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  • 2020
  • Working Paper
  • HBS Working Paper Series

The Twofold Effect of Customer Retention in Freemium Settings

By: Eva Ascarza, Oded Netzer and Julian Runge
  • Format:Print
  • | Language:English
  • | Pages:71
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Abstract

The main tradeoff in designing freemium services is how much of the product to offer for free. At the heart of such a tradeoff is the balancing act of providing a valuable free product in order to acquire and engage consumers, while making the free product limited enough to entice some consumers to pay for the service. We argue that customer retention plays an important role in balancing this tradeoff, due to customer retention’s twofold effect in freemium services—it not only generates additional revenues from the advertising side but can also increase user’s monetization in the future—firms are often myopic in their retention efforts by not recognizing that by limiting the free product, the firm is not only risking monetary losses from the advertising side but is also suffering monetary losses from the premium side. We leverage a large-scale field experiment run in a mobile game context, where game difficulty was exogenously manipulated among customers at risk of churning. As expected, giving customers an easier game significantly decreases purchases in the specific round played. However, lowering the game difficulty not only increases short-term play and subsequent retention, but also increases customer spending from premium services both in the short- and long-run. We find substantial heterogeneity in the effect of reducing game difficulty, where customers who are more prone to making progress in the games exhibit stronger effects and customers who previously spent money on the game exhibit the strongest effect on in-app purchases. We leverage these insights to recommend personalized freemium product design strategies and show how the focal firm can further increase revenues from both advertising and premium services.

Keywords

Freemium; Retention/churn; Field Experiment; Field Experiments; Gaming; Gaming Industry; Mobile App; Mobile App Industry; Monetization; Monetization Strategy; Games, Gaming, and Gambling; Mobile Technology; Customers; Retention; Product Design; Strategy

Citation

Ascarza, Eva, Oded Netzer, and Julian Runge. "The Twofold Effect of Customer Retention in Freemium Settings." Harvard Business School Working Paper, No. 21-062, November 2020.
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About The Author

Eva Ascarza

Marketing
→More Publications

More from the Authors

    • 2022
    • Faculty Research

    When Less Is More: Using Short-term Signals to Overcome Systematic Bias in Long-run Targeting

    By: Ta-Wei Huang and Eva Ascarza
    • August 2022
    • Faculty Research

    Retail Media Networks

    By: Eva Ascarza, Ayelet Israeli and Celine Chammas
    • March 2022 (Revised March 2022)
    • Faculty Research

    Managing Customers in the Digital Era

    By: Eva Ascarza
More from the Authors
  • When Less Is More: Using Short-term Signals to Overcome Systematic Bias in Long-run Targeting By: Ta-Wei Huang and Eva Ascarza
  • Retail Media Networks By: Eva Ascarza, Ayelet Israeli and Celine Chammas
  • Managing Customers in the Digital Era By: Eva Ascarza
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