled with drastic increase in bandwidth has revolutionized several industries
and the life style of people.

2.3.1. Growth of Social Networks
Social networking saw its origin with websites like Friendster and MySpace which were founded in 2002 and
2003. However, it became prominent with launch of Facebook and Orkut both of which were launched in
2004. This was soon followed by a plethora of social networks with both niche areas as well as general social
networks. The most prominent social networks till today have been MySpace, Orkut, Facebook, Twitter,
LinkedIn, and Google+. Some of the major market place impacts of the growth of social networks are:
Increased data mining about the user
Change in brand marketing
Growth of peer reviewed systems and ratings
Revival of display ads
Growth of virtual gaming
Professional and educational uses of social networking
Use of social networks in social revolutions
Group based deals
However, Facebook has undoubtedly been the single most important company of this era and hence has been
studied in more detail.
Facebook: Facebook was founded in 2004 at Harvard University by Mark Zuckerberg and his friend
Eduardo Saverin. The website initially focused only on college students. In the initial years, Facebook faced
stiff competition from MySpace and Orkut but by around 2008 it had become the largest social networking
website in the world. The number of active facebook users crossed 1 billion in October, 2012. Some of the
interesting facts and figures about facebook arexxxi
:
The number of monthly and daily active users on facebook are 1.05 billion and 618 million
respectively.
The number of users who also use their mobile phone to access facebook are 680 million. Out of these
160 million only use their phones to access facebook. Most of these users belong to developing
countries like China, Brazil, etc.
The annual revenue of the company was $5.1 billion. Out of this $4.3 billion came only from
advertising. The rest of the revenue comes in the form of commissions from games hosted on
Facebook’s platform which are owned by companies like Zynga, Electronic Arts Inc, etc.
The average revenue per user of facebook is $4.12 which is significantly low in comparison to firms
like Google and Yahoo who earn $29.2 and $8 per yearxxxii
.
Facebook is the second largest player in display ads worldwide and has been credited with the revival
of the display ads after they suffered a major decline following the growth of Google.xxxiii

2.3.2. Smart Mobile Devices
The most prominent technological change of the current decade has been the growth of mobile devices in the
form of smart phones, Tablets and eReaders. With the number of mobile internet users surpassing desktop
internet users both in developed countries like USA and a developing country like India, the scale of the
impact of smartphones can be clearly understood.
Smartphones: The credit for the smartphone revolution is given to Apple and it’s most popular product
iPhone. iPhone revolutionized the mobile landscape forever. Major mobile phone giants like Nokia were
relegated as they remained stuck with feature phones. Companies like Apple and Samsung usurped the mobile
devices market. Some of the interesting facts and figures about smartphones are:
The most dominating player in mobile operating system is Andorid with 69.7% market share
followed by iOS which has a market share of 20.9%xxxiv
.
Among device makers, Samsung and Apple together hold 52% market share in the smartphone
industry.xxxv
broadband users worldwidexxxvi
.
Mobile data traffic has been expected to grow with a CAGR of 60% from 2011 to 2016.xxxvii
An average user uses 1-2Gb data on his mobile computers followed by around 800 Mb and 600 Mb
on his Tablet and smartphone respectively.xxxviii
Online video and web browsing together contribute the most traffic coming from the mobile devices.
Together these contribute more than 50% of the entire traffic.xxxix
Almost 40% of the smartphone users use their phones even before getting out of their beds.xl
The
average time users spend on their smartphones has been found to be around 2.5 hours a dayxli
.
Tablets and E Readers: Tablets too form a significant share of 10%xlii
among all the smart mobile devices
that exist currently. Even though tablets currently form a minority among the connected mobile devices, the
bigger size and a better form factors make them preferable by app developers and content creators to serve
content. The presence of tablets and eReaders has modified the book publishing industry for forever. With
majr players like Amazon in the domain, the eBooks have revolutionized the entire landscape. With its Kindle
and Kindle Fire Amazon has been the market leader in eReaders. With it’s own epublishing units where it
allows the authors to retain 70% of the royalty, Amazon has made it more convenient for authors to publish.
The publishing industry which worked upon rejections has now changed dynamically where every author can
publish now. It has also opened up several rental services where the users gets authorization to use a book
only for a fixed amount of time.

