Worried about setting the right prices for your products? A smart pricing strategy helps you earn more now and in the future. Just lowering prices to beat the competition can hurt your profits. You need a better plan, which the captive product pricing strategy can provide.
In this strategy, you attract customers with low prices on your main product and then earn more from necessary add-ons and upgrades. It encourages customers to keep buying items that complement their initial purchase.
When done correctly, captive product pricing helps you appeal to customers looking for good deals without cutting into your profits. The secret lies in knowing your customers, creating the right mix of products, and marketing your offerings successfully. Continue reading to learn how to make this strategy work for you.
An overview of captive product pricing
Captive product pricing is a clever strategy where you sell a primary product at a low price and charge higher prices for items that go with it. At the heart of this strategy are 2 types of products: the core product and the captive products.
- The core product is the main item you’re selling at an attractive price, designed to draw in customers.
- The captive products are the additional items or services that are usually essential for the full use of the core product.
Captive products are typically proprietary, so you can sell them at higher prices without worrying about the competition undercutting you.
The magic of captive product pricing lies in its ability to create a continuous revenue stream. After the initial sale of the core product, the ongoing need for captive products keeps customers coming back.
Whether it’s coffee pods for a coffee machine or ink cartridges for a printer, these captive products are where the real profits are made. Since these items are often exclusive to the core product, customers are willing to pay premium prices, leading to higher profit margins.
Pros and cons of using the captive product pricing model
Thinking about using the captive product pricing model? Weigh its pros and cons to make the best choice for your business.
Pros
- Streamlines purchasing decisions for customers
- Secures repeat purchases of high-value products
- Enables higher pricing due to limited alternatives
- Creates a steady and predictable revenue stream
- Fosters brand loyalty and trust
Cons
- Limited choices can decrease customer satisfaction
- Competitors could develop cheaper alternatives
- Minimal flexibility in adapting to market changes
- Risk of customer backlash if the accessory products feel mandatory
- Stable revenue may lead to complacency and hinder innovation
Captive pricing strategy examples
Large and small businesses across various industries are successfully using the captive pricing strategy. Let’s look at some common captive product pricing examples to see how it works.
Printers + ink cartridges and premium print media
Printer manufacturers use captive pricing by selling printers at competitive prices. They make most of their profits from selling ink cartridges and premium print media, such as brochure paper and blank label sheets.
Video game consoles + games and accessories
Video game console manufacturers employ captive pricing by offering consoles at affordable prices. The bulk of their profits roll in as customers purchase accessories and games for their video game consoles.
Cars + aftermarket and replacement parts
Modern car manufacturers take a unique approach to captive pricing, choosing to exclude highly desirable features like heated seats, GPS tools, and even horsepower increases in their basic car models.
SaaS base subscriptions + higher-tier add-ons
When SaaS businesses use captive pricing, they offer plans with basic features at the lowest price point. Then, they upsell higher-tier add-ons to customize subscriptions while maximizing their revenue.
Four additional product mix pricing strategies
Captive product pricing is one of many product mix pricing strategies. These strategies can help you set prices for an entire product range based on how different offerings relate to each other. Here’s a closer look at 4 additional pricing methods to consider.
- Product line pricing: This method sets different prices within a product line to appeal to various customer segments. A good example is how a tech company offers its software in basic, pro, and premium versions, each with more features and a higher price than the last.
- Optional product pricing: This approach lets customers add additional features or services to their purchase to make the product better fit their needs. For instance, when buying a basic smartphone, you can pay more to add optional features like special colors or more storage.
- Product bundle pricing: This strategy bundles several products or services together for a single discounted price. Typically, these items are related to or complement each other, like a laptop with software included.
- By-product pricing: Sometimes, making one product can result in the creation of another product, called a by-product. By setting prices for these by-products, you can turn something that might have been wasted into an extra source of income. For example, a sawmill might sell sawdust as a by-product for use as garden mulch.
These are all useful pricing methods in the right situations. However, you might prefer captive product pricing if the main goal is to ensure ongoing revenue streams from essential add-ons.
What to think about when using the captive product pricing model
If you think captive pricing might work best for your business, consider the following to ensure you make the most of this strategy.
Thoughtfully match core products with captive products
The captive pricing model works well when the main product is so appealing that customers feel drawn to buy all its related products. To make this happen, highlight captive products as essential for the best use of the core product.
For example, with a high-end coffee maker, market unique coffee pods as crucial for the ultimate coffee-making experience. This strategy helps customers view the additional accessories as necessary, not just nice to have.
Assess the overall value of your products from the customer’s perspective
It’s essential to understand the overall value of your products as seen through your customers’ eyes. The perceived value of both the core and captive products affects how customers view the price and worth of the entire set.
If customers see high value in the core product and its upgrades and accessories, they’re more likely to view the prices as fair and the purchases as worthwhile. This means carefully balancing quality, features, and price across all products to meet or exceed customer expectations.
Consider using a complementary pricing strategy
You can make buying both your core and captive products more attractive to customers by using a complementary pricing strategy, such as:
- Bundling: Combine your core product with one or more captive products at a discounted rate. This not only offers better value but also encourages customers to try out additional products they might not have purchased separately.
- Limited-time offers: Create limited-time offers where customers can get a deal on captive products when bought alongside the core product. This urgency can motivate quicker purchase decisions.
- Tiered pricing levels: Offer different combinations of core and captive products at various price points. This allows customers to select a package that fits their needs and budgets, making your products accessible to a wider audience.
Complementary product pricing can make customers happier by giving them more value for their money. Additionally, it can boost your sales, ultimately leading to higher profits overall.
Adhere to legal and ethical pricing standards
When setting up your captive pricing, verify that you adhere to all legal and ethical standards. This means your prices should be fair and transparent, plus follow laws that:
- Prevent unfair competition (antitrust laws)
- Protect consumers from misleading prices (consumer protection laws)
- Ensure equal pricing for all customers (price discrimination laws)
- Guard against deceptive pricing strategies (unfair trade practices laws)
Doing so builds trust with new and existing customers and protects the integrity of your business.
Focus your marketing efforts on the core product
When you focus marketing efforts on your core product, you make it the star of your brand. By highlighting its unique features and benefits, you help customers see its value, which increases their interest in related captive products.
To achieve this, figure out what makes your product special and talk about it on social media, emails, and blogs. Also, share product demos, tutorials, and tips to help people understand how they can benefit. Don’t forget to use stories from satisfied loyal customers to make your product even more appealing.
Build brand loyalty and boost sales with the captive product pricing model
In short, captive pricing is about offering a tempting deal on your core product, and then upselling customers on complementary items at higher prices. It’s how to keep them loyal to your brand and always coming back for more. So, don’t wait another moment. Switch to the captive product pricing strategy today to turbocharge your sales, nurture customer loyalty, and boost your bottom line.