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The freemium model is widely used by digital platforms to grow their user base and generate revenue. However, these platforms face complex trade-offs between acquisition, monetization, and retention—interactions that are rarely captured within a unified framework. We address this gap by developing a steady-state profit-maximization model in which users transition among non-user, free-user, and premium-user states through a Markov process. We determine how platforms should jointly optimize acquisition spending, retention investment, ad intensity, and subscription pricing to maximize the long-run profit. The model endogenizes transition probabilities and is solved numerically to evaluate optimal strategies under varying behavioral and market conditions. Results show that platforms often prioritize acquisition over retention, even when acquisition and retention carry equal costs, due to persistent churn in the premium tier. As premium quality improves, platforms initially invest more across all levers but later reduce retention spending and raise prices as user loyalty strengthens. Likewise, more effective retention tools raise profitability by increasing pricing power rather than expanding the premium user base. These findings reveal that stronger tools and features reshape platform strategy not through user growth, but through more efficient monetization.

(with Can-Baris Cetin and Georges Zaccour)