Designing a referral reward program in freemium: The role of network externalities

Abstract We develop a model to explore firms’ decisions on designing referral reward programs in freemium. We find two indices that firms could compare against value discrepancy to choose their strategy. The optimal price and referral reward rate are obtained. We find that the absence of network externality relating to product quality makes referral dysfunctional, and we conduct sensitivity analysis. This study contributes to theories that incorporate a referral reward program into the freemium model and provides practitioners with viable takeaways.