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What is Captive Product Pricing (And Why It Might Be Beneficial?)

by
in
Maciej Wilczyński
Managing Partner, Founder Valueships
October 19, 2023
pricing
price
SaaS
strategy
products

The worst thing about buying a printer isn't the upfront cost, but the ink cartridges that you'll need to keep purchasing. This is a classic captive product pricing example - a pricing strategy that can be both beneficial and tricky.

But what exactly is it, and how can it be advantageous for your business?

We will cover this topic.

What is Captive Product Pricing

Captive product pricing is a pricing strategy where a company sells a core product at a relatively low price but charges high prices for additional products or accessories required to use the main product. 

This pricing model aims to increase sales and customer loyalty by enticing customers to continue using the key product, which necessitates buying complementary - often pricier - captive products.

Examples of Captive Product Pricing Strategies

All right, but to understand exactly what's going on, look at these examples.

  • Printer and ink cartridges

You already know the first scenario: a printer (the core product) may be sold at a reasonable price, but the ink cartridges (captive products) are expensive and need frequent refills.

  • Video game consoles and games

Another example is video consoles and games. It's sold at a competitive price, but the video games (captive products) are already quite a bit more expensive.

  • Razor and blades

A third example here is a razor sold at a low price. However, in this case, the blades (captive products) are costly and need to be replaced regularly.

When to Use Captive Product Pricing

We know the examples, we know the definition, so it's time to learn when to apply this strategy.

The secret to maximizing profitability and captivating your audience is knowing when to use specific tactics. So, let's unveil the scenarios in which captive product pricing takes center stage.

💯 Increase Sales

This product pricing can help increase sales as it encourages customers to purchase extra products to continue using the core one.

👌🏼 Build Customer Loyalty

It can also foster customer loyalty, as customers are more likely to stick with a specific line of products they've already invested in.

💰 Maximize Profit

Companies that sell products with a captive pricing structure can maximize profits, thanks to setting higher prices for captive goods.

💡 Counteract Competition

Captive product pricing is most effective when there are few substitutes for them. This makes it difficult for competitors to penetrate the market.

🛍️ Encourage Bulk Purchasing

Also, offering these products as a bundle can incentivize customers to buy in bulk. By doing so, you can further increase sales.

💵 Implement Value-Based Pricing

Incorporating pricing for dependent product allows for value-based pricing. Here, the price for a product or service is based on its perceived worth to the customer.

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Tips for Using Captive Product Pricing

If you're ready to get the most out of a captive pricing strategy, we'll delve into a treasure trove of expert tips in this section. They will help you refine your approach and adjust your entire business strategy.

Here they are:

Understand Your Product Line

Knowing the line of your product is the first step in implementing this strategy. Therefore, understand which items serve as the core or primary products and which are accessories. Such clarity is crucial because your captive product pricing is based on how these products interact. 

➡️ For example, in a SaaS model, the main software could be the key product, while additional features or modules could be the captive products.

Set Competitive Prices for Core Products

The base product serves as the entry point to your product line. So, its pricing should be competitive enough to attract customers. This is a common pricing strategy in which you set a lower price for the main product and plan to make up for it with the sales of captive products. 

➡️ A video game console may be priced lower to attract buyers who will then purchase games, which are captive products.

Monitor Costs

Cost monitoring is essential in any pricing strategy, but it's particularly crucial in this one. Keep an eye on the production costs of your captive or accessories to ensure that your pricing structure remains profitable. 

➡️ This is especially important in SaaS businesses where the cost of additional features can vary.

Be Transparent

Transparency is key if you want to work with this approach. Make sure customers are aware of the extra products or accessories they'll need to purchase in order to use the core product effectively. Here's an example: if you're selling printers, be upfront about the cost of ink cartridges. 

➡️ Transparency not only builds trust but also helps in pricing your product in a way that reflects its true cost.

Offer Bundles

Bundling is a type of pricing strategy that can be particularly effective. You can combine the core and captive products as a bundle to provide value and encourage bulk purchasing. 

➡️ This strategy can help increase sales and is often used for product pricing.

Analyze Customer Behavior

On the other hand, understanding customer behavior can offer insights into how effective your captive product pricing strategy is. Use analytics tools and track how often customers purchase captive products alongside the main product. 

➡️ Data can help you adjust your pricing strategy to increase sales and customer loyalty.

