Exploring how the premium value proposition of an equestrian mobile app meet customer needs

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Exploring how the premium value proposition of an equestrian mobile app meet customer needs

An explorative case study conducted together with Equilab – the equestrian mobile tracker app

Copenhagen Business School Master Thesis

Digital Submission: 16^th November 2020

Academic Supervisor: Md. Saifuddin Khalid Author: Sarah Victoria Karin Jängnemyr (125272)

Academic Program: MSc Business Administration and E-business Number of Pages and Characters: 128 508 characters (65 pages)

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Abstract

This master’s thesis aims to answer the research question: how to increase the number of premium users in an equestrian mobile app by offering a value proposition meeting customer needs?

The research question has been examined for exploratory purposes within the specific company Equilab, being an equestrian mobile app employing the freemium business model. This study therefore includes literature review about customer conversion in the freemium business model, value proposition and revenue model. Multi-method qualitative research has been conducted to generate findings related to the literature review.

With an inductive approach, a conceptual framework was developed based on the analysis of the semi-structured interviews and identification of recurring themes. The conceptual framework approached the research question by capturing the key activities in how an equestrian mobile app can increase the number of premium users by offering a value proposition meeting customer needs.

Further, the conceptual framework was used to find the explicit factors increasing the number of premium users. Results show that equestrian mobile apps suggestively should decrease the premium fit to create incentives for users to upgrade, create demand (through inconvenience) by limiting valuable functionalities as an example of versioning and bundle across users by offering a discounted family plan. These propositions together are considered to answer the research question.

Keywords equestrian; mobile app; freemium; premium fit; revenue model; value proposition;

versioning; bundling

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Acknowledgement

I would like to thank a few special people.

First, I would like to send my gratitude to my supervisor Md. Saifuddin Khalid for his support throughout the research process. Your engagement and advice has been highly appreciated.

Secondly, I would like to thank Simon Bengtsson, CTO and lead developer at Equilab, for being a great help providing me with inputs and valuable data. I would also like to send a big thanks to all of the interviewees for taking the time to contribute to this project.

Lastly, I would like to thank my friends at CBS who graduated last semester for supporting and guiding me in the process of writing a master thesis.

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As technology is evolving, completely new experiences are created and developed across industries. The industry of sport is not an exception. Technical solutions such as activity monitoring has become a hot topic in sports (Kim & Chiu, 2017) as it is altering the way athletes improve performance by the retrieval of quantified feedback. Monitoring activity is believed to be of great importance in sport, both to analyze performance but also to minimize injuries (Coorevits & Coenen, 2016). However, some sports are more progressive than others in their adaptation to the technology. The equestrian sport is one of the late adopters of such technology as it just recently received applications and sensors that supports activity

monitoring (Bergström, 2019). To explore the interest of technology aids within the equestrian sport, this research is conducted together with Equilab which is a smart mobile application (app) developed for equestrians who want to track and analyze the training with their horse (Equilab, n.d.).

The equestrian sport is practiced by millions of people all over the world and can be enjoyed as a recreational activity, exercise or for competitive purposes (Magnusson, 2017). The sport is particularly popular in Sweden, being the third most common sport among youths and the eighth biggest sport in terms of number of active participants (Svenska Ridsportförbundet, 2019). The studied case Equilab is a Swedish-based company which tries to capitalize on the popularity of the equestrian sport and its untapped market in terms of technology

development. The app measures training sessions with a sensor, where the phone is the most commonly used device. By placing the phone in a tight pocket while riding, the app monitors the horse’s movements, and converts these data to readable metrics such as gait distribution, number of left or right turns, beat, stride and distance. This information is fed back to the users to be compared and to track progress over time. Moreover, the app also provides the largest social network for equestrians, where users are able to share their journey with others and can communicate with friends (Equilab, n.d.). See Figure 1 for interfaces of some of the app’s functionalities.

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Figure 1. Screens of the Equilab app. From left: Safety tracking, Calendar overview and Social community

Last year, Equilab launched a premium version in extension to its basic version of the app.

The premium version includes additional functionalities which users need to pay a

subscription fee to access (Blixt, 2020). This versioning based business model of providing a premium in extension to a free, basic version is referred to as the freemium business model (Lee, Kumar & Gupta, 2019). The freemium business model means that users can access basic content for free but are charged a subscription fee in order to access richer

functionalities (Kumar, 2014). A premium version usually entails less disturbance, advanced functions, more appealing features and generally increased quality of service (Koch &

Benlian, 2017). The idea of the freemium concept is to attract users to the free version (Lee, Kumar & Gupta, 2019) in the hope that some of the free users are willing to pay for premium functionalities (Wagner, Benlian, & Hess, 2014). However, motivating free users to upgrade to premium is a persistent challenge for freemium providers as only a minority of such basic users become a paying user due to their “for free” mentality (Voigt & Hinz, 2016).

Accordingly, the challenge in managing the freemium business model further defines the scope of this thesis.

Prior research has studied the conversion of free users to premium users in industries such as music as a service, also referred to as MaaS, (Wagner et al., 2014; Mäntymäki, Islam, &

Benbasat, 2019) and mobile games, also called the free-to-play market (Hamari, Hanner &

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Kovisito, 2020; Wang, Zhang, Ye & Nguyen, 2005). Due to the late entrance of technology in the equestrian sport, the existing research of freemium and customer conversion within

equestrian mobile apps is scarce. Previous studies conducted together with the case company Equilab have researched the design of the application in terms of satisfying customer needs (Johansson & Rinaldo, 2017) and enhancing long-term engagement of equestrians (Norén, 2018). The first mentioned study redesigned specific features of the app to give the users more flexibility and provide an accessible overview (Johansson & Rinaldo, 2017) while the latter found that users are motivated by the feeling of development and improvement together with the horse (Norén, 2018). In addition, (Norén, 2018) found that involving the users in the design process of the app is key to understanding their motivations. Hence, this study seeks to involve the users during the research process.

