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 time, to ease consumers’ uncertainty about the functionalities of their products and to help the diffusion of their new software. This paper examines the tradeoff 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 the software firm has the option of providing free trial software with limited trial time with full functionalities or limited functionalities for unlimited 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.ow that the time-locked free trial is favorable when the intensity of network effect is modest.