The Effects of Competition and Costs on Demonstration Strategies in the Software Industry

The working papers in this series are preliminary and circulated for the purpose of discussion. The views expressed in the papers do not reflect those of the Center for Agricultural Economic Research. Abstract In the software industry, the need to provide a mechanism that enables the prospective customer to experience the product before the final purchase increases as a result of the increase in competition and the technical complexity of the product. As a result a demonstration offer is becoming an integrated part of any software sales effort. Software demonstrations vary in length (duration) and personalization level. With the increase in the popularity of the Internet, the tendency to use it as a vehicle for providing information about the product also increases. This includes a demonstration provided via the Internet. The special characteristics of the Internet dictate the demonstration's character, i.e., all programs are self-installing and directly experienced, yet vary in their duration and usage restriction levels. Software products which require either installation or training, cannot be demonstrated via the Internet, and require a personalized demonstration, which due to its high cost, is usually shorter than the average Internet demonstration. In this paper, we model the effect of competition and cost structure—in particular the difference between personalized and impersonalized (Internet) demonstrations—on the demonstration's strategy. This paper shows that if the demonstration is personalized, then a competitive firm tends to decrease both the number of demonstrations and the duration of each. If the software product is demonstrated via the Internet, then the decision about quantity of demonstrations is not relevant, and the decision regarding the demonstrations' duration depends on the intensity of competition. In a highly competitive market, when an increase in the demonstration's duration increases the probability of inclusion in the evaluation set, then competition will cause an increase in the duration of each demonstration. If the demonstration's duration does not contribute to the probability of being tested, then competition will decrease the demonstration's duration. We support the theoretical findings empirically using data collected from two software industries, each with a different demonstration cost structure: software demonstrated via the Internet, and industrial software products, the latter which require personal demonstrations. Software products that are distributed via the Internet represent the industry whose cost of providing a demonstration is the alternative income loss. Analysis of the empirical data indicates that in general, the duration of a demonstration is negatively related to …