Optimal software pricing in the presence of piracy and word‐of‐mouth effect

We develop an analytical model that embeds empirical findings on software diffusion to examine optimal pricing strategies for a spreadsheet software product under coalescing effects of piracy and word‐of‐mouth through its entire life cycle. We find that the demand of the innovators has the most significant impact on the firm's pricing decision. Our research recommends market skimming pricing strategy if innovators' demand is high and the market penetration pricing strategy is preferred otherwise. Surprisingly, the increase of conversion rate of imitators to buyers never significantly alters the pricing strategy pre‐determined by the demand of innovators. Most interestingly, the optimal profit from instituting a two prices policy for a software product with five years lifespan outperforms that from a one price policy by no more than 4%, a finding that corroborates the common one price policy observed in reality.