Optimal Design
of Content Samples for Digital Products and Services
Abstract:
With the rapid penetration of broadband
and mobile technologies, marketing of creative content such as books, video and
music through the provision of free samples of content is emerging as a very
common practice. Clearly, the motivation for providing free samples in any form
is to increase revenue, yet the specific design of the sample through which the
increased revenue is realized, if at all, is an under-researched topic. This is
critically important for some content producers because if the strategy of free
content is not properly implemented, it might result in significant
cannibalization of the firms' revenue stream. On the other hand, if the
strategy is implemented correctly, it can lead to increased sales as well as
consumer welfare.
In this paper, we develop a framework to
understand how free samples impact revenue generation in the case of creative
content, focusing on the quality and design aspects of the sample when sample
of the entire content is given out free. We examine, specifically, under what
conditions managers should provide free sample of creative content. If free
sample is provided, what should be the optimal quality level of the sample and
how does the optimal level depend on the level of functionality that the sample
provides? How does this vary depending on the quality of the original content
being sold? What is the impact on price and the overall revenue under the
optimal policy? As a preamble to our research examination, we discuss the
findings from analyses conducted on the sales data collected from an online
book publisher, who provides samples of full content of different qualities.
Some of the data are from a natural experiment and others are observational
data on sales. We focus on the nature of the relationship between digital
samples and the sales of print books, when the electronic format is used only
as a sample and not for sale. The findings serve as a motivation to guide our
research questions which are examined using an analytical framework in a
monopolistic setting. Based on the normative implications derived from the
model, we empirically determine the conditions under which free samples
increase sales using data from a field experiment with the same online
publisher.
Our research finds that, rather than
being substitutes, free samples of entire content (as in freemium) can be very
effective in increasing revenues. Furthermore, we find that higher quality
samples have a greater impact on the sales of popular content. Under such
conditions, high quality samples increase sales as compared to the case when
the firm provides low quality samples or does not provide a sample. Consistent
with the results of the analytical model, the firm can increase their revenues
by increasing prices under the provision of free high quality samples. Sales of
lower quality content, however, get cannibalized by the provision of free high
quality samples of the entire content.
