"SELLING THE PREMIUM IN FREEMIUM: THE IMPACT OF PRODUCT LINE EXTENSIONS"

October 30, 2017

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Published in 2017

Universidad de los Andes School of Management held a new edition of the Corona Chair Program. In the last seminar, the university had the visit of Professor P. K. Kannan. He is the Ralph Tyser Professor of Marketing at the Robert H. Smith School of Business and the Dean's Chair in Marketing Science at the University of Maryland. Professor Kannan shared the results of his most recent paper with the faculty members: "Selling the Premium in Freemium: The impact of Product Line Extensions".

The Freemium models are, according to professor Kannan, services or products that have a free component but can also produce profits. One example is "Spotify, where you can get free music with advertisement supported streaming or you can buy a premium version of the Spotify where you pay some money. Another example is Dropbox, where you can get free space (2 GB), and then if you want more space you can pay a premium version".

The research tried to answer "How to price the different formats and products in the Freemium market?" and "What type of bundling strategy to use?". The research focused on a publication company (National Academies Press) and how to increase the book sells considering that they also offer free PDFs.

Professor Kannan's team decided to add a new product besides the paperback and the free PDF. To a group of books they added a hardcover version that was also more expensive than the normal book. Another group had an e-book that was cheaper than the normal book. Finally they keep a control group (just the free PDF and the physical book). They compare the results after 32 weeks (8 months).

Results:

According to the research, the inclusion of a new product raised the profits. In the group number 1 (PDF, book and a Hardcover book) the website sold 530 normal books more than the control group (and just 1 hardcover book). The second group had also an increase in the sold paperbacks: 958 more books.

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