When Should Software Firms Commercialize New Products ... - MISRC

9 Conclusions
Inthis paper, we providean extensive head-on comparison between theconventional charge-
for-everything business model and several freemium and seeding models extant in software
markets. Our models are based on an integrated framework capturing multi-period adop-
tion dynamics, network externalities, customer valuation learning, and software modularity.
This allows us to conduct previously unexplored comprehensive performance benchmark-
ing among models and to derive policy implications. Moreover, our analysis sheds more
light on various marketing approaches employed in the software industry. For one, CE,
TLF, and FLF can each be a dominating strategy for the firm, depending on consumer
priors on the value of individual software modules, perceptions of cross-module synergies,
and overall value distribution across modules, whereas uniform seeding is always dominated
by either freemium models or conventional for-fee models. Our analysis offers significant
managerial insights, as we show that switching from CE model to freemium models can
dramatically increase profitability, as can switching between different freemium models. Fi-
nally, we show that freemium is always preferred from the society’s perspective, and derive
recommendations as to when the firm needs to be subsidized in order for the social welfare
to be increased.
Given that the goal of this study is to seek insights by comparing and contrasting sev-
eral established business models, our framework was stylized for tractability. This presents
opportunities for our analysis to be extended in multiple ways, perhaps using simulations or
other numerical approaches when closed-form solutions like ours cannot be derived. First,
throughoutthisstudy, wefocussedonsoftwareproductscharacterized byone-timepurchase,
where the users run the software off their own machines and the developer does not invest
additional resources to support the consumption of the product. For simplicity we do not
consider quality improvement and maintenance via patching. However, as discussed in the
Introduction, freemium applicability extends beyond such products, in particular branching
into the rapidly growing markets for software-as-a-service products, where adoption dynam-
icsareslightly differentandtherevenuemodelisinmanycasessubscription-based,involving
recurring payments from the installed base. In such markets, service providers may incur
non-negligible operational costs associated with running the application (on own hardware
infrastructure or on stable environments sourced from platform-as-a-service providers such
28