1.1 Problem statement & research question

The focus of this report has evolved during the research process. The initial interest for the research was to investigate some sort of prevalent business problems within the studied case company Equilab. Corresponding to literature (Voigt & Hinz, 2016), it was revealed in conversation with the CTO and lead developer of Equilab that attracting users to their

premium version of the app is a persistent challenge (S. Bengtsson, personal communication, 2020, August, 20). Thus, this challenge was consequently chosen as the topic for this study. In the process of reviewing literature related to the topic, research in sports technology was found to be widely available (Kim & Chiu, 2017; Sztyler et al., 2017; Coorevits & Coenen, 2016). There was also access to lots of prior studies examining intention to purchase premium services (Mäntymäki et al., 2019; Wang et al., 2005; Wagner et al., 2014; Hsu & Lin, 2016;

Hsu & Lin, 2015; Hamari et al., 2020). However, few studies combine these areas and investigate premium purchase intention in sports or training related apps.

The above discussion and the late adoption of technology within the equestrian sport opens, from an academic perspective, opportunities for this study to contribute to research in the field of freemium and customer conversion. The focus of this study is narrowed down and seeks to explore users’ willingness to pay for premium functionalities in a real-life context by examining the topic within Equilab. The study “helps to distinguish research from others thanks to being an in-depth inquiry into a subject in real-world context” (Saunders, Lewis &

Thornhill, 2016, p.184) and aims to conclude generalizable findings to apps developed for

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equestrians as well as provide Equilab with strategic recommendations. The main research question will therefore be the following:

Main research question: How to increase the number of premium users in an equestrian mobile app by offering a value proposition meeting customer needs?

The main research question will be answered with support from two sub-research questions consisting of two important themes; valuable functionalities and pricing strategies. Employing the freemium concept requires constant user experience optimization to maintain the delicate balance between offering sufficient valuable content of the free version, in order to attract customers without cannibalizing the option to subscribe to the premium alternative

(Mäntymäki et al., 2019). Thus, to avoid cannibalization and instead encourage subscription, it is important to investigate what the users want and values:

Sub-research question 1: What functionalities are perceived as valuable by users in an equestrian mobile app?

Due to the large community of equestrians, it is expected that customer valuation will vary.

Some features will be highly valuable for some customers, but of little value to others

(Shapiro & Varian, 1998). By customizing the value proposition, it might be possible to fulfill the needs of more users. Therefore, the last sub-research question aims to answer how such customization might increase the number of premium users:

Sub-research question 2: How can pricing strategies and different versions of an equestrian mobile app contribute to increasing the number of premium users?

The approach of how these research questions will be answered is explained further down in the 4.0 Methodology chapter.

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1.2 Scope & delimitation

This research project will be focused on the freemium business model within the area of sports mobile apps providing technology in forms of tracking and analysis of training sessions. The study is delimited to several aspects in order to achieve the purpose of the research. First, the research is delimited to exploring the equestrian sport. Existing research focuses a lot on sensor tracking in the broad area of sports and users' intention to use such technology (Kim & Chiu, 2017; Sztyler et al., 2017). Thus, to create novelty, the decision was made to focus on an area where the topic is still seen as unexplored, i.e. the equestrian sport.

The thesis is furthermore delimited to the Swedish market. Despite the case company’s presence in other countries (Appendix 7), the decision of delimiting the geographical scope is based on two factors; (1) the popularity of the equestrian sport in Sweden in terms of number of active participants (Svenska Ridsportförbundet, 2019) and (2) the fact that Sweden is Equilab’s home market. Additional delimitations refer to the narrowed scope of focusing on attracting rather than retaining premium users. This decision is made in consultation with the case company Equilab as they explained that their biggest issue lies in attracting subscribers more than retaining those who already upgraded to premium (S. Bengtsson, personal

communication, 2020, March, 07)

1.3 Contextual glossary

Canter Is a controlled, three-beat gait of a horse, one of the fastest gait that can be performed by a horse.

Co-rider Someone who helps the owner of a horse with the riding and caring of the horse.

Sometimes for an amount of money or for free.

Gait The paces of an animal, especially a horse or dog, also described as a pattern of movement of the limbs of animals.

Equestrian A person who rides horses, in particular as a job or very skillfully Stride A horse’s step in the canter.

Sensor A device that measures physical input from its environment and converts it into data that can be interpreted by either a human or a machine.

Trot Proceed or cause to proceed at a pace faster than a walk, lifting each diagonal pair of legs alternately.

Walk The slowest gait of a horse.

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1.4 Thesis structure

This section is dedicated to provide the reader with an overview of the thesis, its structure and what each chapter constitutes. This thesis is based on seven chapters with several sub-

sections. Following this introductory chapter, the thesis includes subsequent chapters.

2. Context

The purpose of including this chapter is to provide the reader with a contextual understanding of the research project by explaining briefly different types of mobile apps and how its

purpose might affect users’ attitudes, the concept of freemium, the case study Equilab and its technology and the competitive landscape.

3. Literature review

The literature review starts with a describing the approach of how the literature review was conducted. The purpose of the literature review is to critical analyze and present previous research which provides the reader with a common understanding of the research area and further defines the scope for this thesis. The literature review covers the innovative

subscription-based models, how successful business models should be designed, purchase intention towards premium and the significant value of free users.

4. Methodology

This chapter aim to provide the reader with details on how the research is conducted. The chapter commences with the methodological path, to further present the methodological foundation being an explorative case study with an interpretivist view and inductive reasoning. Thereafter, a description of the qualitative data collection methods unstructured interviews, participant observation and semi-structured interviews is presented, which follows by a section of how these are analyzed. The chapter ends with a quality assessment section which defines the research’s reliability and validity.

5. Results & Analysis

This chapter start with presenting the outcome of the qualitative data analysis; an inductively developed conceptual framework of how to increase the number of premium users in an equestrian mobile app by offering a value proposition meeting customer needs. The

conceptual framework captures the key activities in how to answer to the research question.

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The conceptual framework consists of four main components derived from the identification of themes, which are analyzed in sub-sections of this chapter. The chapter ends with

summarizing the results of the analysis.

6. Discussion

Parts of this chapter discuss the strategic recommendations for the studied company Equilab, to further discuss how it contributes to research. The chapter also includes a section for reflecting on potential limitations of this thesis.