Diversify Captive Products

Offer a range of captive or accessory products, as it can make your pricing strategy more dynamic. Just see: you could offer different types of inks or various video game genres. 

➡️ A diversified range of captive products can cater to a broader audience.

Leverage Penetration Pricing

Penetration pricing can be combined with captive product pricing for a more aggressive market entry. Therefore, offer the core product at an exceptionally low price to attract a large customer base quickly.

➡️ Once the customer base is established, the sales of captive products can sustain the business.

Adapt to Market Changes

The market is not going to stand still, and so should your captive product pricing strategy. As a result, regularly review market trends, competitor pricing, and customer feedback.

➡️ Adapt your pricing system accordingly to ensure that it remains effective and competitive.

Is Captive Product Pricing Worth It?

You know what is captive product pricing, its tips, and when to use it, but is it worth implementing in your business?

The answer largely depends on your product or service and how it's structured.

In SaaS, for example, offering a core product at a competitive price while pricing additional features higher can create a steady revenue stream. This pricing work is meant to encourage users to invest in accessory features, thereby increasing sales and customer loyalty.

However, there are also challenges.

You must consider the difference between captive and other pricing models like by-product pricing or two-part pricing. Captive product pricing is based on the necessity of purchasing another product for the main product to function. This can be advantageous but also risky if customers find alternatives.

In the end, it's essential to use captive pricing judiciously. It can be a great pricing strategy that offers various advantages, but you need to tailor it to your product or service based structure for it to be effective.

Captive Product Pricing Works When...

when the core product has a strong market presence, and the captive products are indispensable for the functionality of the main product. 

This strategy can also be highly effective in markets where the key product serves as a standard that customers are reluctant to switch away from.

If you understand the advantages and disadvantages of this pricing strategy, you can make informed decisions that benefit both the company and its customers.

So, whether you're in the SaaS industry or selling physical goods - incorporating captive product pricing could be a jackpot for your business.

Frequently Asked Questions On Captive Product Strategy

What is Captive Product Pricing? 

Captive product pricing is a strategy where a company sells a base product at a competitive price but sets higher prices for accessories or complementary products. For example, a printer may be sold at a regular price, but the ink cartridges, known as captive products, can be a little bit more expensive than usual. It can help increase sales and customer loyalty.

How Does Captive Product Pricing Work in SaaS?

In a Software-as-a-service model, the main software may be offered at a competitive price or even for free. However, additional features, modules, or services are priced higher. This strategy is meant to entice users to continue using the core product and invest in the higher-priced extra features.

What Are Some Examples of Captive Product Pricing?

Common examples include printers and ink cartridges, video games and consoles, and razors and blades. In each of them, the base product is sold at a competitive price, while the accessories required for the product to function are priced higher.

What Are the Benefits of Using Captive Product Pricing?

The benefits of captive product pricing are, among others: increased sales, customer loyalty, and the ability to maximize profits. This pricing strategy can also be particularly effective when there are few substitutes for the captive products, as then competitors struggle to enter the market.

How Is Captive Product Pricing Different from Optional Product Pricing?

The difference between captive and optional product pricing lies in the necessity of the additional products. In captive product pricing, the accessory products are essential for the core product to function. In optional product pricing, the extra products enhance the key product but are not absolutely necessary.

Can Captive Product Pricing Be Used in Different Pricing Strategies?

Yes, captive product pricing can be combined with other pricing strategies like penetration pricing or value-based pricing. For example, a company may use penetration pricing to introduce the main product into the market at a low price and then employ captive product pricing for the accessories. This combination of different pricing strategies can help a company adapt to market changes and customer preferences.

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Maciej Wilczyński
Managing Partner, Founder Valueships

Expert in B2B pricing, monetization and value-based selling strategies. Over the past year, he has completed over 40 consulting projects in Europe. Prior to founding Valueships, he worked at McKinsey & Company, mainly in the TelCo, software, and banking industries. He completed his doctorate in pricing in SaaS start-ups at the University of Economics in Wrocław, where he also lectures.

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Maciej Wilczyński
Managing Partner, Founder Valueships

Expert in B2B pricing, monetization and value-based selling strategies. Over the past year, he has completed over 40 consulting projects in Europe. Prior to founding Valueships, he worked at McKinsey & Company, mainly in the TelCo, software, and banking industries. He completed his doctorate in pricing in SaaS start-ups at the University of Economics in Wrocław, where he also lectures.