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theses

The distribution of free trial samples has long been used as a common and important promotional to create brand awareness, improve brand loyalty, and expand product category. Not only does it provide sampled customers with firsthand experience of the true quality of the product, it also generates consumer goodwill to help expedite the diffusion of new product. Despite those advantages, however, sampling can have negative impact on the firm sometimes. Not mention the expensive cost of distributing free samples, the firm also risks losing part of the demand for its commercial product when introducing the free sampling. This leads to a dilemma for business firms: What are the effects of free sample trials? Is it always good to distribute free samples? Under what conditions should a firm offer free trial samples to the market? What is the optimal way of offering a free trial? How firm performance is improved by the free sample trials? In this dissertation, we study the firm’s optimal strategy of free trials in the presence of network externality. In the first essay, we study a software monopolist and derive (a) the conditions under which free sample trials are profitable, and (b) the optimal duration of the free trial period. We consider two underlying factors favoring free trials: resolving uncertainty about the performance of the product and the network externality. On the other hand, however, those free versions may cannibalize the sales of the paid version.We examine how a monopolist software company can optimally determine the free trial period as well as the price of the paid version. We show that the firm is more profitable to offer free trials when the network externality is modest and consumers’ initial beliefs of the product quality are low. The implementation of optimal trial duration can increase the firm’s profit substantially compared to the typical 30-day scenario. In the second essay, we build an analytical model in a duopoly setting to examine the tradeoff between network effects and the cannibalization effect, and aims to uncover the conditions under which firms should introduce the free trial product. Our proposed analytical model suggests that when network externality is large, the firm is better off providing free demos with low quality to keep vertical differentiation between itself and its competitor. Although the distribution of free trial demos with a higher quality may drive the competitor out of market, the firm will suffer from a more severe cannibalization on its own demand. The third essay is a case study. We use a unique experimental design to empirically test how the online free samples have impact on immediate sales. Specifically, using the three month transaction data from a free sampling event in a Chinese online marketplace, we adopted a difference in difference approach to study how free sample impacts on sales differs in the pre and post promotion period, and how WOM interact with free sample effectiveness to influence sales.

ETD_5752

Ph.D.

Includes bibliographical references

Includes vita

by Shuojia Guo

doi:10.7282/T3CJ8G36

ETD doctoral

The author owns the copyright to this work.