7. Conclusion

This chapter provides a summary of the thesis’ scope and presents the answer to the research question. The chapter ends with suggestions for future research.

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2. 0 Context

This section aims to provide an understanding of the research project’s context. First describing different types of mobile apps and how those are valuable to users depending on the purpose of the app. Continuously, the concept of freemium is explained and how mobile app providers may use it. The case company, its application’s technology, and functionalities are presented as well as the technology of indirect and direct competitors.

2.1 Mobile applications

Previous research typically divides mobile apps into categories of utilitarian and hedonic apps, as they found that users have different attitudes depending on the type of app (Tang, 2016). Apps that are mainly used for fun, such as games and entertainment apps can be classified as hedonic apps, while all the other apps such as business or utility apps consequently can be classified as utilitarian apps, or non-hedonic apps (Lio, Au & Choi, 2012). While hedonic apps aim to derive pleasure from using the app, utilitarian apps aim to enhance task performance (Hsu & Lin, 2016). For instance, app categories such as maps, news and fitness, users tend to look more for utilitarian benefits, while for apps such as social media and gaming, users focus more on hedonic benefits. Utilitarian motivations refer to the functions and tasks that a product should have. Hedonic motivations refer to positive

emotions such as fun and happiness felt in experiencing activities. The more enjoyment towards products or services, the higher the purchase intention (Tang, 2016). Succeeding in designing mobile apps appears to be more challenging than designing traditional software.

Users have high expectations and expect to run an application without training or any kind of help-system which puts greater pressure on developers to deliver a fully functional product (Holtzblatt, 2005).

2.2 The freemium concept

The freemium concept has gained popularity over the past years and many internet services such as music, video, cloud storage, social networking and games are today based on the freemium business model (Mäntymäki et al., 2019). The freemium business model is defined as “having a free version that is made available to anyone who wants it in hope that some

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users will then choose to upgrade to the premium version'' (Wagner, et al., 2014, p.260).

Many well-known firms offer a version with limited functionalities for free, but charge customers a subscription fee for unlocking the premium features of the product or service (Laudon & Traver, 2017). For instance, Adobe published a so-called crippleware i.e. a “light”

version of the software which was free for consumers to try, but charged a subscription fee for the full version of the software (Wagner et al., 2014). In-app-purchase (IAP) are also

commonly used in the freemium strategy, especially within gaming apps. However, these are not subscription services. IAP refers to the phenomena of users who would like to e.g.

advance in the app, buy extra lives, coins or similar (Google AdMob, n.d.).

Another alternative way to attract users in the freemium strategy, in particular used by the software industry, is to offer a free trial period which means that the consumers are able to test all available functionalities but for a limited time. When the free trial period expires, the software is locked and the users need to purchase a premium account to gain further access (Wagner et al., 2014). However, it is important to note that a free trial might create a cannibalization effect i.e. decreasing the demand for the full-functional software due to the fact that some consumers with lower requirements will be satisfied with the trial period (Tang, 2003).

To operate successfully with the freemium business model, the product should be easy to use and preferably have a potential audience that reaches a minimum of one million users

(Laudon & Traver, 2017). Furthermore, as a large network is desirable, it is highly essential that the variable costs of offering the product or service to additional customers for free must be low (ibid.)

2.3 The case company: Equilab

In accordance with the above described concept of freemium, Equilab provides one free version with limited functionalities but charges a subscription fee for the premium features.

The overview of the functionalities in each version is presented in the table below, see Table 1. The table is created by the researcher through exploration of the mobile app as there was no structured list available of which functionalities that belonged to which version.

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Table 1. Overview of functionalities included in Equilab’s free and premium version (Created by the researcher based on exploration of the app)

Equilab has in total almost 740 000 active users today (Bengtsson, personal communication, 2020, August, 20), whereas the largest user segment is women (approximately 90%) who are in between the ages of 18-34 years old, see Appendix 7 for data provided by Equilab. Among the active members, there are about 4 700 who have subscribed to a premium account

(Bengtsson, personal communication, 2020, August, 20) which gives a percentage of 0,64%

premium users. Equilab’s premium offering can be bought either monthly, 6 months or 1 year, see Table 2.

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Table 2. Equilab subscription options

It is revealed that Equilab mostly struggles with attracting free users or potential users to become a premium user rather than retaining those who already subscribed to an upgraded account (Bengtsson, personal communication, 2020, August, 20). However, according to a survey conducted by Equilab, where the churning users were asked to confirm the reason for cancelling the subscription, the majority answered that they tend to do it because of cost reasons or lack of interest in the application, see Appendix 8. The survey was designed so that the respondent’s answer could only fit one category (Saunders, Lewis & Thornhill, 2016).

Thus, it is not revealed whether these users turned to other mobile applications or what caused their reduced interest.

2.4 Competitive landscape

It is assumed that the readers of this thesis are not familiar with the Equilab app due to its niche market and its relatively small user base. Therefore, a summary of the competitive landscape is presented to provide the unfamiliar reader with contextual understanding about what type of app Equilab provides. Hence, the inclusion of the competitive landscape consisting of direct and indirect competitors is not aimed to be analyzed.

2.4.1 Indirect competitors

Indirect competitors are typically operating in different industries but still compete indirectly because their products can substitute for one another (Laudon & Traver, 2017). Equilab’s indirect competitors would logically be training mobile apps providing tracking and logging functionalities. When searching for a “training tracker app” on App Store, there are plenty of alternatives. However, two apps with high visibility are Strava and Runkeeper. These two apps can be seen as indirect competitors to Equilab as they are providing a similar training and logging app, but for runners and cyclists.

Strava enables athletes to track workouts and compare or share those with others in the network. Strava works like a social network for athletes where users can, for instance, share their routes by uploading them to the community for others to try the same trail. The

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application also offers real-time location sharing by activating Beacon. The security feature enables the user to choose up to three contacts to know where you are during your training by sending an automated text message. Strava uses the freemium business model by offering strictly limited functionalities in the free version and additional functionalities in the premium offering which costs 79 SEK/month (Strava, n.d.).

