Free trial or no free trial: Optimal policy of electronic products with positive and negative network effects

Abstract

The rapid development and widespread application of the new generation information technology has not only promoted innovation in traditional business models, but also has even created new business models and new industries. The free trial, as one of the new business models, has been utilized by major enterprises to advertise and promote their products in the expectation of receiving more attention from consumers, increasing the potential value of products. However, the accompanying problem of setting the number of lucky customers and free trial operation scheme properly should be handled urgently. In reality, the purchasing decision of the consumer is influenced by a variety of factors, such as reviews, trial campaigns. Meanwhile, consumers have positive and negative perceptions of products and activities, which could be transmitted to surrounding consumers. Consequently, this paper discusses the problem of the free trial policy for the electronic product by considering the positive and negative network effects. It is attempted to be solved both theoretically and empirically. The consumer network utility, demand and product profit models are proposed to solve the problem, which produces empirically testable hypotheses and Management propositions. Then, these hypotheses are tested and these management propositions are validated by utilizing real operational data from Lenovo Mall. The test and validation results indicate that there is a significant increase in the price and demand for products after the merchant taking the free trial. Moreover, although the operating costs of the merchant are increased, a much larger boost is provided by the free trial to the merchant in total profit. It is worthwhile considering the accuracy in identifying the valuable consumer, which the success of the free trial depends on.