IDEAS home Printed from https://ideas.repec.org/a/inm/orisre/v23y2012i2p488-504.html
   My bibliography  Save this article

Optimal Software Free Trial Strategy: The Impact of Network Externalities and Consumer Uncertainty

Author

Listed:
  • Hsing Kenneth Cheng

    (Department of Information Systems and Operations Management, Warrington College of Business Administration, University of Florida, Gainesville, Florida 32611)

  • Yipeng Liu

    (Department of Operations and Information Management, Kania School of Management, University of Scranton, Scranton, Pennsylvania 18510)

Abstract

Many software firms offer a fully functional version of their products free of charge, for a limited trial period, to ease consumers' uncertainty about the functionalities of their products and to help the diffusion of their new software. This paper examines the trade-off between the effects of reduced uncertainty and demand cannibalization, uncovers the condition under which software firms should introduce the time-locked free trial software, and finds the optimal free trial time. As software firms have the option of providing free trial software with full functionalities but a limited trial time or limited functionalities for an unlimited trial time, we develop a unified framework to provide useful guidelines for deciding which free trial strategy is preferred in the presence of network externalities and consumer uncertainty.

Suggested Citation

  • Hsing Kenneth Cheng & Yipeng Liu, 2012. "Optimal Software Free Trial Strategy: The Impact of Network Externalities and Consumer Uncertainty," Information Systems Research, INFORMS, vol. 23(2), pages 488-504, June.
    • Handle: RePEc:inm:orisre:v:23:y:2012:i:2:p:488-504
    DOI: 10.1287/isre.1110.0348
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/isre.1110.0348
    Download Restriction: no
    File URL: https://libkey.io/10.1287/isre.1110.0348?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Kapil Bawa & Robert Shoemaker, 2004. "The Effects of Free Sample Promotions on Incremental Brand Sales," Marketing Science, INFORMS, vol. 23(3), pages 345-363, November.
    2. Carl Shapiro, 1983. "Optimal Pricing of Experience Goods," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 497-507, Autumn.
    3. Kathleen R. Conner, 1995. "Obtaining Strategic Advantage from Being Imitated: When Can Encouraging "Clones" Pay?," Management Science, INFORMS, vol. 41(2), pages 209-225, February.
    4. Ramnath K. Chellappa & Shivendu Shivendu, 2005. "Managing Piracy: Pricing and Sampling Strategies for Digital Experience Goods in Vertically Segmented Markets," Information Systems Research, INFORMS, vol. 16(4), pages 400-417, December.
    5. Goering, Patricia A, 1985. "Effects of Product Trial on Consumer Expectations, Demand, and Prices," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 12(1), pages 74-82, June.
    6. Pei-Yu (Sharon) Chen & Lorin M. Hitt, 2002. "Measuring Switching Costs and the Determinants of Customer Retention in Internet-Enabled Businesses: A Study of the Online Brokerage Industry," Information Systems Research, INFORMS, vol. 13(3), pages 255-274, September.
    7. Shin-yi Wu & Pei-yu Chen, 2008. "Versioning and Piracy Control for Digital Information Goods," Operations Research, INFORMS, vol. 56(1), pages 157-172, February.
    8. Dirk Bergemann & Karl H. Schlag, 2012. "Pricing Without Priors," World Scientific Book Chapters, in: Robust Mechanism Design The Role of Private Information and Higher Order Beliefs, chapter 12, pages 405-415, World Scientific Publishing Co. Pte. Ltd..
    9. Christophe Faugere & Giri Kumar Tayi, 2003. "Designing Free Sofware for Marketing: A Game Theoretic Approach," Game Theory and Information 0311003, University Library of Munich, Germany.
    10. Amir Heiman & Bruce McWilliams & Zhihua Shen & David Zilberman, 2001. "Learning and Forgetting: Modeling Optimal Product Sampling Over Time," Management Science, INFORMS, vol. 47(4), pages 532-546, April.
    11. Jing, Bing, 2007. "Network externalities and market segmentation in a monopoly," Economics Letters, Elsevier, vol. 95(1), pages 7-13, April.
    12. Scott, Carol A & Yalch, Richard F, 1980. "Consumer Response to Initial Product Trial: A Bayesian Analysis," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 7(1), pages 32-41, June.
    13. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279-279.