Runkeeper is a GPS fitness-tracking application which can sync with plenty of devices, but is directed to runners. Similarly to Strava, users can track routes, set goals and see progress over time. To motivate the users, the app offers features such as audio cue to e.g. keep the pace.

There is also the possibility to connect by sharing goals and activities with the network.

Runkeeper uses the freemium business model by offering strictly limited functionalities in the free version and additional functionalities in the premium offering which costs 109

SEK/month (Runkeeper, n.d.).

2.4.2 Direct competitors

Direct competitors are companies that sell highly similar products and services into the same market segment (Laudon & Traver, 2017). Two companies are said to be direct competitors to Equilab; Ridely and Equisense (Bengtsson, personal communication, 2020, August, 20). The last mentioned do not offer a paid version of the app but is included in the context for the sake of exploring their offerings

Ridely is also founded in Sweden and is focused on the planning and structure of the riding rather than sensor tracking. Users can share their horse with owners, trainers or co-riders, find inspirational films from well-known riders and trainers, upload photos or videos in the

activity feed to follow progress and set goals and milestones to evaluate the training. Ridely uses the freemium business model by offering limited functionalities in the free version and additional functionalities in the premium offering which costs 85 SEK/month (Ridely, n.d.).

Equisense is very similar to Equilab. The app includes GPS tracking, measuring of distance and speed, calendar, training programs and sharing options to the team. Equisense is a french based app and is one step ahead of Equilab in terms of technology. They offer sensors which are incorporated into the horse’s equipment in order to track and monitor additional features such as heart rate, calories burned and recovery time. As mentioned, Equisense does not

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provide a premium version of the app. Instead they include all functionalities in the free version of the app, but offer additional sensors which customers can purchase via the app or the website where the cheapest one costs around 200 euros (Equisense, n.d.).

It is expected that the respondents have not used Equisense due to its geographical origin.

However, the interest in such technology will be investigated among the user groups during the interviews to explore if it has potential to serve as a value-adding factor in Equilab’s premium offering.

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3. 0 Literature review

The purpose of the literature review is to explore previous studies within the area of

subscription-based models to find the potential knowledge gap to be covered, which in turn supports the formulation of the research questions. The chapter first starts with describing the approach of conducting the literature review. Thereafter, the literature review continues with researching the development of digital business models to further introduce subscription- based models as a result of innovation and how existing marketers utilize it. The literature review is further discussing two particular elements which are, according to Laudon & Traver (2017), essential for managing a successful business model. Furthermore, research findings of purchase intentions towards premium functionalities and premium content are presented and the significant value of free users in the context of freemium is explained. Lastly, the

literature review is summarized at the end of this chapter to provide the reader with an easy accessible overview.

3.1 Methodology of literature review

The literature review consists of a description and a critical analysis of what other researchers have written about the chosen topic. Critically reviewing literature determines what literature and findings that are significant to include. The critically selected literature further provides the foundation for which the thesis is built (Saunders et al., 2016). The literature review was collected iteratively before, during, and after the collection of primary data. The iterative process was adapted as an extended information need was realized after having conducted a few of the interviews.

The literature was located using academic databases such as AIS (Association for Information Systems) as well as with Google Scholar. Articles were selected by initially using keywords such as “freemium business model”, “subscription-based model” and “freemium mobile apps” to find relevant literature. While browsing literature, the researcher gained an understanding of the topic and formulated the research question of this study. The defined research question further enabled the researcher to narrow the scope down of the search terms. The keywords in the end were narrowed to search words such as “customer conversion freemium”, “purchase premium” and “freemium revenue model”. The reviewed articles were

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critically filtered based on its relevance for the research questions, the thesis’ objectives and also on its trustworthiness by looking at the publisher and number of citations. Lastly, as freemium and mobile apps are a relatively new concept, no articles were needed to be excluded due to its year of publication.

3.2 Business model innovation

A business model can be described as “a set of planned activities designed to result in a profit in a marketplace” (Laudon & Traver, 2017, p.56). Profit which can be generated by applying different revenue models such as advertising, subscription, transaction fee, sales, and affiliate (ibid.). The subscription model is the most popular revenue model today as customers are today more interested in access rather than owning physical products. This has led to a change in customer behavior. For instance, watching a movie was previously based on one single transaction i.e. buying a DVD. When a DVD was bought, the customers owned this product.

In comparison, when subscription customers are watching movies today, for instance via Netflix, they do not own the movie as a product in itself. Instead, they own the access to watching the movies (Tzuo, 2018).

Nevertheless, subscriptions have emerged from being popular in merely streaming-media such as Netflix, to being increasingly used in consumer goods such as Walmart or P&G as well. The most popular type of subscription in consumer goods is curation which seeks to surprise the customer with highly personalized and customized products or experiences in categories such as apparel, groceries and beauty. Other common types are replenishment which automates the purchase of commodity items such as razors, and access which serves as a provider of discounts or members-only perks (Chen, Fenyo, Yang, & Zhang, 2018).

3.3 Developing successful business models

As briefly explained previously in this thesis, the freemium concept works in the context of subscription models by providing limited functionalities in the cost-free layer of the service and charging customers a subscription fee for the upgraded version (Punj, 2015). Although, the freemium business model may be approached in different ways. Thus, the question is raised concerning how the freemium business model should be exerted to remain successful.

What appears to be common for a successful business model is addressing the following eight elements efficiently; value proposition, revenue model, market opportunity, competitive

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environment, competitive advantage, market strategy, organizational development, and management team (Laudon & Traver, 2017). Although, this research will only be focusing on the elements; value proposition and revenue model due to the limited scope of this thesis and as those are seen as most essential to be able to answer the research questions.

3.3.1 Value Proposition

Most of the regular training applications put great focus on motivating the users to exercise (Spillers & Asimakopoulos, 2014). However, it appears that individuals practicing the equestrian sport are often less dependent on motivational factors than other sports people as practitioners’ sense strong passion for their sport and see the training as a necessity for the horse’s health rather than your own (Norén, 2018). Accordingly, as motivation already seems to be prevalent, an equestrian mobile app therefore needs to focus on enhancing the value.

Thus, evaluating the value proposition plays a crucial part in answering the research question of this thesis.

