The Research and Publications office of IIM Bangalore hosted a seminar, on July 06, by Professor PK Kannan on the topic, ‘Selling the Premium in Freemium’. It was an illuminating discussion about three of Professor Kannan’s papers.
Prof. PK Kannan
Dr. P. K. Kannan is the Dean’s Chair in Marketing Science at the Robert H. Smith School of Business at the University of Maryland, USA. His main research focus is on marketing modeling, applying statistical and econometric methods to marketing data. Currently, his research focuses on attribution modeling, media mix modeling, new product/service development and customer relationship management (CRM).
Paper 1: Formats and pricing
The problem was to find out how to price different formats (PDF, print) of books from the National Academies Press and whether the formats were complements or substitutes. The aim was also to determine the optimal bundling strategy for the books sold by the National Academies Press. To this end, Prof. Kannan described the process of collecting data using an online choice experiment. Using this experiment and surveys regarding the complementarity of the two formats, they found a number of results. Mixed bundling strategies are optimal and customers are heterogeneous with respect to their complementarity perception. This means that different customers perceive the complementarity of PDF and print versions differently. They also found that the degree of complementarity is important in changing the pricing policy. In addition to this, they were able to determine the optimal pricing policy for each format in order to maximize profit.
Paper 2: Samples and sales
Professor Kannan then discussed how samples of the books would affect the sales of different quality books. They found that high quality samples of high quality books would increase sales however high-quality samples of low quality books would decrease sales. If the product is of low quality then the sample should also be of low quality. This was the gist of his second paper.
Paper 3: Free vs paid
Professor Kannan then discussed his third paper. The paper discussed how to sell the premium in freemium. The freemium business model refers to a strategy in which a free basic good or service can be enhanced through payment for the advanced version or for advanced features. They conducted an experiment with three parts – One where a hardcover was introduced at a much higher price compared to the existing two formats viz., the paperback and free PDF. In the second part of the experiment, an ebook was introduced at a price between that of the paperback and free PDF. The third was a control setup that captured demand variation for books over time.
Interestingly, they found that with the introduction of the hardcover book, the sales of paperbacks increased by more than 500 books (with only one hardcover actually being sold). The hardcover had an anchoring effect, making people switch from the free PDF to the paid but cheaper paperback despite the zero-price effect. The zero-price effect states that people tend to perceive free products as having greater benefits than others. It also confirmed the compromise effect. With the introduction of the ebook at a price different from that of the paperback, the sales of the paperbacks increased by more than 900 copies! In fact, as the price of the ebook became more similar to that of the paperback, the effect magnified with more copies of the paperback being sold. The ebook made the paperback look more appealing to a consumer. If the price of the ebook is similar to the paperback price, people are willing to pay a little bit more to get the paperback rather than the ebook.
Through the seminar, Professor Kannan shared some fascinating information about how to sell the premium in freemium.
