The zero-price effect in freemium business models: The moderating effects of free mentality and price–quality inference

Abstract

In the digital world, many firms struggle in employing a freemium business model (simultaneously offering restricted free options and full featured premium options). Although this is an increasingly popular revenue strategy, conversion rates for premium options are relatively low as free options provide users an irrationally high value, the so-called zero-price effect. This study develops a framework of the zero-price mechanism by shifting the attention to the more intuitive mode of decision making. When being confronted with freemium offers, users are expected to rely on different naïve intuitions, which diverge and, ironically, may even have opposite implications. This study identifies two central intuitions about freemium offers: a free mentality (the tendency to intuitively expect that all digital services should be available at no cost) and price–quality inference (the tendency to intuitively expect a positive relationship between price and quality). Individuals are expected to greatly vary in their degree of subscription to both intuitions. Even more important, it is this paper's overarching premise that the interplay between both opposing intuitions shapes user's response to freemium offers thereby providing a lever to tackle the issue of low conversions for premium options. The zero-price framework is tested in two studies. First, the implicit association test identifies the opposing intuitions, and second, a choice-based conjoint study for a highly relevant digital service (media streaming) examines the catalyzing role of both intuitions as well as their intricate interplay. Implications for marketing theory and directives for future research are developed.