Research On Experience Product's Free Strategy Based On Customers' Prior Perception And Trial Budget Constrain

A main challenge faced by startup firms,who launch new experience products,is that customers are uncertain about the quality of the products.Customers may not know the true quality of a new experienced product unless they have tried it.Therefore,when a new product is launched,customers may not get true quality of product but only hold prior perception.One common strategy firms adopt to reduce or mitigate customers' belief uncertainty is to offer free products to customers.Free trail can help customers get the information of product quality and improve their willingness-to-pay,which allows firms to charge a higher price and increase profits.But free trial also leads to demand loss,as customers who would buy the product now can get it free.Focus on experiences products' free trial strategy,this paper conducts firms' optimization model under monopoly and duopoly market structures.By comparing firm's optimal decisions and profits with and without free trial under different market structures,the paper intent to explore startup's optimal free trial strategy and how free trail affects firm's pricing decisions.Firstly,the basic model without budget constrain is established.We find that the startup can always charge a higher price by offering free trail.However,under a duopoly structure,free trial can lead to a higher price only if customers' prior perception of the new product is relatively low.The free trial will intense the competition between two firms.The results also show that the startup has incentive to offer free trial if and only if customers' prior perception is low.This finding is suitable under both monopoly and duopoly structure.In addition,when there exists a competitor,the startup has more incentive to offer free trail as the quality of competitor's product increases.Secondly,based on the basic model,we further study the case where the budget of the startup is limited.That is,though each customer has the same chance to get the free sample,only a few customers may get the product eventually,as the startup only able to offer limited number of free samples.Our results show that when the startup faces limited budget,the product price increases in its budget.As the budget increases,the startup can offer more free samples to customers in the first period.The price may even higher than customers' prior perception,which means there may be no customers buy the new product in the first period.The startup may suffer from profit loss if it offers free trial with fairly limited budget.Moreover,our research shows that the increase in product cost will reduce the benefit of higher price caused by free trial,and thus weaken firm's incentives to offer free trial.Thirdly,the paper explores the impact of customers' prior perception heterogeneity on startup's pricing decisions and free trial strategy.The results imply that free trial may lead to a lower price when the proportion of customers who overestimate the quality of product is large.The startup can benefit from free trial when the proportion of customers who overestimate is small.When facing competitor,we show that the startup has low motivation to offer free trial.