The term value proposition is defined by Laudon & Traver (2017, p.57) as “how a company’s product or service fulfills the needs of customers”. In specific, customer need originates from a problem which a person is trying to find a solution for by seeking a product or service that does so (Miller, 2020). To succeed with freemium, firms’ value propositions need constant improvements by e.g. implementation of new features, better interfaces, better compatibility with other systems or simply more free space (Holm & Günzel-Jensen, 2017). Furthermore, the value proposition represents the value for one, or several target customers (Osterwalder &

Pigneur, 2003). According to Osterwalder & Pigneur (2003) value is normally created through either:

1. Use. Value is usually derived from the actual use of bundled products or services when product attributes (e.g. features, design, value-added services, support) correspond to the customer’s needs.

2. Risk. Value can be created by reducing risk. For instance, price risk can be reduced with insurance contracts.

3. Efforts. Value can be created by making the customer’s life easier via reduction of efforts. For instance, making a customer’s life easier by providing solutions that require less effort, such as home delivery of groceries.

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If firms seek to analyze and/or develop their value proposition, it is required for those to understand why customers would value your firm over another company (Laudon & Traver, 2017). Previous studies have examined the influence customers’ perceived value has on purchase behavior in the context of paid content in mobile apps (Hsu & Lin, 2015; Hamari et al., 2020). According to Kuo, Wu & Deng (2009), perceived value can be defined from four different perspectives; money, quality, social psychology and benefits. Money means that value is generated when less is paid. Quality means that value is created when less money is paid for high-quality products. Social psychology means that value is created when goods carry meanings such as social-economical status. Lastly, benefits mean that value is created based on evaluation of perceived benefits i.e. what they get and perceived sacrifices i.e. what they give up in terms of costs (ibid.). In other words, perceived value can be seen as a trade- off between perceived benefits and perceived costs (Hsu & Lin, 2015; Lin & Wang, 2006).

Perceived value is rooted in the theory of equity, which refers to what customers think is fair, accurate or deserved for the perceived cost of offering. However, perceived costs are not merely related to the monetary value, it also entails sacrifices such as time- and energy consumption (Yang & Peterson, 2004). Customers often measure the sense of feeling

“equitable treated” by looking at competitors’ offerings, and if they experience the perceived value as low they are more likely to switch to competing businesses (ibid.)

3.3.2 Revenue Model

Initially, the freemium model is not a revenue model but a customer acquisition strategy.

Firms often use this strategy to attract a large user base to the free version at a low cost.

Companies expect that about 95% of their user base will be free users who do not contribute directly to the company’s revenue (Lee, Kumar & Gupta, 2019). Conclusively, there are two groups of users in freemium models; the free users who contribute to expanding the network and the premium users, usually consisting of around 3-5% of the user base, who are

responsible for financing the free users (Wagner et al., 2014).

Despite not being the initial purpose, the freemium concept is a popular revenue model, in particular among mobile apps (Appel, Libai, Muller, & Schahar, 2019). A revenue model can be referred to as a framework for yielding monetary value. It is key to a company’s business model as it identifies; revenue source, value offering, value pricing and who pays for the value (Afuah, 2004). The logic of freemium as a revenue model is to convert free users into

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paying users. The revenue is generated from the subscription fee, which may be withdrawn on e.g. daily, monthly or yearly basis. Regardless of how frequently the user uses the service, the subscription fee remains the same (Rappa, 2010). However, converting users to paying customers is a complicated issue as consumers are generally not willing to pay for online content. Hence, it is rarely successful to charge for all content (Lambrecht & Misrab, 2017) such as monetize through only offering a paid version and charging customers a one-time cost for accessing (Google AdMob, n.d.). Instead, it is important to carefully consider what to charge users for in order to increase conversion. There are some existing conversion guidelines provided in prior studies; (1) avoid charging for things which users are used to receiving for free and (2) keep away from limiting access to content or services which users are used to receiving (Parker, Van Alstyne, & Choudary, 2016).

Although firms might be able to decide on what to charge customers for, there’s a prevailing challenge in how to set prices accordingly. Consumer valuations might fluctuate over time which makes it difficult to set a fixed price. It is suggested that offerings in the free versions should increase during high-demand periods and vice versa, a term called countercyclical offering. The theory is supported by consumers’ heterogeneous valuations (Lambrecht &

Misrab, 2017) which are elaborated upon further in this chapter under section 3.4 Pricing Strategies.

3.4 Pricing strategies

Information goods have one important property; high costs of production and low costs of reproduction, a combination which implies low marginal costs (Shapiro & Varian, 1998). A criterion which Laudon & Traver (2017) raised to be important for managing the freemium business model. When operating in competitive markets, prices will automatically fall to marginal costs. Thus, in the case of information goods, the marginal costs will be close to zero as the reproduction of the software is cost-free (de Bornier, 1992). In the situation of the low marginal costs, traditional pricing strategies such as cost-based pricing or competition- based pricing are ruled out (Shapiro & Varian, 1998). Shapiro & Varian (1998) argues that the only applicable pricing strategy in information goods therefore is setting the prices in accordance to the customer value i.e. value-based pricing.

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3.4.1 Versioning

In a perfect world, products would be sold to different prices reflecting the value which the buyers place on it. A practical way of doing this is called versioning (Shapiro & Varian, 1998). Versioning means creating different versions of a product or service, and selling it to different market segments at different price, also called a price discrimination strategy. This strategy is based on the simple argument that if a customer really wants the product, charge a higher price and vice versa (Laudon & Traver, 2017). Versioning is often used in the

subscription economy (Tzuo, 2018). The most common way of versioning in context of freemium subscription services is providing a free version with ads and the premium version without ads (Kanuri, Mantrala, & Thorson, 2017). Shapiro & Varian (1998) suggests different versions of versioning in information technology, a selection of them are described below in Table 3. whereas advertising can be found in one of them.

