Making Digital Freemium Business Models a Success: Predicting Customers’ Lifetime Value via Initial Purchase Information

Abstract

In digital freemium business models such as those of online games or social apps, a large share of overall revenue derives from a small portion of the user base. Companies operating in these and similar businesses are increasingly constructing forecasting models with which to identify potential heavy users as early as possible and create special retention measures to suit those users’ needs. In our study, we observe three digital freemium companies that sell virtual credits and investigate to what extent initial purchase information can be used to determine a given customer’s lifetime value. We find that customers represent higher future lifetime values if they (a) make a purchase early after registration, (b) spend a significant amount on their initial purchase, and (c) use credit cards to purchase credits. In addition, we see that users tend to spend increasing amounts on subsequent purchases.