2.3.3. Growth of dedicated application stores
The growth of smart and connected mobile devices has led to the development of a new kind of platforms to
access different applications. These platform form a unique business model in themselves as they have two
customers(Two platform Business Model) and they allow one of the customers(app developers) to cater the
other. The opening of the application development has led to rapid growth of available mobile apps and hence
the spurt in the sales of smartphones. The first successful launch of the platforms from users can download
applications, music, books, movies, etc goes to Apple App Store which first originated in the form of iTunes
store which was opened to sell digital music. However after the launch of iPhones, Apple decided to open up
the application development for iOs to the entire world. This resulted in the launch of App Store in 2008. The
success of the app store can be clearly understood from the fact that in less than 6 years the number of apps
that exist on App Store has crossed 700,000 and the number of downloads have exceeded 40 billion.
Following the growth of App Store several other similar platforms emerged namely Google Play(earlier
known as Android Market), Windows Phone App Store for smartphones. Social networks like Facebook and
Google Plus also came up with their own app centers which can be used on the respective social networking
platforms. Some of the interesting statistics of this rapidly developing market are:
The total number of apps available on Apple App Store and Google play are 700,000 each with
expected addition of 435,000 to Apple’s App Store in 2013.xliii
The total no. of downloads for both the platforms collectively has exceeded 75 billion with app store
contributing 40 billion while Google Play contributed another 35 billion.xliv
An average iPhone user downloads more than 80 apps to add to the pre-installed 20 apps with more
than 50% of these apps being absolutely free.
The total market for paid smartphone apps has exceeded $8 billion. The average revenue for paid
apps has been found to be around $19,560.xlv
The total revenue generated from smartphone and tablet apps(including advertisements and in app
purchases) has exceeded $25 billion out of which App Store contributes around 65% followed by
Google Play which contributes around 27%.xlvi
Average price of a paid app was found to be $2.82.xlvii
In-app purchases generated a record 76% of all revenue in the Apple App Store for iPhone in the U.S.
in February 2013. At least 90% of all revenue was generated by in-app purchases in the Asian
markets, which include Hong Kong, Japan, China and South Korea.xlviii
Among the top ten apps for February 2013, which were released since January 2012 in the U.S. for
iPhone, the ARPD(Average Revenue Per Download) ranges from $0.37 to $7.04.
Of the three various business models, freemium apps generate the least amount of revenue per
download with an average of $0.93 when looking at the top 250 apps in the Apple App Store in the
U.S. Ninety-two freemium apps generated less than $0.99, which is the lowest price point for paid
apps.

The average revenue per download (ARPD) of the top 250 apps released since January 2012 is $0.99
in the U.S. This number is significantly higher in Japan, where the average user spends more on apps,
and the ARPD of the top 250 apps released since January 2012 is $3.12.
Paid apps without in-app purchases generate $2.25 in the Apple App Store for iPhone in the U.S.
Paid apps with in-app purchases generate even more per download, indicating that users are not put
off by the fact that they also have to pay for additional features within the app, in addition to the one-
off fee they initially paid for their app.
The average revenue per download for paid apps is higher on iPad than on iPhone in the Apple App
Store in the U.S.: $4.04 versus $2.25, respectively.
The average iPad download generates more revenue with in-app purchases than on iPhone. Freemium
apps have an ARPD of $2.26 on iPad versus $0.93 on iPhone
3. Prevalent Business Models of each Era
3.1. Netscape Era:
The most common business models of the Netscape era were:
i. Ecommerce: Ecommerce has one of the most simple business models in the webspace. It is identical
to the grocery stores in the physical world. The only advantage is has over the grocery stores is the
factor of scale and the absence of running costs in the form of the store.
ii. Software as a Service: Software as a service business model had started even before the arrival of
Netscape. In this business model users pay for the usage of the software after fixed intervals of time.
iii. Two Platform Model(Advertising Model): The growth of Netscape followed by the plethora of web
portals revolutionized the web space for forever. Two Platform model in essence is not a creation of
the World Wide Web, t.v channels and newspapers have been following this model for a long time.
However, the web altered the way Two Platform Model used to work. Schemes like Pay per Click,
Pay per thousand Impressions, Pay per sale executed have been the greatest innovations in the world
of advertising in the last few decades. All these schemes are directly measurable and hence the ROI of
marketing/advertisement can be easily calculated.
3.2. Search Era:
The search era or the Google Era saw modifications/arrival of two business models.
i. Two Platform Model: The Two Platform Model initiated during the Netscape era saw the actual
upliftment during the Google Era. Google’s products like AdSense and Ad Words completely altered
the way advertisements were sold on the web. There was a sudden rapid shift from banner ads to text
ads.
ii. Classified Advertising model: Craig’s List that emerged during the Google Era brought the concept of
Yellow Pages to the online world. It turned out that the web was more suitable for Yellow Pages than
the print newspapers and this created a trend of selling classified ads on the internet.