Table 3. Versioning strategies (Shapiro & Varian, 1998)

Nevertheless, the pricing of the premium version depends on the value it brings to the customer. Customers reveal the value they place on the information and the amount they are willing to pay for it in situations of versioning (Shapiro & Varian, 1998). To exemplify, the New York Times allows 10 articles a month for free but charges a fee for those who want to read more. In this case, customers will segment themselves into groups; willing to pay for more than 10 articles vs. not willing to pay for more articles (Laudon & Traver, 2017). Hence the value they place on accessing more than 10 articles per month is disclosed.

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3.4.2 Bundling

Bundling is another popular value-based pricing strategy (Rautio, Anttila & Touminen, 2007).

Bundling may take different forms. To start with, subscriptions in itself is one form of

bundling as products or services are offered over time (Viswanathan & Anandalingam, 2005).

Bundling can also refer to the practice of market two or more products or services to a single package price. For instance, airlines can bundle flights with car rentals or hotel stays

(Guiltinan, 1987). It can also refer to the strategy of selling the value proposition to several users at the same time, like a package deal (Desai, Purohit, & Zhou, 2018). In other words, bundling across consumers (Viswanathan & Anandalingam, 2005) which is a strategy

commonly used in Spotify where they offer a discounted family plan giving six people in the same household access to the same premium membership but still allow them to have

different accounts (Spotify, 2020).

One of the primary purposes bundling serves for is being a price discrimination strategy. It is most effective if customer valuations are heterogeneous and least effective when the

valuations for components are positively correlated (Viswanathan & Anandalingam, 2005).

Viswanathan & Anandalingam (2005) explains the efficiency of bundling by using the individual products MS word and MS excel as an example, see Figure 2. Here the customer valuation varies much more for each product individually (valuations ranges from 5 to 45) compared with the bundled valuations (valuations ranges from 50 to 60). Thus, if the individual products were bundled, the seller would avoid forgoing profits from the lower valuation customers. Instead, they would be able to sell the products to the lowest valuation price to all of the customers and at the same time extract more revenue (ibid.).

Figure 2. Illustration of the benefits with bundling information goods (Viswanathan & Anandalingam, 2005)

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Some companies choose to bundle as they strive to become monopolists. For instance, Apple recently confirmed the Apple One subscription bundle which brings together Music, TV Plus, Arcade, and more. What Apple is trying to do here is creating an ecosystem that should be hard for customers to leave. By bundling these services together, it is expected that the overall usage of the platform will increase as people might value the products differently, i.e. some customers might value Apple Music but don’t want Apple TV, however, this customer would still pay the monthly subscriptions fee to access Apple Music. This strategy is similar to how Amazon bundles Amazon Prime Video and Amazon Music with its general Prime

subscription fee. It is believed that if someone has their gaming, music, and entertainment resources all in one monthly subscription package, it might deter them from using alternative apps like Spotify (Alexander, 2020).

There are many potential benefits with bundling. Besides potentially acquiring a larger share of the market by bundling products or services, it is also beneficial cost wise. In particular, in the software sector thanks to the low marginal costs of software, because when marginal costs rise, bundling becomes less attractive (Nalebuff, 2004). Furthermore, it also eliminates the need for consumers to assemble individual components and it helps firms to differentiate from competitors (Viswanathan & Anandalingam, 2005) as there are more possibilities simply due to the fact that there are more features and products (Rautio, Anttila & Tuominen, 2007).

3.5 Converting users to premium in freemium

Converting customers can be explained as the phenomena of a company being able to convert a user to a paying customer. It is not the initial purpose of the freemium concept to convert users to paying customers as providing a free version of a software is mainly a decision aiming to build a customer base (Yogev, 2011). However, as some freemium providers rely on subscription revenue alone, it is not desirable to have a lower conversion rate than 1%. A low conversion rate from freemium to premium users can be seen as a sign that too much is offered in the free version, or that customers do not understand the value proposition of the premium offering. Although, a high conversion rate is not necessarily a certificate of success as it can signal a non-compelling free version. Hence, the benefits of the freemium model to generate traffic might be lost (Kumar, 2014). Nevertheless, it is important for freemium providers to convert a high number of premium customers in order to cover the costs which the free users constitute (Wagner et al., 2014; Mäntymäki et al., 2019, Kumar, 2014).

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3.5.1 Purchase intention

Several studies have examined purchase intention and willingness to access premium content (Wang et al., 2005; Mäntymäki et al., 2019; Hsu & Lin, 2015; Hamari et al., 2020). However, the studies’ implications differ and do not provide clear conversion guidelines for freemium providers. In order to make sense of prior research findings in customer conversion in the freemium context, an overview is conducted, see Appendix 1, visualizing each study’s context, topic and implications.

From the view of perceived value, value-for-money i.e. “the utility derived from the product due to the reduction of perceived short term and longer term costs” (Hsu & Lin, 2015, p. 48) has been proved to affect a user’s purchase intention. Meaning that users are motivated to purchase paid apps when perceiving them as offering value-for-money i.e. the perceived utility derived from an app is a function of cost (Hsu & Lin, 2015). Value-for-money is examined in other scholars as well, but are referred to as the price value for the premium subscription (Mäntymäki et al., 2019). It is found that the price value of the premium

subscription i.e. “the extent to which premium subscription to the service offers good value for money” (ibid. p. 305) affects the intention to upgrade in Mäntymäki et al.’s (2019) study as well.

3.5.2 Premium fit

Conversion has previously been explained to be connected to the degree of premium fit.

Premium fit describes to which extent the free and the premium version are similar in terms of the functionalities of each quality provided. A high premium fit, for instance, means that the free version includes almost all of the premium version’s functions (Wagner et al., 2014).

However, this might lead to so-called freemium effects which occur when the free version’s value exceeds or is equal to the premium version’s value (Niemand, Tischer, Fritzche, &

Kraus, 2015). Some freemium providers instead try to persuade users to upgrade to the premium version by decreasing the premium fit in offering a very limited cost-free version in terms of functionalities (Wagner et al., 2014). For instance, MaaS providers like Pandora choose to limit the music consumption by restricting the number of listening hours per month or removing the offline and mobile access to the music (ibid.).

