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

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.