Offering Free? Think Again!

Sandeep Arora, Frenkel ter Hofstede, and Vijay Mahajan
free vs paid apps
Key Takeaways
What? Many app developers offer free versions of their paid apps, but the effectiveness of this strategy to promote paid apps is not clear.

So What? Revenue distribution in the app industry is highly skewed: 4 apps on Google Play store and 7 apps on iTunes App Store (out of 700,000 apps in each store) accounted for 10% of the revenue of these stores in 2012; 59% of apps fail to break even.

Now What? Given the negative implications of offering free versions for paid app performance—especially for games and in the later life stages of paid apps—developers may consider alternative strategies to promote their paid apps.
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​​The app industry has grown from having virtually no revenues a decade ago to $143 billion today. This rapid rise of the app industry is driven primarily by 12 million app developers, most of which are small businesses. While the app industry provides tremendous opportunities to these small businesses through its low entry barriers and easy access to a large customer base, its rapid growth also brings challenges.

With almost 4,000 new apps being added to the existing 5 million each day, the app industry is flush with apps of varying degrees of quality and differentiation. Thus, app developers are tasked with creating awareness about their apps and convincing potential customers to purchase them. 

Lacking huge advertising budgets and popular third-party recommendation agents, many app developers offer free versions of their paid apps to entice customers to try their apps, increase app awareness, and promote paid app sales. Consequently, more than 90% of apps on Google Play are free, and a large proportion of these free apps are offered as samples of full-featured paid apps. 

Developers that adopt the strategy of offering free versions of paid apps hope that these free versions will entice customers to try their apps, thereby increasing app awareness and promoting paid app sales. Despite the popularity of this strategy, there is a dearth of understanding about its effectiveness. In new research published in the Journal of Marketing, Sandeep Arora, Frenkel ter Hofstede, and Vijay Mahajan investigate this strategy and also explore the implications of developer reputation and paid app user rating for the performance of paid apps.

Research


The authors used a unique data set containing 7.7 million observations from 12,315 paid apps offered on Google Play store to explore the associations of free version presence, developer reputation, and paid app user rating with the adoption speed of paid apps.

Findings


The results show that despite its popularity, the practice of offering free versions of paid apps is associated with a decrease in the adoption speed of paid apps. In addition, this negative association between free version presence and paid app adoption speed changes across the life and characteristics of paid apps. The presence of a free version is associated with a larger decrease in the adoption speed of apps bought for fun and pleasure (games) and in the later life stages of a paid app. 

The authors also found that the positive association between paid app user rating and paid app adoption speed is smaller for games than for utilitarian apps. Finally, the positive associations of paid app user rating and developer reputation with paid app adoption speed move in opposite directions across the life of a paid app. In other words, early in the life of a paid app, developer reputation has a stronger positive association, and paid app user rating has a weaker positive association, with its adoption speed. However, towards the later life stages of a paid app, the positive association between its adoption speed and its developer’s reputation becomes weaker, whereas the positive association between its adoption speed and paid app user rating becomes stronger.

Simulations


To highlight the magnitude of the association between free version presence and performance of paid apps, the authors simulated the performance of two popular paid apps (one game and one utilitarian app) on Google Play across two scenarios: one in which free versions of the apps exist and the other in which there are no free versions.

The simulations show that that offering free versions is associated with a decrease in the number of times these apps reach different installation levels, and that this decrease is larger in the later life stages of the apps. In the simulations, the paid app with a free version was 12%–20% less likely to reach 500 installations than the paid app without the free version. At the 10,000 installation level, this difference jumped to 80%–88%.

The authors further observed that offering a free version is associated with a decrease in paid app adoption speed. In their simulations, paid apps with free versions took 18%–28% longer to reach the 10,000 installation level compared with paid apps without free versions.

Conclusions


The results of this research suggest that app developers may not be strategic in following the current norm of offering free versions and should re-evaluate their promotion strategies. App developers may benefit by discontinuing free versions in the later life stages of paid apps, when free version presence has a stronger negative association with paid app performance. Finally, because the negative association between free version presence and paid app adoption speed is stronger for paid games, mobile game developers may consider alternative modes of promoting their paid apps.


From: Sandeep Arora, Frankel ter Hofstede, and Vijay Mahajan (2017), “The Implications of Offering Free Versions for the Performance of Paid Mobile Apps​,” Journal of Marketing, 81 (6), 62–78.

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ABOUT THE AUTHOR:
Sandeep Arora, Frenkel ter Hofstede, and Vijay Mahajan
Sandeep Arora is Assistant Professor, Asper School of Business, University of Manitoba. Frenkel ter Hofstede was Associate Professor, McCombs School of Business, University of Texas at Austin. Vijay Mahajan is John P. Harbin Centennial Chair in Business, McCombs School of Business, University of Texas at Austin.

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