Optimal selling price and replenishment time with a limited-time free trial

Abstract

Nowadays, online stores have become the choice markets for consumers. However, a main disadvantage of this choice is that consumers hardly have opportunities to inspect the product. So, a free trial period could be used as a marketing tool giving prospective customers the ability to evaluate and inspect the products before making their orders. Hence, the disadvantage of lack of product experience diminishes, contributing to sales increase. In addition, pricing is a well-known powerful and effective marketing tool towards increasing sales. As a result, pricing and free trials are two of the most powerful and effective marketing tools to increase sales and profitability. Nevertheless, in inventory management literature, the studies on the joint impact of free trial and selling price are rarely seen. Within the EOQ framework, we propose a model, in which the seller has the ability to determine whether to offer free trials or not, and then to decide the optimal selling price and replenishment cycle so that the total profit is maximized. Furthermore, we establish several theoretical results and try to answer the following important and relevant questions: (1) the conditions under which the seller should offer a free trial to prospective customers, (2) the impact of a free trial offer on the replenishment cycle and selling price, and (3) the influence of price elasticity on the selling price and order quantity. Finally, through sensitivity analysis we study the effect of several parameters on the optimal solution.