3.3. Social Networking Era:
The last decade has seen a spurt of innovation among business models around the World Wide Web.
Appearance of social networks like Facebook, introduction of User generated content and platforms like App
Store & Google Play brought about rapid changes on the web space. Some of the most prevalent business
models of this era were:
i. Multi-Platform Business Models: Multi-Platform business models where a product has more than 2
customer types are of the key models of this era. Companies now had three different types of
customers or more viz. Corporate Consumer, Corporate Advertiser and Normal User. All these
customers derive different value from the same product and co-exist in the ecosystem.
ii. Freemium Model: Freemium Model is inarguably the greatest innovation among business models of
this era. Freemium as a business model is completely described in the subsequent section.
iii. Bait & Hook Model: Bait & Hook Model came out of the innovation in use and throw blades by
Gillette. The web space saw the revival of this model where one product was offered for free with the
expectation that the user will buy another paid product along with it. The most successful product that
has applied this business model is Amazon’s Kindle. Kindle is one of the few products which suffer a
loss when sold to the customer but gains in the long run from sales of goods and products through it.
iv. Virtual Goods Ecommerce: The growth of virtual or online gaming giants like Zynga, Rovio, EA
Sports brought about a new kind of Ecommerce where users paid real money for a virtual product
used in the course of the game. There has been a lot of debates among scholars around the world
whether this business model is just a fad or will be long term trend in the web space.
4. Freemium Business Model
4.1Definition and Types of Freemium
The word ‘Freemium’ is made up of the words ‘Free’ and ‘Premium’. It represents a new kind of pricing
model where a version of the product is offered for free and premium version of the same product is offered at
a very high cost. The term ‘Freemium’ was coined by Fred Wilson, a Silicon Valley Venture Capitalist in a
blog post. Chris Anderson, the curator of TED1
, proposes that, “At the beginning of the twenty-first
century, we are inventing a new form of free, which is not a gimmick, a trick to shift money from one
pocket to another, Instead, it is driven by an extraordinary new ability to lower the costs of goods and services
close to zero.” The 21st
century has seen the marginal costs of web and software products falling so low that
the many companies decided to offer the product for free. Offering the product for free leads to quick adoption
by a large number of users and hence the product itself becomes a marketing tool. Some of the most common
Freemium products are Skype, Gmail, Flickr, WhatsApp, etc.
1
TED is the company that organizes and supports TED talks throughout the world.

One of the major misconceptions regarding Freemium is confusing it with the ‘Two Platform Model’. The
‘Two Platform Model’ is majorly advertisement oriented where the product has two customers and one of the
customer types pays for the other. The most common example of this business model is Google Search.
Freemium on the other hand is about having some of the users pay for a premium version of the product and
these users typically pay off for the rest of the users in the same customer type. However a lot of the current
high tech products use both the Freemium and Two Platform Model simultaneously for the same product.
The division between the premium and the free product in the Freemium Model can be based on several
different factors like time, feature, customer types, etc. On the basis of the literature search done, Freemium
Model can be divided primarily into five categories:
i. Time Based Freemium: In this form of Freemium, users are allowed to use the product free of any cost
for a small initial period of time and are then asked to pay for the premium version of the product to
continue using. Time based freemium is the most common and is probably the first type of freemium
ever seen. The simplest manifestation of this is in the concept of having trial versions of products.
However the last few years have seen a lot of products having a trial version as long as 6 months to 1
year. This amount of time is sufficient for any user to get hooked onto a product.
ii. Feature based Freemium: The major advantage of the evolution of the World Wide Web is the ability
to serve the long tail where every user has its own needs. Feature based freemium model has seen its
rise in this ability. In feature based freemium, companies offer the product for free with few
(sometimes sufficient) features to basic users and charges the users if they need advance features. One
of the most common examples of this is Skype. The major assumption in this business model is that
users once they start using the product will want the premium features as well and that the free
product will create a value perception about the product.
iii. Customer Type Freemium: Customer type freemium generally divides the users into two categories:
basic(individual) users and enterprise users. The basic users get the product for free whereas the
enterprise users pay for the product. The basic users in this model act as a channel of networking and
marketing of the product.
iv. Seat Limited Freemium: Seat limited freemium model limits the number of accesses each user can
have. This can be understood mostly simply with the IEEE business model where institutions can buy
as many number of accesses as they want.
v. Bundling Oriented Freemium: In this kind of model, one of the products(mostly software) is generally
sold with another kind of product for free. Sometimes one of the products is offered at a selling price
lower than the cost which is then recovered by later purchases in the product. One of the most popular
products which use this model is Amazon Kindle which is sold at a discount and is then compensated
by the sales that occur through the device.

