If you’re thinking of changing up your pricing strategy, captive product pricing is a strategy you should consider.
The concept of captive product pricing is simple. For example, imagine owning an Xbox without games. Unless you just enjoy collecting consoles, it doesn’t make sense to own the console without games. Companies, like Microsoft, know you need both the console and games to make the product work. So, to increase sales, they sell the core product (in this case, the Xbox) separately from the accessories (ie. the games).
This strategy can be relevant to SaaS businesses, too. With this pricing model, you’re almost guaranteed to have the same customers make additional purchases. In this post, you’ll learn the benefits of captive product pricing and how to make it work for your business.
Typically, the core product is purchased by the customer only once, but the accessories are purchased as necessary — sometimes over and over again. Companies typically price core products at a loss and attempt to make up the difference by pricing the captive products and accessories at a higher rate.
Added value can come from being the only business that sells the additional required accessory, as you’re guaranteed more business from customers who purchase your core product.
An example of captive productive pricing is a printer and its required ink. There’s really no reason to buy the printer just to buy the printer. The accessory, or the captive product, is the ink required to use the core product and give it meaning. In this example, a consumer buys the printer and immediately buys ink (the accessory) because they know it won’t function without it.
Captive product pricing can boost sales and increase profit margins. Having accessories required for core product functions is a surefire way to inspire customer loyalty, especially if they feel like the expense is worth it.
There are a few considerations to keep in mind if you choose to use a captive product pricing strategy.
Deciding to use this model should stem from having a natural, complementary product and accessory. You shouldn’t opt to do this if the products aren’t necessarily related, as this could be seen as a money grab for your customers — not to mention that it’s unethical.
You should also price your products separately. Many businesses underprice core products and overprice captive products to compensate for a loss. While this should be considered, they should be priced separately based on their worth.
Lastly, customers are the key factor in this scenario. You should always price and sell with your customers in mind. Your products should still provide value for your customers, but your products shouldn’t be outrageously priced either. As mentioned, you don’t want to be flagged for unethical practices.
Let’s go over some examples of products and services that use the captive product pricing model you may have encountered before.
Video game consoles are typical examples of captive product pricing. The core product is the gaming console, like an Xbox, that may be nice to have but worthless without the accessories. So, the captive products are controllers, games, and any additional accessories that make having an Xbox worth it.
Creators of video game consoles are also capitalizing on an additional benefit of captive product pricing — being the only one to produce accessories that work with the product.
For example, Xbox games only work for Microsoft gaming products. They aren’t interchangeable with Nintendo or Sony games. Thus, these companies benefit from having consumers purchase multiple consoles to play their favorite games that aren’t compatible with their favorite device.
For car manufacturers, the attempt to corner the market with captive product pricing is more complicated than other industries, but they’re still a great example. The core product is the car purchased, and the captive product is any replacement parts or additional accessories (like GPS tools) required to keep the car running or improve user experience.
It’s more difficult to corner the market with automobiles because consumers can often purchase parts from third-party dealers. However, many businesses discourage customers from doing this by offering free services if parts are bought and installed by their technicians.
While you can purchase a device with cellular capabilities and use it without that function, there is no need to spend more money on a product for that reason. A cell phone is the core product, while a wireless plan is a captive product. A cell phone is basically useless without a wireless plan.
SaaS software also followed the captive-product model. Businesses will often provide baseline tiers that consumers can purchase (core product) and charge for additional add-on functionalities (captive product) like leveling up to a different business tier or paying for specific tools.
If you’re a business with products or services that provide value and purpose from additional products, you should consider using the captive product pricing model.
Pricing your core product at an affordable price will attract new customers. Then with the captive product, you will increase your profit margins and turn those new customers into repeat customers.
When executed right, captive product pricing can increase sales and build a base of loyal customers that are ready and excited to purchase accessories to enhance the experiences they get from your products.
Editor’s note: This post was originally published in January 2021 and has been updated for comprehensiveness.