Imagine owning an Xbox without games, or a film camera with no film. Unless you’re a collector, it doesn’t really make sense. You may own both of the items, but if you’ve paid a lot of money for them you probably want to use them to their full potential. The companies you buy from know that you need both the film and the games to make these products work, so they sell the core product, the Xbox or film camera, separate from the accessory product, games or camera film, in order to inspire more sales.
You might not have thought too in-depth about it before, but this occurs due to a pricing strategy that businesses use called captive product pricing. This strategy is relevant to SaaS businesses and entertainment companies alike (think going to Disney with a standard ticket and upgrading to a Fast Pass). They know that you want to buy the captive product, a Fast Pass, to enhance your experience at Disney, so they sell it separately from the standard, baseline ticket to generate more revenue.
As mentioned before, businesses use captive product pricing because it helps them increase sales. If they sell a product that requires additional accessories, they’re almost guaranteed to have those same customers make additional purchases from them. This piece will define captive product pricing, outline standard considerations for using the model and give real-life examples of products you may use that fall into this category.
What is captive product pricing?
Captive product pricing is when a business prices goods and services based on a core product (the actual functioning product) and additional accessories (the captive product) that are necessary for the core product to work. The core product is bought once while the accessories are purchased over and over again, or as necessary.
Companies typically price core products at a loss and attempt to make up the difference by pricing the captive products/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.
It may be hard to follow this without an explanation, so let’s go over an example. A printer needs ink to work. 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. So, in this case, 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 function is a sure-fire way to inspire customer loyalty, especially if they feel like the expense is worth it.
Captive Product Pricing Considerations
Should you choose to price your products this way, there are a few things to keep in mind.
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 to your customers and is also an unethical practice.
You should also price your products separately. Many businesses underprice core products and overprice captive products to make up 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 price with them in mind and sell with them in mind as well. Your products should still provide value to them, but they shouldn’t be outrageously priced either. As mentioned before, you don’t want to get flagged for unethical practices.
Captive Product Pricing Examples
I hadn’t thought in-depth about how many of the products I have used this model, but many of them do. 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
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 can’t become a cell phone without a wireless plan.
In this case, captive products can also be additional accessories bought from a manufacturer or provider. For example, Apple recently stopped including wall adapters with their cell phones, so users who don’t already have a charging block need to make additional purchases from them.
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.
Use Captive Product Pricing to Increase Business Sales
If you’re a business with products or services that get value and purpose from additional products, you should consider using the captive product pricing model.
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.
Originally published Jan 21, 2021 8:30:00 AM, updated January 21 2021