Patching Strategies Of The Freemium Software:Network And Security Externalities

The freemium pricing model has been increasingly embraced by software vendors,due to the software's special characteristics of low marginal cost and high network externality.In a nutshell,this model involves giving away for free a certain version of the software while making money on the premium version with more features or functions.Existing literature on the freemium strategy mainly focuses on balancing the trade-off between positive network effect and the cannibalization effect: the network effect enhances the users' valuation of the software and thus boosts the sales of the premium version,while the freeware may also cannibalize the premium version and hurt sales.Nevertheless,beyond this tradeoff,a vendor has to take into account the negative security risks caused by the unpatched freeware users and choose a patching strategy accordingly.Through a backward induction fashion,this paper examines a two-stage decision problem faced with a software vendor which involves the optimal security patch policy under different conditions and the optimal version policy based on the optimal patch strategy.This study reveals the external conditions under which the software vendor can make the profit maximization when adopting the freemium strategy,and we also find that the optimal decision of software vendors depends on the comprehensive interaction between the positive network externality and the negative security externality.A key insight of the analysis is that when the positive network externality is not high,the negative security externality plays a major role in the optimal patching strategy.But with the increase of the positive network externality intensity,its effects begin to manifest,and become more and more significant,even in the case of high negative security externality.The main contribution of this research is that we make the theory research on freemium pricing model more perfect via considering the joint effect of the positive network externality and the negative security externality on the vendors' marketing strategies,and providing a more comprehensive and practical guidance and insights to the software vendor's economics policy and management.