Captive Pricing

Pointing out that someone or something is being a captive does not sound like a promising introduction. But, no need to worry, the explanation is much less complicated than it seems. 

A list of pricing strategies you may want to try out can seem never-ending. There are always new strategies emerging, especially nowadays, when repricing capabilities are dictated by technological advances.

One of those is captive pricing. No, your business won’t be a captive, but we need to explain what is behind this concept. 

What is captive product pricing? 

Captive product pricing or simply captive pricing happens when you have a core product that needs accessories (add-ons) in order to be properly used. Therefore, the final price must include the price of all relevant products. What companies usually do is make one of those products inexpensive or discounted, while the other has a higher price. 

It can also be thought of as a type of bundle pricing, just not explicitly stated.

Usually, the core product can’t function properly without the add-on. It’s not a hard guess that in many cases the core product requires the add-on from the same company in order to work. 

The logic behind this concept is that shoppers get to buy the core product at a lower price which is perceived as a good deal. But, in order to use that core product, they need to buy additional products at a higher cost. As you can see, captive products are the ones that bring profits, but they wouldn’t be useful without the core ones. 

Captive pricing examples

We’re sure you can think of many everyday products that are sold as core and captive products. Here are some of the most common ones:

• Razor and blades
• Video consoles and games
• Printers and ink cartridges 
• Cars and replacement parts

Essentially, the primary product candidates for captive pricing are complementary products. As we have said, they are almost always purchased together by default. If not, then shortly one after another. This is because they cannot work on their own.

But have you ever considered yourself as a captive product? Yes, you can also be a captive product, and believe it or not, you have likely been in those situations many times.

For example, when you are waiting for the flight, the lunch you pay for at the airport is more expensive than the one you could have outside the airport.

Amusement parks are another good example. The ticket is pretty cheap, but that often makes the queues endless. In order to avoid waiting, you can buy fast passes. Therefore, captive pricing can also be location-based. 

Okay, this is useful to know from the customer standpoint, but what if you are the owner of a SaaS company? Can captive pricing be applicable then as well?

Can captive product pricing be used in SaaS?

The way that SaaS companies are using the captive product pricing strategy is usually the following: 

Mostly, the core product is offered with a free or basic subscription plan, and it offers enough functionality for users to test it and decide whether it would be a good solution in their case. But, if they are looking for more extended functionality, then they would need to make specific upgrades. For example, some of the reports can be available for everyone, but if the client needs a custom solution, he needs to be prepared to pay more. 

Hence, SaaS companies are using captive pricing to build loyalty and trust. The core products serve customers to get an overall idea of the product/tool/service but if they want high-end functionalities, they would need to pay extra money. This strategy comes in handy in these situations because the final price can be very high and no one is ready to risk paying for something without testing it fully. 

SaaS companies usually offer different price plans that cover different functionalities so that everyone can find the most affordable solution according to their needs. 

A good example of this is the way in which price monitoring tools work. There is usually a free trial period during which clients can test the tool. This is very important because there are many things to be considered when using these tools. For example, how many products/competitors can be monitored, can data be imported/exported in bulk, are the results timely and accurate, how good is the customer support, is the tool way too complex to use, etc. 

Only if the client is satisfied with these basic requirements, they will be ready to discuss other additional functionalities and pay more for them. 

What are the risks of using this pricing strategy?

This strategy might seem just the one you’ve been looking for, but don’t get ahead of yourself – we need to explain the possible risks as well. 

First and foremost, you need to consider the customers’ reactions. We already talked in our previous posts about price discrimination, so be careful that your prices don’t get perceived as unethical. 

Another very important thing is to set the prices very carefully. As we said, one of the options is to bundle the core product with the accessory one, but in that case, you need to be extra careful. The price of a bundled product needs to be higher than the price of buying the accessory product alone. Let’s explain it in more depth. 

For instance, new razors usually come with a few blades. If you are selling them as bundled products, then they need to be more expensive than buying replacement blades separately. You can’t expect anyone to buy the accessory product alone if the whole bundle is a cheaper option. 

Conclusion

When done right, captive pricing can drive more sales and profits. As you can see, it can also be applicable to various other business aspects. But, as we always like to mention, there is no universal solution for everyone. 

Have you ever considered using captive pricing? Have you maybe encountered any issues with it? 

Feel free to share your experience with us and our readers.