Optimal sequential releasing strategy for software products in the presence of word-of-mouth and requirements uncertainty

Abstract

This study proposes a two-period analytical model to explore the relative optimality of three sequential releasing strategies for a software vendor: (1) Skipping Strategy—skip the limited-functionality version and introduce a full-functionality version in the next period, (2) Replacement Strategy—release a limited-functionality version first and replace it with a full-functionality version later, and (3) Line-extension Strategy—release a limited-functionality version first and extend the product line by releasing a full-functionality version later. Word-of-mouth (WOM) effect and uncertainty in consumers’ requirements are taken into consideration. Our analysis shows that Skipping Strategy is optimal when the net WOM is negative and sufficiently small, while the Replacement Strategy becomes the optimal choice when the net WOM is negative but not sufficiently small. However, the Line-extension Strategy dominates other two strategies when the net WOM is positive. Different pricing patterns may be chosen when adopting Line-extension Strategy, i.e. when the net WOM is positive and not very large, Low–High pricing pattern (a relatively low price for the limited-functionality version and a relatively high price for the full-functionality version) is optimal, while High–Low pricing pattern (a relatively high price for the limited-functionality version and a relatively low price for the full-functionality version) becomes optimal when the net WOM is positive and sufficiently large. Numerical experiments show that the software vendor could improve its profit by choosing optimal quality design but the overall dominance pattern of the three release strategies is similar no matter whether the quality design is exogenously given or optimally chosen.