What Is Captive Product Pricing?
For example, let’s say a company sells a lower-priced core product that requires an accessory product for it to function – this is called captive product pricing. What happens is that the company might lose out on sales of the core product initially, but eventually they make up for it (and then some!) through the sales of more expensive accessory products that customers need to keep buying because they go with the main product.
There are five product mix pricing strategies, and this is one of them. The others are product line pricing, optional product pricing, by-product pricing, and product-bundle pricing.
Real-World Examples of the Pricing Strategy
The captive product pricing strategy is one that you’ve probably experienced firsthand if you have a cell phone with a wireless plan. The cell phone itself is the core product, and the phone’s wireless plan is the captive product. Similarly, other captive products include phone cases, earbuds, and other products created to increase functionality. The goal is to encourage the use of the core product and to keep customers engaged with new products.
For car manufacturers, the attempt to corner the market with captive product pricing is more complicated than for other industries. 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 the user experience.
According to Flori Needle, writer at HubSpot, car manufacturers also leverage this product mix pricing strategy, but uniquely.
Pros and Cons of Captive Product Pricing
The main advantage of captive product pricing is that it’s a great way for companies to increase sales and revenue, while also building long-term customer loyalty. By creating a cycle of demand, these companies can enjoy more significant profit margins, as well as added value from being the only provider of accessory products. Additionally, they have valuable cross-selling opportunities for other products and services within the company.
Although this pricing strategy has its advantages, it’s important to keep in mind that it’s not the right fit for every product. Additionally, certain disadvantages come with this strategy – like the risk of customers growing dissatisfied from spending more money on accessory products over time. Another potential downside is that it could damage brand identity and deteriorate customer loyalty. Finally, companies might experience increased pressure to keep creating new accessory products to support core products.
Needle at HubSpot explains that when done correctly, captive product pricing can increase sales and create a group of loyal customers who are always ready and excited to buy more accessories to improve their experiences with your products.