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There are two perspectives of the premium fit in freemium strategies. One perspective argues that users are generally more easily convinced to purchase when the premium fit is perceived as high as it allows them to experience and evaluate its functions (Wagner et al., 2014). Other researchers find that the higher satisfaction with the free version, the lower the purchase intention for the premium version (Hamari et al., 2020; Hsu & Lin, 2015). Hsu & Lin (2015) discovers that when users find the free and the premium versions having comparable

functionalities, they tend to choose the free version. In these cases, offering a free version negatively affects purchase intention (ibid.). When consumers are satisfied with the free alternative, they might not sense the need for upgrading. Thus, designing freemium requires a delicate balance between causing inconvenience in the free version, to encourage users to upgrade to the premium version. A strategy which is called, creating “demand-through- inconvenience”. This strategy needs to find the perfect amount of frustrations in the free version, as too much frustration can instead, make the users abandon the service or product completely (Hamari et al., 2020)

3.5.3 The user base

Free users should be treated as a valuable resource rather than costly free-riders as free users can be used as a marketing tool (Holm & Günzel-Jensen, 2017). For instance, if users are positive towards the free version of an app, and give positive reviews and high ranking, it will be top-ranked on App Store’s list and automatically displayed on the main page. The visibility and promotion of the app creates a spinning wheel, as more potential users are exposed to the app, it increases the likelihood of those downloading it. This, in turn, also leads to network effects which can boost sales of the premium version (Lee et al., 2019).

Wagner et al. (2014) also discuss the free users' significant value as they build the critical mass to enable network effects i.e. increasing the value of the product or service by increasing the number of users (Laudon & Traver, 2017). As the freemium business model only

generates revenues after a customer base is built (Yogev, 2011) achieving network effects is a critical part to cover costs. The presence of free users is especially valuable to businesses operating in markets where so-called same-side network effects are available, i.e. the situation where the higher the number of users the higher the value of the product or service. For instance, Skype is a typical example of where the product’s value becomes greater the more people joining, as users consequently can reach more people (Benlian & Koch, 2016).

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Furthermore, free users are important when the freemium strategy is combined with referring incentives like compensating users for every new user that they bring (Benlian & Koch, 2016). These sharing incentives are called referral reward programs and are commonly adopted when companies are trying to leverage the power of social networks. However, these referral strategies need to be carefully balanced against revenue as the users need to be encouraged to bring in new customers, but not disincentives them from upgrading (Kumar, Lee & Gupta, 2019).

3.6 Summary of literature review

The extant review of secondary data has revealed several aspects. Literature generally agrees upon the fact that the freemium concept is not a strategy to generate revenue but to expand the network (Lee et al., 2019; Wagner et al., 2014; Yogev, 2011). Nevertheless, achieving a high subscription rate is essential for yielding revenue and covering the costs the free users carry.

To be more precise, a healthy subscription rate should be around 3-5% (Wagner, Benlian, &

Hess, 2014) which implies that Equilab’s current subscription rate of 0.64% is too low.

Furthermore, the subscription-based model is revealed to be applicable both on physical products (Chen, Fenyo, Yang, & Zhang, 2018) as well as in the highly competitive mobile application market. However, the freemium business model in the context of subscriptions is, despite its availability to all types and sizes of firms, difficult to leverage due to the

consumers’ general discouragement to pay for online content (Lambrecht & Misrab, 2017).

Literature somehow agrees that value-for-money or price value affect purchase intention (Hsu

& Lin, 2015; Mäntymäki et al., 2019). However, literature is not clear about how much of the value that should be added in the free version respectively in the premium version (Wagner et al., 2014; Hsu & Lin, 2015; Hamari et al., 2020).

Moreover, value proposition and revenue model appear to be key aspects of developing successful business models (Laudon & Traver, 2017). When addressing these elements, customers’ perceived value seems to be the central theme for both evaluating value propositions (Laudon & Traver, 2017) but also for deciding the revenue model as pricing should be set in accordance to customers’ valuations (Shapiro & Varian, 1998).

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4. Methodology

The aim of this chapter is to ensure that the methodological considerations are appropriate, but also to guide the reader through each step of the research process and how it was conducted. The methodology chapter serves to create a common understanding and to promote the thesis’ reliability.

4.1 Methodological path

First, a methodological path is outlined in Figure 3 to provide the reader with an

understanding of the research process. Important to mention is that the research process is an iterative process. Thus, the arrows serve as indicators as the stages did not follow any strict order. As seen in Figure 3 the initial interest for this thesis was rooted in the researcher’s personal interest in the equestrian sport which was also how Equilab was discovered. The company was contacted and in conversation with the company, several business problems were presented as interesting topics for the thesis, eventually deciding on delimiting the topic to their challenge of attracting users to their premium version of the app. Data collection stage 1 consists of reviewing relevant prior literature to find the knowledge gap and conducting participant observation to gather contextual understanding. This supported the formulation of the research question. Data collection stage 2 covers the semi-structured interviews which were further thematically analyzed.

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Figure 3. Illustration of methodological path

4.2 Interpretivist research philosophy

This section explains research philosophy i.e. “the system of beliefs and assumptions about the development of knowledge” (Saunders et al., 2016, p.124) and the way knowledge is understood. Each researcher has their own views of what constitutes truth or knowledge.

These views guide the researcher’s way of thinking, beliefs or assumptions about society and ourselves (Kawulich, 2012). Whether a researcher is aware of it or not, a number of

assumptions will be made at every stage in the research. It is valuable for the researcher and the reader to consider the philosophical assumptions as alignment and consistency is a quality measurement. That is, if the assumptions are carried out consistently and in a thoughtful way, it will constitute a credible research philosophy and thus support methodological choices, research strategy and data collection techniques and analysis procedures (Saunders, Lewis &

Thornhill, 2016). Therefore, it is essential to be transparent by analyzing and making explicit the researcher's view to provide the full picture.

This study is based on the philosophical assumption of interpretivism which emphasizes meanings created by humans. The philosophy is appropriate for qualitative studies with purposes of creating new, richer understandings, which goes in line with the decision of conducting a case study in this research (Saunders et al., 2016). The interpretivist viewpoint is also suitable for this report because the researcher views humans’ interpretations of reality as

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essential. Thus, the researcher’s role in this thesis is to seek to understand the different realities of the users being interviewed. In other words, to understand their motives, actions and intentions in a way that is meaningful (Kawulich, 2012). Interpretivism is highly

subjective (ibid.) and in this research, the author cannot be separated. The researcher is well- familiar with the equestrian sport and will consequently take a subjective view.