4.2 Factors supporting Freemium
After having laid the basic foundation about Freemium and its different types, It becomes important to study
the factors that have led to the development of the Freemium Model in the past decade.
i. Negligible Marginal Costs: As technology advanced, the marginal cost of developing and maintaining
a software product has gone down drastically. The lower costs make it ineffective to price the product
at the marginal cost and this allows companies to be profitable with only 2-3% of users paying for the
product.
ii. Low Bandwidth and Storage Cost: The cost of bandwidth usage has decreased rapidly with the
adoption of newer technologies. The storage cost has also decreased rapidly allowing the marginal
costs for most software products to go down rapidly.
iii. Lack of Marketing/Promotion Costs: One of the major components of cost for a software product until
the last decade was the marketing cost. However the launch of Apple App Store revolutionized the
way users can be reached. Users now have a known platform where they can look for different kinds
of applications/tools that they need. The pricing structure of the App Store supported by growth of
social media has reduced the cost of marketing to zero.
iv. Growth of Smart Connected Devices: The growth of smart mobile devices with large processing
power has become the backbone of the entire software industry.
4.3 Why study Freemium Model?
The final question that the literature review tries to address is: Why is there a need to Study Freemium
Business Model? This question can be best answered by looking at some of the statistics related to the growth
of Mobile devices and App Stores. Most of the apps developed for the mobile devices use Freemium Model
and this entire industry has been growing at a very quick rate, hence it becomes important to study them to
create a better understanding.
Growth of Smart Mobile Devices:
broadband users worldwide.
Mobile data traffic has been expected to grow with a CAGR of 60% from 2011 to 2016.
An average user uses 1-2Gb data on his mobile computers followed by around 800 Mb and 600 Mb
on his Tablet and smartphone respectively.
Online video and web browsing together contribute the most traffic coming from the mobile devices.
Together these contribute more than 50% of the entire traffic.
Almost 40% of the smartphone users use their phones even before getting out of their beds.
The average time users spend on their smartphones has been found to be around 2.5 hours a day.

Growth of App Stores:
The total number of apps available for download on Apple App Store and Google play is 700,000
each with expected addition of 435,000 to Apple’s App Store in 2013.
The total no. of downloads for both the platforms collectively has exceeded 75 billion with app store
contributing 40 billion while Google Play contributed another 35 billion.
An average iPhone user downloads more than 80 apps to add to the pre-installed 20 apps with more
than 50% of these apps being absolutely free.
The total market for paid smartphone apps has exceeded $8 billion. The average revenue for paid
apps has been found to be around $19,560.
The total revenue generated from smartphone and tablet apps(including advertisements and in app
purchases) has exceeded $25 billion out of which App Store contributes around 65% followed by
Google Play which contributes around 27%.
Average price of a paid app was found to be $2.82.
5. Traditional Price based Sales Promotions
The current studies on Freemium based business models lack an important literary comparison with the
traditional sales promotion models. In the current project several concepts of the traditional price based sales
promotions shall be carried forward to create theoretical background needed to understand freemium model.
In the purview of the current research only price based sales promotions have been studied and their impacts
on brand loyalty, purchase quantity and category incidencexlix
.
Time based effects of price promotion:l
The benefits to end users from sales promotions can be classified
into hedonic and utilitarian benefits which can be crudely understood as intrinsic and extrinsic benefits. Time
based temporal effects of price promotions are the one that have been studied the most. Most researchers
conclude that there are no long term impact of price promotions on brand loyalty and purchase quantity. The
time frame impact of price promotion can be divided primarily into immediate effects, Adjustment (or
Intermediate) effects and Permanent effects.
Immediate Effects: The immediate effects are reflected in short term change in sales of the product. The
immediate promotional effects are higher for brand choice than for the other two sales components viz.
category incidence and purchase quantity.
Adjustment Effects: The adjustment effects refer to transitional period between the short term response and the
resulting new equilibrium. The adjustment effects are positive for category incidence and negative for brand
choice. The positive impact on category incidence can be credited to the artificial increase in purchase due to
the price promotion which implicitly offers users a risk premium to try new products and hence increase their
consumption. The negative impact on brand choice can be credited to the competitive reaction and the over
consumption in the immediate time frame of the promotion.

