Research On Pricing And Advertising Strategy Based On Freemium Business Model

With the development and breakthrough of information technology,more and more people have their own intelligent terminals,leading to an increasing demand for information products.Traditional pricing strategy is unsuitable due to the unique nature of information product.There are many business models in market,among these models,the freemium business model that provides free low-quality product with advertisement and high-quality paid product has gradually become popular.In reality,the advertising intensity in free product,that is,the frequency and duration of advertisement per unit time,can be controlled by both developer and advertising provider.This distinction may affect the developer’s pricing decision,which in turn leads to the change of the developer’s profit.Therefore,based on the freemium business model,this paper builds a model that contains developer and consumer for analyzing the optimal pricing and advertising strategy of the developer,considering the situation that the advertising intensity is determined by different decision makers,as well as the existence of advertisement and network effect.Firstly,when the advertising intensity is exogenous,this paper studies the optimal pricing strategy of information product developer.We obtain the equilibrium price and examine the effects of advertisement revenue rate on price,profit,consumer surplus,and social welfare.Then we compare the equilibrium results of the benchmark and the freemium model.As the advertisement revenue rate increases,we find that the equilibrium price and the profit increase,while consumer surplus decreases.When the advertising intensity is low,social welfare increases;when the advertising intensity is high,social welfare first decreases and then increases.The freemium model might be harmful to the information product developer if the advertising intensity is exogenous.Only when the advertisement revenue rate is high enough,can the developer be better off by adopting freemium business model.The developer should comprehensively consider the size of advertisement revenue rate and advertising intensity if he intends to adopt the freemium business model.Secondly,when the advertising intensity is endogenous,this paper studies the optimal pricing and advertising strategy of information product developer.We obtain the equilibrium results of price and advertising intensity,and examine the effects of advertisement revenue rate on price,profit,consumer surplus,and social welfare.Then we compare the equilibrium results of the benchmark and the freemium model where the advertising intensity is determined by the developer.At last,we investigate how the quality change of free product affect the developer’s profit.As the advertisement revenue rate increases,our results show that the equilibrium price and the profit increase.If the network effect is low,the advertising intensity and the advertisement revenue rate show a U-shaped relationship that first decreases and then increases;consumer surplus first increases,then decreases,and finally remains unchanged;social welfare continues to increase.If the network effect is high,the advertising intensity will initially be 0,then continue to increase,and finally remain unchanged;consumer surplus continues to decrease,and finally remains unchanged;social welfare first decreases and then increases.The freemium model is always beneficial to the profit and social welfare if the advertising intensity is endogenous,while consumer surplus will be higher under the freemium model only when the advertisement revenue rate is low.Moreover,by designing the quality of free product,the developers’ profit can be further improved.Specifically,when the advertisement revenue rate is low or medium,the developer should provide a lower-quality free product.When the advertisement revenue rate is high,the developer should provide a high-quality free product.Finally,in the duopoly market with two developers providing different products,this paper investigate the optimal pricing and advertising strategies of the two developers.We obtain the equilibrium results and note that the price and advertising intensity are not influenced by the advertisement revenue rate.The quality difference in products will affects the profits of all two developers.To maximizing their profits,the developers need to improve the quality of paid products and reduce the quality of free products.