New product pricing strategies for network effects products: free products?

Abstract

An increasing amount of products introduced today exhibit network effects, i.e., the value of using the product increases as more people adopt it. However, current marketing literature offers little decision-making guidance for managers introducing network effects products. In this paper, we show that the consistency between product characteristics, objectives of product launch, and pricing objectives determines preferable introductory pricing strategies. Contrary to traditional products, the pricing decisions for network effects products are influenced by whether creating a critical mass of users is important for the future success of the product. Additionally, we demonstrate that although penetration pricing can be recommended in some cases, it is not suitable in all situations. Premium prices can be charged depending on the relative importance of intrinsic and extrinsic product value. The results of our study highlight the need to update the theoretical reasoning on launch strategies for network effects products. Implications for managerial practice are discussed and suggestions for further research offered.