Permanent Effects: The permanent effects refer to the long term impact of the promotions. Permanent impact
of promotions are absent for all sales components. The total promotional impact is positive for all sales
components. The total promotional effects are higher for category incidence than the other two components.
For storable products, the total promotional impact is higher for purchase quantity than for brand choice.
However for perishable products it’s the opposite. For each sales component, the promotional effects die out
within the first quarter. The quantity adjustment period is longer for storable products than for perishables.
Impact of advertising on Consumers price and brand sensitivity:lilii
Non price oriented advertising is
expected to reduce consumers price sensitivity in the long run. The long-term impact of advertising on
consumers' price sensitivity is likely to be stronger for non-loyal consumers than for relatively loyal (and less
price-sensitive) consumers. In the long run, advertising will reduce consumers’ sensitivity to price oriented
promotions and increase the same towards non price oriented promotions. In general, the long term effect will
be stronger for the non-loyal segment than for the loyal segment.
Advertising generally reduces the size of the non-loyal segment. Over the long run, price oriented promotions
will increase consumers price sensitivity and hence the price oriented promotions while ate the same time it
will decrease the consumer sensitivity to non-price oriented promotions. Non price oriented promotions will
decrease the price sensitivity of loyal consumers and increase the price sensitivity of non-loyal consumers.
Price oriented promotions are likely to increase non-loyal segment size. If price oriented promotions attract
many consumers who under non promotion circumstance would have very low probabilities of buying the
brand, then on the next purchase occasion average repurchase rate will be brought down by these consumers.
The price consumers expect to pay for a brand decreases with an increase in the observed frequency of the
price promotions of the brand. The price consumers expect to pay for a brand also decreases with an increase
in the observed depth of price discounts of the brand.
Impact of Price Promotion on buyers’ Internal Reference Priceliii
: Another major area of study in price
promotion is the study of price promotions on internal reference priceliv
, perceived acquisition valuelv
and
perceived transaction valuelvi
. There is a positive relationship between buyers’ perceptions of quality and their
internal reference price. There is a positive relation between advertised selling and reference price and buyers’
internal reference price.
There is a positive relationship between buyers’ perceptions of quality and their perceived acquisition value.
There is a negative relationship between the advertised selling price and buyers’ perceptions of acquisition
value. There is a positive relationship between buyers’ internal reference price and their perceived transaction
value. There is a negative relationship between the advertised selling price and buyers’ perceptions of
transaction value.
There is a positive relationship between buyers’ perceptions of acquisition value and their willingness to buy.
There is a positive relationship between buyers’ perceptions of transaction value and their willingness to buy.
There is a negative relationship between buyers’ perception of acquisition value ad their intentions to search.

There is a negative relationship between buyers’ perception of transaction value and their intentions to search.
There is a positive relationship between buyers’ perceptions of transaction value and their perceived
acquisition value.

