Also called: Captive Pricing, Captive Pricing Model, Captive Pricing Strategy, Captive Pricing Structure, Captive Pricing System, Captive Pricing Plan, Captive Pricing Scheme, and Captive Pricing Methodology
See also: Bait and Hook, Cross Selling, Reversed Bait and Hook, Pricing Strategy
Relevant metrics: Customer Acquisition Cost, Conversion Rate, Average Order Value, Customer Retention Rate, and Gross Margin
How to calculate Captive Product Pricing:
P = C + (M - C) × (1 - D)
What is Captive Product Pricing?
Captive product pricing is a pricing strategy used by companies to increase the profitability of their products. It involves setting a price for a product that is higher than the cost of production, but lower than the market price. This allows the company to capture a larger portion of the market share and increase their profits.
It is a way for companies to ensure that their products are competitively priced and attractive to potential customers. By setting a price that is lower than the market price, companies can attract more customers and increase their profits.
Captive product pricing is also used to encourage customers to purchase additional products or services. Companies may offer discounts or other incentives to customers who purchase multiple products or services. This allows companies to increase their profits by selling more products or services.
Captive product pricing is a common strategy used by companies to increase their profits and to capture a larger portion of the market share.
Where did Captive Product Pricing come from?
The term “captive product pricing” was first used in the early 20th century by economists to describe the practice of setting prices based on the cost of related products or services. This pricing strategy was used by companies to increase their profits by charging a higher price for a related product or service. This strategy was seen as a way to capture more of the market share and increase profits.
Over time, the term “captive product pricing” has become more widely used and is now used to describe any pricing strategy that involves setting the price of a product or service based on the cost of the related product or service.
When Companies Use Captive Product Pricing to Their Advantage
The captive product pricing strategy is often used by companies that have a monopoly on a particular product or service. By offering a lower-priced item alongside the higher-priced item, the company can increase its profits without having to compete with other companies. This strategy can also be used to encourage customers to purchase more of the higher-priced item, as they may feel they are getting a better deal by buying the two items together.
Captive product pricing can also be used to encourage customers to purchase items that they may not have otherwise considered. For example, a company may offer a discounted price on a laptop if the customer also purchases a printer. The strategy can be used to increase sales of both items, as customers may be more likely to purchase the laptop if they are getting a discount on the printer.
A Strategic Pricing Tool
Captive product pricing is based on the idea that customers are willing to pay more for a product if they perceive it to be of higher quality or if they are offered additional benefits. For example, a business may offer a product at a higher price than its competitors, but also include additional features or services that make it more attractive to customers. This can help the business to increase its profits, as customers are willing to pay more for the product.
The Captive Product
A captive product in captive pricing refers to a product that is sold as a complement or accessory to another product, and its price is dependent on or tied to the price of that main product. For example, in the context of a printer, the ink cartridges may be considered a captive product because the price of the ink cartridges is determined by the company that makes the printer, and it is often set at a premium compared to market prices, as the company knows that customers will need the cartridges to use the printer. The captive product is meant to ensure ongoing sales and profits for the company.
What is a captive market?
A captive market is a market where the customers have limited choices and are effectively “trapped” into purchasing a product or service from a single supplier, due to factors such as high switching costs, lack of substitutes, or strong brand loyalty. The customers in a captive market are said to be “captive” to the supplier, as they are unable to easily switch to a competitor’s product or
Captive vs Optional Product Pricing
Captive product pricing refers to pricing strategy where the price of one product is tied to the price of another product. For example, the price of ink cartridges for a printer may be higher than what the market would typically bear, because the company that makes the printer is also selling the ink cartridges.
Optional product pricing, on the other hand, refers to pricing strategy where a customer has the option to buy or not buy a product, at a price that is set independently of other products. The customer has the freedom to choose, and the price of the product reflects the
Captive vs Predatory Product Pricing
Predatory product pricing is a pricing strategy where a company uses its monopoly power over a certain product to charge excessively high prices for complementary or competing products, with the intention of driving out competition and maintaining its monopoly power. Predatory pricing is considered illegal under antitrust laws in the United States because it harms competition and consumers.
