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Differentiation Factors Between Free and Premium Among Different Cloud Computing Services Differentiation factors between free and premium among different cloud computing services Author: Martijn Beltman University of Twente P.O. Box 217, 7500AE Enschede The Netherlands ABSTRACT: This paper tries to give more insight in the differentiation factors between free and premium versions for consumers among various cloud computing services. The design is a comparative case study by which Spotify, MBAM, LinkedIn, DropBox, Flickr and Skype are subjected to qualitative content analysis. The product of this essay is a taxonomy formed of literature, applied to the cases. The results show that the differentiation factors are different as well as the cases. Most of the cases have multiple differentiation factors (a mix) to go premium. The theoretical implications of this paper (due to limitations) shows the need for more research for a more complete understanding. Practical implications could be the rise in awareness in the decision to go premium for consumers. Supervisor: F. Wijnhoven Keywords Versioning, Freemium, Differentiation, Cloud computing services Permission to make digital or hard copies of all or part of this work for personal or classroom use is granted without fee provided that copies are not made or distributed for profit or commercial advantage and that copies bear this notice and the full citation on the first page. To copy otherwise, or republish, to post on servers or to redistribute to lists, requires prior specific permission and/or a fee. 5th IBA Bachelor Thesis Conference, July 2nd, 2015, Enschede, The Netherlands. Copyright 2015, University of Twente, The Faculty of Behavioural, Management and Social sciences. 1. INTRODUCTION (Shapiro & Varian, 1999). These formats are generically called The term freemium is coined used two words free and premium. information goods. Books, movies, music, magazines, software, It describes a business model where you give away a core games, databases, telephone conversations, stock quotes, Web product for free and then generate revenue by selling premium pages, news, ringtones, etc. all fall into this category. products to a small amount of free users. Freemium business Information goods have the characteristics of involving high models play a key role in business today. They are widely use fixed costs, but low (often zero) marginal costs. (Belleflamme, in a range of industries. An example of this is that apps with 2006) freemium models account for 98% of the revenue in googles app store and 95 % in apples app store. The freemium concept 2.2 Freemium dates back to the 1980s when software firms like Adobe started Although the freemium concept dates back to the 1980s. Wilson to publish software in “light” versions. These sharewares, or was the first to use the word freemium by combining free and cripple wares, did not include all the functionalities and were premium (Wilson, 2006). Anderson (2009) describes this free of charge (Wagner, Benlian, & Hees, 2014).This model revenue model as having a free version that is made available to was initially only used within the software industry, but this is anyone who wants it in the hope that some users will then choose no longer the case anymore. Newspapers, music, publishing, to upgrade to the premium version. Pujol (2010) uses a broader telecom, education and far more industries are now facing definition of freemium, describing it as loosely connected competition for freemium business models. The underlying products or services. According to Anderson (2009), about 95% concept that makes this possible is the rise of digital production. of users will use the free service, but 5% of the users will be The fact that is currently possible to produce and distribute a willing to pay for premium features. Those heavy users will wide variety of value propositions using computers and the compensate for the remaining 95% of non-paying users. In internet. Because of the ever decreasing cost of computer particular a premium version includes: advanced features, power, storage and internet bandwidth, the marginal cost of functionality, or related products and services (Bekkelund, distributing this value is virtually zero. Once a musician has 2011). Furthermore Niculescu and Wu (2011) distinguish three produced an album, it costs him practically the same to have 10 forms of freemium models: feature-limited freemium and time people or 1 million download the album (Froberg, 2015). The limited freemium as well a hybrid forms of these. Freemium is fact that this business model is growing in a lot of industries based on a gratis products to attract users. The complexity of opens the question in what way it is used to gain a completer gratis products is subject to more additional work to understand understanding of the concept. The ``what is free´´ and ´´what is it properly (Shampanier, Mazar, & Ariely, 2007). However the paid´´ questions are very different across industries who are research thus far can be broadly categorized into three categories using freemium. The delta between what is free