Letting potential new customers (and competitors) try your web application for free or not?

Let's say a company developed some easy to use web applications: a CMS an eCommerce, etc.

Do you think it should place a working DEMO on their website for these applications or NOT?

The question is:

will the demo be more used by potential customers or will it be more used by competitors to copy the features and usability of the web applications???

We are asking because w e noticed that when developing our web applications we did study our competitors web applications by going on their website and playing with their demos. :)

If your competitors are serious enough, they won't mind paying to access your application (unless your service is really expensive perhaps). On the other hand, how many customers are going to pay for something they haven't tried? People expect a free trial, as that is what the vast majority of the Internet services provide.

I think you'd lose a lot more than you'd gain by not having a free trial.

As a way of mitigating the problem of competitor access, some companies put a clause in their user agreement saying that competitors aren't allowed to sign up for the service, but I don't know how effective that is.

If you have a competitors that can undercut your business by simply copying your app,then you need to worry not about trials but positioning.

The day your competitors start copying you, it means you struck a nerve and are heading in the right direction.

The trick here (which is hard to do, unfortunately) is to make sure your product has a set of features that are hard to replicate. It's not the design, layout or navigation... it's what's under the hood that really matters. The algorithms you use, for example.

But going back to your base question: you SHOULD offer customers the ability to try the product for free, online.

If customers can use you solution for a period of time, you'll have them evaluate it in self-service mode. This will bring down your cost of sales (instead of having to schedule demos, conf calls and send your sales squad to meet the customer). They'll do a hands on evaluation of the product, and compare it with other alternatives they might be looking for (some may not be available for trial).
At the end of the day, you might loose 90% of all trial users, but the 10% you convert into paying customers will have costed you virtually 0$.

So focus all your energy in:
1) making your product non easily replicable,
2) providing a good trial version, with easy sign-up and instant gratification (a WOW every 5 minutes since the prospect signs-up)
3) getting as many people as possible into your site and onto the trial (remember, this is a numbers game. For example 1000 people visit, 5% sign-up, 10% become customers - 5 new customers for every 1000 visits). Increase the visits, and grow your customer base)

Your competitors will always be prepared to put more effort into examining your software than potential customers, so any barriers you put up will have adverse effects for you.