    14. Cheng, Hsing Kenneth & Tang, Qian Candy, 2010. "Free trial or no free trial: Optimal software product design with network effects," European Journal of Operational Research, Elsevier, vol. 205(2), pages 437-447, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jyotishka Ray & Syam Menon & Vijay Mookerjee, 2020. "Bargaining over Data: When Does Making the Buyer More Informed Help?," Information Systems Research, INFORMS, vol. 31(1), pages 1-15, March.
    2. Marius F. Niculescu & D. J. Wu, 2014. "Economics of Free Under Perpetual Licensing: Implications for the Software Industry," Information Systems Research, INFORMS, vol. 25(1), pages 173-199, March.
    3. Yanqing Han & Zongming Zhang, 2018. "Impact of free sampling on product diffusion based on Bass model," Electronic Commerce Research, Springer, vol. 18(1), pages 125-141, March.
    4. Kang Li & Jingwei Zhang & Lunchuan Zhang, 2021. "Optimal Software Feature-Limited Freemium Model Design: A New Consumer Learning Theoretical Framework," Mathematics, MDPI, vol. 9(9), pages 1-24, April.
    5. Jalili, Monire & Çil, Eren B. & Pangburn, Michael S., 2024. "Pricing and structuring product trials: Separate versus mixed wine tastings," European Journal of Operational Research, Elsevier, vol. 312(2), pages 668-683.
    6. Sadat Reza & Hillbun Ho & Rich Ling & Hongyan Shi, 2021. "Experience Effect in the Impact of Free Trial Promotions," Management Science, INFORMS, vol. 67(3), pages 1648-1669, March.
    7. Daniel Halbheer & Florian Stahl & Oded Koenigsberg & Donald R. Lehmann, 2013. "Digital Content Strategies," Working Papers 329, University of Zurich, Department of Business Administration (IBW).
    8. Wu, Lingli & Deng, Shiming & Jiang, Xuan, 2018. "Sampling and pricing strategy under competition," Omega, Elsevier, vol. 80(C), pages 192-208.
    9. Guofang Nan & Xingtao Li & Zan Zhang & Minqiang Li, 0. "Optimal pricing for new product entry under free strategy," Information Technology and Management, Springer, vol. 0, pages 1-19.
    10. Zibo Liu & Zhijie Lin & Ying Zhang & Yong Tan, 2022. "The Signaling Effect of Sampling Size in Physical Goods Sampling Via Online Channels," Production and Operations Management, Production and Operations Management Society, vol. 31(2), pages 529-546, February.
    11. Guofang Nan & Xingtao Li & Zan Zhang & Minqiang Li, 2018. "Optimal pricing for new product entry under free strategy," Information Technology and Management, Springer, vol. 19(1), pages 1-19, March.
    12. Halbheer, Daniel & Stahl, Florian & Koenigsberg, Oded & Lehmann, Donald R., 2014. "Choosing a digital content strategy: How much should be free?," International Journal of Research in Marketing, Elsevier, vol. 31(2), pages 192-206.
    13. Zhijie Lin & Ying Zhang & Yong Tan, 2019. "An Empirical Study of Free Product Sampling and Rating Bias," Service Science, INFORMS, vol. 30(1), pages 260-275, March.
    14. Shivendu Shivendu & Zhe (James) Zhang, 2015. "Versioning in the Software Industry: Heterogeneous Disutility from Underprovisioning of Functionality," Information Systems Research, INFORMS, vol. 26(4), pages 731-753, December.
    15. Mehrafshan, Nima & Goerke, Björn & Clement, Michel, 2016. "The Effect of Unexpected Chart Positions on the Firm Value of Music Labels. An Event Study of Album Success," EconStor Preprints 142161, ZBW - Leibniz Information Centre for Economics.
    16. Yi, Zelong & Li, Fan & Ma, Lijun, 2019. "The impact of distribution channels on trial-version provision with a positive network effect," Omega, Elsevier, vol. 85(C), pages 115-133.
    17. Bing Jing, 2011. "Exogenous Learning, Seller-Induced Learning, and Marketing of Durable Goods," Management Science, INFORMS, vol. 57(10), pages 1788-1801, October.
    18. Fischer, Greg & Karlan, Dean & McConnell, Margaret & Raffler, Pia, 2019. "Short-term subsidies and seller type: A health products experiment in Uganda," Journal of Development Economics, Elsevier, vol. 137(C), pages 110-124.
    19. Yifan Dou & Marius Florin Niculescu & Dongjun Wu, 2011. "Optimal Consumer Network Structure Formation under Network Effects: Seeds Controllability and Visibility," Working Papers 11-07, NET Institute, revised Oct 2011.
    20. Kretschmer, Tobias & Peukert, Christian, 2014. "Video killed the radio star? Online music videos and digital music sales," LSE Research Online Documents on Economics 60276, London School of Economics and Political Science, LSE Library.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:orisre:v:23:y:2012:i:2:p:488-504. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.