The main difference between captive product pricing and predatory product pricing is the intent behind the pricing strategy. Captive product pricing is meant to ensure ongoing sales and profits, while predatory product pricing is meant to harm competition and maintain a company’s monopoly power.
Is Captive Pricing Illegal?
Captive pricing by itself is not illegal. It is a common pricing strategy used by many companies. However, certain practices related to captive pricing can raise antitrust or competition law concerns and can be illegal if they are found to be anti-competitive or anti-consumer. For example, if a company uses its monopoly power over a certain product to artificially inflate the prices of complementary products, such as by setting excessively high prices for ink cartridges, it may be in violation of antitrust laws.
Regulatory bodies, such as the Federal Trade Commission (FTC) in the United States, monitor such practices and take action if they find evidence of anti-competitive or anti-consumer behavior. However, captive pricing remains a legitimate pricing strategy as long as it does not result in harm to competition or consumers.
Is dumping the same as captive product pricing?
Dumping refers to the practice of a company selling a product in a foreign market at a price that is lower than the price it charges in its home market. The goal of dumping is often to gain market share in the foreign market, by undercutting the prices of local competitors. Dumping can be illegal if it is determined to cause harm to the domestic industry in the target market.
Captive product pricing, as described earlier, is a pricing strategy where the price of one product is tied to the price of another product, often with the intention of ensuring ongoing sales and profits for the company. It has nothing to do with selling a product in a foreign market at a lower price.
Advantages of Captive Product Pricing
The low price of the main product attracts customers, while the higher price of related products, known as captive products, helps maintain profit margins. As the customer base grows due to the attractive pricing of the core product, sales of the captive products also increase.
- Increased Profits. Captive product pricing allows businesses to increase their profits by charging a higher price for a product that is only available through their own store. This can be especially beneficial for businesses that have a unique product or service that cannot be found elsewhere.
- Improved Brand Recognition. By charging a higher price for a product that is only available through their own store, businesses can create a sense of exclusivity and prestige around their brand. This can help to increase brand recognition and loyalty among customers.
- Increased Customer Loyalty. By offering a product that is only available through their own store, businesses can create a sense of loyalty among customers. This can help to increase customer loyalty and repeat business.
- Increased Customer Satisfaction. By offering a product that is only available through their own store, businesses can ensure that customers are getting the best possible price for the product. This can help to increase customer satisfaction and loyalty.
Challenges of Implementing Captive Product Pricing
- Complexity. Captive product pricing can be complex to implement, as it requires a deep understanding of the product and its market. This can be difficult to achieve, especially for companies that are new to the market or have limited resources.
- Cost. Captive product pricing can be expensive to implement, as it requires a significant investment in research and development. Additionally, the cost of marketing and advertising the product can be high.
- Risk. Captive product pricing can be risky, as it requires a company to commit to a certain price point and may not be able to adjust it in the future. This can lead to a loss of profits if the market changes or the product fails to meet customer expectations.
- Competition. Captive product pricing can be difficult to compete with, as other companies may be able to offer similar products at lower prices. This can lead to a loss of market share and profits.
What pricing strategies work best in combination with captive products?
There are several pricing strategies that can work well in combination with captive products. These include:
- Bundle pricing. Offering the main product and captive products as a bundle at a discounted price. This can encourage customers to purchase the complementary products, and can also simplify the purchasing process for the customer.
- Value-based pricing. Setting the price of the main product and captive products based on the perceived value that the customer receives. This can help ensure that the price of the captive products is seen as fair and reasonable.
- Loss leader pricing. Setting the price of the main product lower than the cost to attract customers and drive sales, while making up for the lower price on the captive products.
- Penetration pricing. Setting the price of the main product low to quickly capture market share and increase sales, and then gradually increasing the price of the captive products over time.
The most effective pricing strategy will depend on the specific products and target market, and that these strategies should be used in combination with market research and customer feedback to ensure the best results.
Examples of Captive Product Pricing
Captive product pricing is a common pricing strategy in many industries, and there are many examples of it in practice:
- Razor and blades. Companies that sell razors often price them low, with the intention of making a profit on the blades, which need to be replaced frequently.