6. Appendix:
6.1. Advertising Trendslvii
:
Global internet advertisement spending was pegged at $80.2 billionlviii
.
Total web advertising revenue in U.S $31 billion in 2011.
Out of this, Google owns a 44% market share followed by Yahoo at 12.3%, Facebook at 3% and AOL
at 1.5%.
Out of these, the share held by each forms of advertising are:
o Search: 47%
o Display/Banner Ads: 21%
o Classifieds: 7%
o Digital Video: 6%
o Lead Generation: 5%
o Mobile: 8%
o Rich Media: 3%
o Sponsorship: 2%
o Email: 1%
Revenues by pricing model:
o Performance based(Cost per click): 67%
o Cost per 1000 impressions: 31%
o Hybrid: 2%
Retail advertisers, despite an overall decline, continue to represent the largest category of Internet ad
spending, accounting for 20% in the first-half of 2012, or $3.4 billion, down from 4% ($3.5 billion)
reported in HY 2011.
Telecom companies accounted for 12% of 2012 first six months' revenues or $2.1 billion, consistent
with revenues reported in 2011, which represented 14% of HY 2011 revenues.
Financial Services advertisers accounted for 13% in 2012 ($2.2 billion), up from the $1.9 billion (13%
of total) reported in HY 2011.
Automotive advertisers accounted for 13% of revenues in the first-half of 2012, or $2.2 billion, up
from the $1.7 billion (11% of total) reported in HY 2011.
Computing products advertisers represented 8% of revenues in the first six months of 2012, or $1.3
billion, down from the $1.5 billion (10% of total) reported in HY 2011.
Leisure Travel (airfare, hotels, and resorts) accounted for 8% of revenues in the first six months of
2012 ($1.3 billion), up from the $1.2 billion (8% of total) reported in HY 2011.
Consumer Packaged Goods represented 5% in 2012, or $898 million, up from $866 million (6%)

Entertainment accounted for 4% of 2012 revenues, or $729 million, up from the $556 million (4% of
total) reported in HY 2011.
Media accounted for 4% in 2012, or $719 million, up from the $660 million (4% of total) reported in
2011.
Pharma/Healthcare accounted for 6% in 2012, or $1.1 billion, up from the $608 million (4% of total)
References:
i
Alibaba is the largest B2B ecommerce website in China
ii
Baidu is a Chinese search engine and has the largest share(61%) in the search engine market there.
iii
The Mosaic browser was the first browser made. However Netflix was the first popular browser and was based on
Mosaic.
iv
http://www.tandfonline.com/doi/pdf/10.1080/10438590100000009
v
http://www.tandfonline.com/doi/pdf/10.1080/10438590100000009
vi
The actual stock swap value was $4.2 billion in November, 1998 but it appreciated to $10 billion by the closing of the
deal in 1999.
vii
http://secfilings.nasdaq.com/filingFrameset.asp?FileName=0000912057-96-
017646.txt&FilePath=1996081400&CoName=YAHOO+INC&FormType=10-Q&RcvdDate=8%2F14%2F1996&pdf=
viii
http://allthingsd.com/20100111/yahoos-pitch-to-advertisers-we-sell-ginormous-ads/?mod=ATD_sphere
ix
Deatiled statistics of the global advertising market has been mentioned in Appendix 1
x
Source: http://marketingland.com/report-yahoos-mobile-ad-revenue-125-million-33752
xi
Source: http://en.wikipedia.org/wiki/Yahoo!#Revenue_model
xii
Source: http://gigaom.com/2012/10/31/gmail-finally-beats-hotmail-according-to-third-party-data-chart/
xiii
Source: http://advertising.yahoo.com/article/flickr.html
xiv
Source: thomashawk.com/2011/01/how-much-revenue-does-flickr-make-from-paid-pro-accounts-my-guess-50-
million-per-year.html
xv
Source: http://articles.latimes.com/1996-04-01/business/fi-53780_1_netscape-home
xvi
Source: http://gs.statcounter.com/#search_engine-ww-monthly-201201-201301
xvii
Source: http://searchenginewatch.com/article/2065293/Google-Launches-Gmail-Free-Email-Service
xviii
Source: http://www.geekwire.com/2012/farewell-hotmail-microsoft-rolling-outlook-webmail-service/
xix
Source: http://online.wsj.com/article/SB10000872396390443890304578006503381099858.html
xx
Source: http://techcrunch.com/2012/10/18/googles-mobile-run-rate-is-now-8-billion-up-from-2-5-billion-a-year-ago/
xxi
Source: http://www.statisticbrain.com/google-searches/
xxii
Source: http://www.youtube.com/yt/press/statistics.html
xxiii
Source: http://allthingsd.com/20120621/youtubes-gigantic-year-is-already-here-citi-says/
xxiv
Source: http://gigaom.com/2012/10/31/gmail-finally-beats-hotmail-according-to-third-party-data-chart/
xxv
Source: http://thenextweb.com/google/2012/08/06/chrome-rises-google-browser-grabs-13-of-the-global-market-
statcounter/
xxvi
Source: http://www.gartner.com/newsroom/id/2335616?source=email_rt_mc_body

