Freemium vs. Deterrence: Optimizing revenue in the face of piracy competition

Abstract

The freemium pricing strategy is widely adopted by digital firms, despite the challenges posed by piracy. This study assesses whether digital firms should use freemium strategies to capitalize on piracy or combat it. Analyzing a digital firm’s strategic options against piracy for both its base and add-on products, the study examines three strategies: no action, deterrence, and freemium. The findings reveal that deterring piracy may backfire, as it can push consumers toward pirated alternatives, particularly when penalties for using pirated products are low. The freemium strategy, which involves offering a free base product, is more profitable under such conditions. Furthermore, a no-action strategy may lead to greater adoption of legitimate products. The study also considers network effects, revealing that strong cross-version and cross-product effects favor a no-action strategy. In contrast, cross-version and cross-product/same-version network effects support the freemium strategy. These insights help digital firms develop effective strategies against piracy.