and what is (Jiang, 2010): network externalities (in which free adopters paid is call product differentiation (Pujol, 2010). This paper is increase future adopters’ valuation), demonstration effects (in structured as followed: freemium products/services case studies which users can try the software before buying) and word-of- in this paper are seen as cloud computing services. In the theory mouth effects (in which free software adopters help speed up the are these concept illustrated by literature. The theory concludes diffusion of a new product. When a network externality (effect) with a research question, which is further in this paper is present, the value of product or service increases as more answered. people use it. The classic example being telephony, as having a telephone is only valuable if there are other people with 2. THEORY compatible telephones (Katz & Shapiro, 1985). Compared to network effects, product demonstrations play on the intrinsic 2.1 Cloud computing services features of the product, not the extrinsic (Bekkelund, 2011). Being able to try a product before buying has been shown to play A prior study (Kim & Lee, 2011) on cloud computing shows a significant role in the adoption of information technologies that many people defines cloud computing as an emerging (Agarwal & Prasad, 1997). Furthermore the study of Gallaugher computing paradigm where data and services reside in massively scalable data centers and can be ubiquitously and Wang (2002) found that trial versions were associated with price premiums and help seed the initial market, as for network accessed from any connected devices over the internet. That externalities. Jiang and Sarkar (2009) found out that if other means that users are able to obtain useful information they want benefits does not exist, a company can still benefit from giving and use a variety of services and computing resources through away fully functioning software as the free adopters help speed the internet as a cloud without the constraints of time and place up the diffusion process. This is done by the free adopters in a (Kim & Lee, 2011). Furthermore the National Institute of verbal way (spreading information about its availability and Standards and Technology (NIST) in the USA developed also a quality) or non-verbal way (through others seeing the product in definition of this concept: ‘’Cloud computing is a model for use, peer pressure or social influence). However this study enabling ubiquitous, convenient, on-demand network access to focuses on free software without a premium version. Literature a shared pool of configurable computing resources (e.g., search on freemium shows merely two different perspectives. networks, servers, storage, applications, and services) that can The first perspective deals with freemium as a possible revenue be rapidly provisioned and released with minimal management model and the second perspective focuses on consumers and their effort or service provider interaction.’’ (Mell & Grance, 2011, acceptance of freemium as a model for accessing services. Since p. p2). Perhaps the most famous examples of cloud computing, the objective of this paper lies in the willingness of a consumer which people do not see as a cloud computing service at first to pay for a premium version of a cloud computing service the glance are social networking websites like Facebook, LinkedIn second perspective is here more important. In line with the and Twitter. Besides, web-based email services like Hotmail or second perspective, researchers want to identify the reasons for Windows Live Mail from Microsoft are also cloud computing consumers’ willingness to pay for a service, although the basic services. Furthermore back up services like Dropbox and functions are available for free. Wagner et al. (2014) study shows Google Drive are cloud computing services as well. All cloud that limitation in features for a free version on music-as-a-service services deliver information goods. Information can be defined (MaaS), like Spotify changes the consumer evaluation for both very broadly as anything that can be digitized (that is, encoded the free and premium version. Their results indicate that as a stream of bits): text, images, voice, data, audio and video 2 companies providing freemium services can increase the (Shapiro & Varian, 1999). Furthermore the work of Shapiro and probability of user conversion by providing a strong functional Varian (1999) include a list of various dimensions alongside a fit between their free and premium services. (Doerr, Benlian, lists of users or uses for which these dimensions have meaning. Vetter, & Hess, 2010) surveyed 132 MaaS users to determine This list (next page) is not meant to be complete. There are as different service features’ influence on their willingness to pay many dimensions on which to version as there are dimensions to for a premium MaaS. This research concludes that next to price, your product. Versioning is thus very product-specific. See table contract duration and music quality as the most important below product attributes determine willingness to pay.
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