What Is Captive Product Pricing & How Does It Work?

This article focuses on by-product pricing. Everyone in the industry has their own pricing strategy, rules and guidelines for captive product pricing. If you use the correct pricing, you will increase your profits.

Captive pricing refers to strategies for pricing captive or by products. In many ways, the company's revenue, customer loyalty and brand promotion depend on this. Captive pricing can be seen as a tool that you need to be able to use to grow your company. And in this article, we will analyze all aspects of the captive pricing strategy.

Some industries are known for releasing captive products. Such products have no value, and getting rid of them is expensive, which affects the price of the main product these businesses offer.

The producer seeks to find a market for their captive products and is often willing to accept any price, as long as it covers storage and shipping costs. This allows them to lower the price of the main product, making it more competitive. But this is just one of their strategies.

For example: you've probably noticed that cosmetics stores sometimes put discounted or low-priced products in one box. It is possible that such products are already running out of shelf life, but it is expensive to get rid of them. When a person has already bought what he needs, he can pay attention to these goods because of their price, and although the buyer does not really need anything else, he can still buy something from this box. Thus, this cheap product can serve as an addition to the main one.

Captive product pricing can also be a strategy designed to attract customers to buy a core product at a lower price. In such a case, the main product cannot function without the captive product, and this is the motivation for buying the by-product.

The pricing of by-products depends on your particular case and your main business strategy. In this article, we will consider several examples.

Coffee makers are a typical example of captive pricing. The coffee maker is the core product, but why would you want one without pods, capsules, or coffee beans? Capsules, pods, coffee beans, etc., are by-products, without which you are unlikely to need a coffee machine.

Razors with changeable blades are another example of core and captive products. You may buy an initial package with a razor handle and a few razor heads that you can replace. After that, you only purchase razor refills with your preferred number of blades and other add-ons. Because many people use razors as a daily part of their hygiene routine, recurrent purchases of accessory products for the razor handle can quickly add up to be profitable.

Game consoles and games often use a captive pricing strategy. Consoles, for example, aren't cheap themselves, and as a by-product, players regularly buy games. This can add up to about $50-60 per month or even per week. Don't forget about other accessories like controllers, headsets, etc. The gaming industry earns even more on all these auxiliary items than on the sale of the consoles themselves.

Companies that sell software also integrate by-products into their sales. One example is the tiered pricing model. That is, you not only buy the product itself, but you can also pay for a subscription in order to use all the benefits of the main product. The tiered pricing model means that there are several types of subscriptions at different prices, and the more expensive the subscription, the more services you get.

Smartphones are an example of captive pricing that many people use in their daily lives. The core product is the most expensive investment. However, by-products and cell phone services are also fixed costs. In this way, companies receive not only income from the sale of phones, but also a constant income from cellular services for the normal functioning of the phone.

As mentioned above, the pricing strategy depends on what you are selling. You can make the main product expensive and the captive products less expensive. Or you can make the main product inexpensive or even unprofitable, and sell captive goods at a high price, thereby offsetting the loss from the main product.

Typically, companies choose the second strategy, because they can initially attract a client with a small price for the main product, but then get profit from by-products that the client will have to purchase in order to use the main product normally.

Captive pricing, like any other strategy, has its advantages and disadvantages. But there will likely be more benefits.

Here are the main advantages if you build a captive pricing competent.

- Increase in sales. By selling captive products in addition to the main ones, you will obviously increase your overall sales.

- Increase in income. This point follows from the previous one. If captive products are not unprofitable, then revenue will increase.

- Customer loyalty. Selling captive products makes it much easier to keep a customer.

- Valuable opportunities to cross-sell other products and services within the company. This point depends on the specifics of your brand, but nothing prevents you, for example, from selling the same captive products to different main products.

- Added value for being the only supplier of captive products.

- Customers may experience dissatisfaction due to constant spending on captive products.

- Cost can damage brand identity and undermine customer loyalty.

- Companies may also be under increasing pressure to continue creating new ancillary products to support core products.

It’s important to remember the risks associated with captive pricing. First of all, you must evaluate how the buyer will react to the prices of by-products. If they are too expensive or even more expensive than the main product, then the buyer will find these prices unethical and will be dissatisfied, which will damage your brand.

Plus, you also need to strike a good balance between the cost of the core product and the accessory product. You can’t make it cheaper to buy the core product bundled with the accessory than buying just the accessory alone.

Captive pricing is effective when your main product really can't function without side products. Items requiring refills or upgrades are ideal for captive prices. You can also successfully use captive pricing if you have tiered services.

Here are some tips to help you successfully implement captive products in your business:

Study your market carefully. Look at how other brands with identical services and products provide captive products to their customers, what price they charge, what they sell, whether it is in demand, and so on. It is better to first study your competitors, analyze consumer behavior, and then offer captive products.

Create a variety of by-products. Give customers multiple versions of a captive product so they can customize the main product however they want. In addition, they will be able to purchase several types of by-product they like at once, which will also bring more profit to the business.

Include free by-products along with the main product. That way, the buyer will be able to appreciate the importance and functionality of the by-products, and will be more motivated to buy more of them.

If you want to integrate captive pricing in your business, you can use the Priceva service - Price Intelligence Software.

Captive product pricing is used by companies whose product cannot be used alone. Such products always require something additional or some additional services. Companies that use captive product pricing include Nintendo, Walt Disney Parks, HubSpot, and Gillette.

Companies use captive product pricing because it drives profit growth and sales growth. Captive products ensure customer loyalty.

A captive product is a product that a customer purchases in order to use the main product. For example, a printer, as the main product, cannot work without ink: the captive product in this case. Also, captive products can include additional services, services of different levels, or special subscriptions.