Free Trial or No Free Trial: Optimal Software Product Design with Network Effects
European Journal of Operational Research, Forthcoming
28 Pages Posted: 10 Jan 2008 Last revised: 1 Sep 2014
Date Written: 2007
A common business strategy to promote product adoption in software industry is to provide a free trial version with limited functionalities of the commercial product to increase the installed user base. The increase of user base will lead to higher value of the software because of positive network effects. However, offering a free trial version may cannibalize some demand of the commercial software. This paper examines the tradeoff between network effects and the cannibalization effect, and aims to uncover the conditions under which firms should introduce the free trial product. We find that when network intensity is strong, it is more profitable for a software monopoly to offer free trial than to segment the market with two versions of different qualities. In addition, this paper solves the joint decision problem of finding the optimal quality for the firm's free trial software and the optimal price of its commercial product. Finally, we analyze the impact of competition on a firm's decision of whether to offer free trial in a duopoly market.
Keywords: software free trial, network effect, network externality, information goods
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