I've been with Exposure Manager for some time now. They are constantly monitoring the market and sales of all the accounts they have. Bottom line is people want digital files of their images. Sometimes that is all they want and never intend on even making prints. This is only going to get to be more of the rule than the exception as time goes on. So not offering a digital download means not giving the customer what they want. Which means they either take it, watermark or not, or they walk away. Either way you make nothing. So the trick is to offer a download/digital file priced where they would rather pay the price than deal with a small watermarked image.
I've offered digital download files on my site for a long time. My first stab at it was to charge a lot for higher resolution files to try and justify the print order loss. I sold zero of these digital downloads and my print sales were so-so. This is where the good people at EM evaluated my site and sales for free and gave me advice on how to better price and organize my galleries and products.
In their stats they figured out that if you price a 4x6 print a little steep, and a 5x7 just a little more than a 4x6 then more people will order the 5x7 and in the end you make more. This was absolutely true because I followed their advice. Next, they advised to price a digital download to be close to a 5x7 print price and make the resolution enough to print 5x7 (around 1500x2100 pixels). In addition to this they advised me to offer a digital download plus a 5x7 print package and price it to be less than if they ordered these two separately.
Turns out this is working great! Consider that now I sell quadruple in terms of images ordered. I sell about as many digital downloads as I do prints now. And the cool thing is that the same people who order digital files ALSO order prints of the same image. Why? Because they want the digital file because they can use it on-line, in digital frames, and in this format it can be preserved much longer/safer than just a print by saving on computers, and discs. But, they also order prints because they want a print that is done at a professional lab.
Now I am not saying all of them order both, but a lot do. There are a lot of photographers out there who feel that selling digital files is equivalent to selling your soul, but in reality it is more and more what the customer wants and if they can not get it reasonably they will take it. So it is best to figure out how to accommodate your customer rather than alienate them. In seeing my sales before and after my move to reasonably sell digital files I see that before I was not selling any digital and they were likely just taking them or walking away. So at least now these images are generating income rather than just sitting on my disc taking up space.
I have also actually got jobs where the client told me they had to have the ability to obtain digital files of the images and other photographers just flat out do not offer this so the client kept looking until they found one that did.
...oh and along with the purchase of digital downloads from my site they have to agree to a personal-use license agreement that explains how they can and can not use the images.