Optimal Length of Free Trial for Online Service Considering User's Learning Effect

Abstract

Free trial strategy, which allows a user to use service/product freely for a limited time, is widely applied in online service. With time-based pricing, we first consider that the service provider launches its initial version and offers a fixed length of free trial. We observe that the optimal length of free trial cannot be more than 1/3 of the initial version's lifespan. Then, we analyze the two-stage setting where a strategic or myopic service provider (SP) upgrades its initial version in the second stage with another fixed length of free trial. The findings show that the optimal length of free trial becomes shorter if a strategic SP sets the same price in two stages. When the paying users in the first stage pay the same for both the initial and the upgraded versions, the upgraded version has a shorter length of free trial and a lower price, which is counter-intuitive. For a myopic SP, the upgraded version has a longer length of free trial and a higher price. The above findings are insightful for the operation of online service.