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Free trial or no free trial: Optimal software product design with network effects

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  • Cheng, Hsing Kenneth
  • Tang, Qian Candy

Abstract

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.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:ejores:v:205:y:2010:i:2:p:437-447
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Euy-Young Jung & Chulwoo Baek & Jeong-Dong Lee, 2012. "Product survival analysis for the App Store," Marketing Letters, Springer, vol. 23(4), pages 929-941, December.
    2. Daniel Halbheer & Florian Stahl & Oded Koenigsberg & Donald R. Lehmann, 2013. "Digital Content Strategies," Working Papers 329, University of Zurich, Department of Business Administration (IBW).
    3. Arne Katzmarzik, 2011. "Product Differentiation for Software-as-a-Service Providers," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 3(1), pages 19-31, February.
    4. 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.
    5. Oliver Francis Koch & Alexander Benlian, 2017. "The effect of free sampling strategies on freemium conversion rates," Electronic Markets, Springer;IIM University of St. Gallen, vol. 27(1), pages 67-76, February.

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