Perils and Benefits of Free Trials in Large Scale Service Systems: An Operations Perspective

Abstract

Despite their pervasive use in practice, the operational implications of offering free trials are not well understood. Motivated by this, we consider a service provider that has the option of offering free trials to a new market while catering to an existing market of price and delay sensitive customers. Then, we pose the following question: Under what conditions is offering free trials beneficial and what is the extent of this benefit? This question is relevant because with free trials the firm essentially gives away part of its capacity to potentially generate more revenue in the future. Hence, it is not apriori clear if offering free trials is beneficial. To answer these questions, we pursue an asymptotic analysis that allows us to glean novel insights as to when and how a large-scale service firm should offer free trials: When the firm offers free trials with no control, we find, somewhat surprisingly, that offering free trials is beneficial only for small free trial market sizes with correspondingly small relative benefits. When capacity can be adjusted, we derive tractable expressions that can accurately determine when offering free trials is beneficial and the extent of this benefit. Consequently, we establish that offering free trials is always beneficial when capacity can be adjusted below a cost threshold. Thus, we conclude that service firms should opt to simultaneously increase capacity as free trials are offered to unlock the expected benefits, and otherwise not offer free trials at all.