4.3 Inductive research approach

This section presents the process of reasoning. The most common approaches to theory development are deductive and inductive. A deductive approach starts with theory and aims to test this set of premises. An inductive reasoning on the other hand, is a theory generating approach where the outcome is based on analyzed data such as observations and findings. An inductive approach is recommended when existing theory on a concept is insufficient, and researchers seek to extend the knowledge of this concept (Saunders et al., 2016). As the existing research in the area of freemium business models in equestrian mobile apps is considered inadequate, this study will take an inductive approach. While the deductive approach follows a highly structured methodology, an inductive approach aims to avoid constructing a rigid methodology that does not permit alternative explanations of the problem (ibid.). This is seen as crucial for this thesis as the issue increasing the number of premium users is most likely related to individual human behavior rather than theory.

4.4 Research design: A qualitative exploratory study

This section aims to explain the research design and how the study will go about to answer the research question

Qualitative methods

This study adopts qualitative strategies for collecting and analyzing data (Saunders et al., 2016). Data collection in qualitative studies involves interaction with the participants of the research while analyzing data by interpreting the language of the informant (Bryman & Bell, 2007). This research applies several techniques for collecting data. Thus, being a multi- method qualitative study (Saunders et al., 2016). The qualitative methods unstructured interview, participant observation and semi-structured interview are further described 4.5 Data Collection: Primary Data.

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Exploratory purposes

When designing research, it is essential to recognize its underlying purpose. Research projects are undertaken for various purposes such as exploratory, explanatory, descriptive or

evaluative motivations (Saunders et al., 2016). This research is driven by exploratory purposes. To begin with, the aim was to explore what the current research in the area of freemium business models constitutes of, see 3.0 Literature review. The process is

continuously driven by exploration as the research aims to find the knowledge gap in current literature which frames the scope of the thesis. Finally, the thesis seeks to explore how to increase the number of premium users in an equestrian mobile app by offering a value

proposition meeting customer needs. Exploratory studies often start broad but as it allows for flexibility. The direction can be steered in other ways than expected during the research process when new insights are brought into light (Saunders et al., 2016). The flexible process of exploratory research suits this thesis well as it goes through the efforts of narrowing the scope and formulating the research question throughout exploration of the literature review and the collection of qualitative data.

Case study

A case study may be defined as “an in-depth inquiry into a topic or phenomenon within its real-life setting” (Saunders et al., 2016, p.184.). Yin (2018) explains that case studies are appropriate for answering the “how” or the “why”. He further notes that case studies are suitable for the exploratory phase of an investigation (Yin, 2018). In addition, Flyvbjerg (2006) states that case studies are particularly relevant when the researcher wishes to gain an understanding of individuals’ actions in each context. These criteria fit well with this thesis as the aim is to answer the research question by exploring the “how” in a specific case with an interpretivist view that emphasizes individual meanings.

This research is a case study of one company, Equilab, and investigates how the company can increase the number of premium users by offering a value proposition meeting customer needs. The examination of the research question within the studied company involves analysis of sub-units such as interviews with Equilab employees and Equilab users. Hence, this

research can be defined as an embedded case study (Saunders et al., 2016).

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4.5 Data collection: Primary data

This study collects primary data using three different methods; unstructured interview, participant observation and semi-structured interview. A table of the applied methods is provided below, see Table 4, including information about performed activities, the participants who took part in each method, and how the data was recorded.

Table 4. Table of methods

4.5.1 Unstructured interview

Unstructured interviews aim to flow like a natural conversation and have no predetermined list of questions. However, the interviewer needs to have a clear idea of what is aimed to explore (Saunders et al., 2016). The unstructured interviews in this thesis were conducted face-to-face together with the researcher’s contact person at Equilab. The contact person, Simon Bengtsson, is the CTO and lead developer at Equilab and was interviewed twice. The idea of the first interview was to introduce the thesis collaboration and to get an

understanding of Equilab. During the first interview, Simon Bengtsson suggested a number of business problems that were of interest for Equilab to investigate. Among these problems, the

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issue of encouraging users to subscribe to their premium version of the app was introduced.

The topic delimitation for the thesis was decided after the first interview and before the second interview. Hence, the purpose of the second interview was mainly to go through how Equilab could contribute during the research process and how they could assist with important data. The unstructured interviews were continuously followed up upon via email

communication. For instance, during the interview, particular data was agreed to be retrieved which were later on provided in email from Equilab, see Appendix 7 and Appendix 8 for an example of data retrieved.

The unstructured interviews were not audio-recorded as it was believed that this would disrupt the natural conversation and unintentionally make the interviewee provide limited information which in turn, would reduce the reliability (Saunder et al., 2016). Instead, the researcher took notes during the interviews which was fed back to the interviewee via email to reconcile what was discussed and agreed.

4.5.2 Participant observation

Participant observation is a qualitative method which is commonly used to become integrated into the participants’ natural community setting and to understand and interpret given

situations (Saunders et al., 2016). Thus, the method is aligned with the interpretivist approach.

Participant observations can be conducted in different ways as it has several dimensions and the researcher may choose from four different roles; complete participant, complete observer, observer-as-participant and participant-as-observer (Saunders et al., 2016). In this case, there was no reason for the researcher, to reveal the identity or to participate in activities during the observations as the purpose was mainly to collect insights regarding the environment and the users. Consequently, the researcher took on the role as a “complete observer” i.e. the

participants’ were unaware of the observer’s presence, identity and purpose (ibid.).

The reason to include the participant observation in this thesis was initially for inspirational purposes as little was known about the app and its users in the beginning of the research process. The aim for conducting participant observation was to be provided with contextual knowledge as “understanding context is fundamental for case study research” (Saunders et al., 2016, p.185). The collected contextual understanding of the participant observations becomes evident in the interview guide, see Appendix 3, as the insights were useful in the

Exploring how the premium value proposition of an equestrian mobile app meet customer needs