Service quality explains why people use freemium services but not if they go premium: An empirical study in free-to-play games

•Freemium has become de facto business model for online services.•User responses were gathered from freemium games (N=869).•Service quality positively predicts intentions to continue using freemium services.•Quality of a freemium service is indirectly associated with premium purchases.•The effect of quality on premium purchases is mediated by use of freemium. During the last decade, the “freemium” business model has spread into a variety of services especially online. However, service developers have faced a dilemma of balancing between making the service as high quality as possible but at the same time creating demand for the premium products that augment the core free service. If the service is of enough high quality, augmenting premium products might not offer significant added value over the otherwise free service. In this study we investigate how perceived service quality predicts customers’ willingness to continue using the freemium services and to purchase premium content. User responses were gathered from freemium services (free-to-play games) (N=869). The results indicate that while expectedly the different dimensions of service quality (assurance, empathy, reliability and responsiveness) positively predict the intentions to continue using the freemium service, they do directly predict why people would be willing to spend more money on premium, i.e. the effect of perceived quality of a freemium service on premium purchases is mediated by use of freemium. These findings indicate that increasing the quality of a freemium service has surprisingly little effect on the demand for additional premium services directly.