xxvii
Source: http://www.youtube.com/yt/press/statistics.html
xxviii
Source: http://www.jeffbullas.com/2012/05/23/35-mind-numbing-youtube-facts-figures-and-statistics-infographic/
xxix
Source: http://allthingsd.com/20120621/youtubes-gigantic-year-is-already-here-citi-says/
xxx
Source: http://en.wikipedia.org/wiki/Wikipedia:About
xxxi
Source: Facebook Q4, 2012 earning slides
xxxii
Source: http://seekingalpha.com/article/596291-facebook-this-is-the-bet-you-are-making
xxxiii
Source: http://online.wsj.com/article/SB10000872396390443890304578006503381099858.html
xxxiv
http://www.gartner.com/newsroom/id/2335616?source=email_rt_mc_body
xxxv
http://www.gartner.com/newsroom/id/2335616?source=email_rt_mc_body
xxxvi
Source: http://www.internetworldstats.com/stats.htm and ‘Traffic and Market Report Data’ Ericsson, November
2011.
xxxvii
Source: Traffic and Market Report Data’ Ericsson, November 2011.
xxxviii
xxxix
xl
xli
Source: http://www.nextbigwhat.com/smartphone-users-in-india-297/
xlii
Source: http://mobithinking.com/mobile-marketing-tools/latest-mobile-stats/a#phone-shipments
xliii
Source: techcrunch.com/2013/01/22/new-reports-claim-the-ios-app-store-will-gain-435k-new-apps-in-2013-but-
most-apps-go-unnoticed/
xliv
Source: http://www.engadget.com/2012/09/26/google-play-hits-25-billion-app-downloads/
xlv
Source : http://techcrunch.com/2013/01/22/report-market-for-paid-apps-hits-8b-in-2012-while-average-revenue-
per-app-drops-27/
xlvi
Source: http://techcrunch.com/2013/03/12/abi-tablets-will-take-a-35-8-8bn-app-revenue-share-this-year-passing-
smartphones-by-2018/?source=email_rt_mc_body
xlvii
Source: http://techcrunch.com/2013/01/22/report-market-for-paid-apps-hits-8b-in-2012-while-average-revenue-
per-app-drops-27/
xlviii
Source: ‘HOW THE MOST SUCCESSFUL APPS MONETIZE THEIR USER BASE’ report by Distimo Publication, March
2013
xlix
Category Incidence refers to the total change in sales for the particular category of the product irrespective of brand.
l
Source: Koen Pauwels, Dominique M Hanssens, S. Siddharth; ‘The Long term effects of price promotion on Category
Incidence, Brand Choice and Purchase Quantity’; Journal of Marketing Research, Vol. 39, Nov. 2002.
li
Source: Maohar U. Kalwani, Chi Kin Yim; ‘Consumer Price and Promotion Expectations: An experimental study’;
Journal of Marketing Research, Vol. 29, Feb 1992.
lii
Source: Carl F. Mela, Sunil Gupta, Donald R Lehmann, ‘The Long term impact or promotion and advertising on
consumer brand choice’, Journal of Marketing Research, Vol. 34, May 1997.
liii
Source: Dhruv Grewal, Kent B Monroe, R Krishnan; ’The effects of price comparison advertising on buyers’ perception
of Acquisition Value, Transaction Value and Behavioral Intentions’, Journal of Marketing, Vol. 62, American Marketing
Association, April 1998.

liv
Internal Reference Price is defined as a price in buyers’ memories that serve as a basis for judging or comparing actual
prices.
lv
Perceived Acquisition Value has been defined as the buyers’ net gain(or trade off) from acquiring the product or
services.
lvi
Perceived Transaction Value has been defined as the perception of psychological satisfaction or pleasure obtained
from taking advantage of the financial terms of the price deal.
lvii
Source: IAB internet advertising revenue report, October 2012.
lviii
Source: http://www.go-gulf.com/blog/online-ad-spending/

Section 3
Study on Freemium Products: Web Survey to understand User
Preferences
Created by:
Tarkeshwar Singh
Senior Undergraduate, Department of Electrical Engineering, IIT Gandhinagar
Under the Supervision of
Prof. Krishna Prasad Miyapuram
Department of Computer Science & Engineering, Indian Institute of Technology,
Gandhinagar, India

Understanding the Freemium Business Model

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