- Printers and ink cartridges. Printer manufacturers often sell their printers at a low price, with the intention of making a profit on the ink cartridges, which are required to keep the printer running.
- Cell phones and phone plans. Cell phone manufacturers often offer phones at a low price, with the intention of making a profit on the phone plans, which are required to use the phone.
- Video game consoles and games. Video game console manufacturers often sell their consoles at
Everything you need to know about Captive Product Pricing
The most common example of captive product pricing is bundling. This is when two or more products are sold together at a discounted price. For example, a company may offer a bundle of a laptop and printer for a discounted price.
Another example of captive product pricing is cross-selling. This is when a company offers a discount on a related product when a customer purchases a different product. For example, a company may offer a discount on a laptop case when a customer purchases a laptop.
Captive product pricing can be beneficial for both customers and companies. Customers can save money by purchasing multiple products from the same company, while companies can increase sales and profits.
However, captive product pricing can also be seen as a form of price discrimination. This is when a company charges different prices for the same product to different customers. This can be seen as unfair and can lead to customer dissatisfaction.
Overall, captive product pricing is a pricing strategy used by companies to increase sales of related products. It involves offering a discount on one product when another product is purchased. This strategy can be beneficial for both customers and companies, but it can also be seen as a form of price discrimination.
Examples
Apple
Apple is well known for its captive product pricing strategy. This involves pricing products such as iPhones, iPads, and Macs at a premium price, while also offering accessories such as cases, chargers, and headphones at a higher price than competitors. This allows Apple to capture more of the market share and increase their profits.
Amazon
Amazon has also adopted a captive product pricing strategy. This involves pricing products such as books, electronics, and clothing at a lower price than competitors, while also offering Amazon-branded products such as Kindle ereaders, Fire tablets, and Echo speakers at a higher price. This allows Amazon to capture more of the market share and increase their profits.
Walmart
Walmart has also adopted a captive product pricing strategy. This involves pricing products such as groceries, household items, and clothing at a lower price than competitors, while also offering Walmartbranded products such as electronics, toys, and furniture at a higher price. This allows Walmart to capture more of the market share and increase their profits.
-
What is the purpose of using captive product pricing?
Hint Captive product pricing is a pricing strategy used by companies to increase sales of related products or services. It involves setting the price of one product or service in order to increase the sales of another product or service. -
What are the potential benefits and drawbacks of using captive product pricing?
Hint The potential benefits of using captive product pricing include increased sales of related products or services, increased customer loyalty, and increased profits. The potential drawbacks include decreased customer satisfaction, decreased customer loyalty, and potential legal implications. -
How will captive product pricing affect my customers?
Hint Captive product pricing can affect customers by making them more likely to purchase related products or services. A drawback is that they might also feel like they are being forced to purchase something they may not want or need. -
What are the potential legal implications of using captive product pricing?
Hint The potential legal implications of using captive product pricing include accusations of price fixing, anti-competitive behavior, and unfair trade practices. -
How will captive product pricing affect my competitors?
Hint Captive product pricing can affect competitors by making it more difficult for them to compete on price, as well as by making it more difficult for them to differentiate their products or services. -
What are the potential longterm implications of using captive product pricing?
Hint The potential long-term implications of using captive product pricing include decreased customer loyalty, decreased customer satisfaction, and decreased profits. -
How will captive product pricing affect my bottom line?
Hint Captive product pricing can affect your bottom line by increasing sales of related products or services, as well as by increasing profits. -
What other pricing strategies should I consider before implementing captive product pricing?
Hint Other pricing strategies to consider before implementing captive product pricing include competitive pricing, value-based pricing, and dynamic pricing.
You might also be interested in reading up on:
- Scott Galloway @profgalloway
- Shep Hyken @Hyken
- Jay Baer @jaybaer
- Chris Brogan @ChrisBrogan
- Seth Godin @ThisIsSethsBlog
- Captive Pricing: How to Price-Lock Customers and Increase Profits by John Gourville (2006)
- Captive Pricing Strategies: How to Increase Profits and Market Share by Robert G. Cross (2009)
Want to learn more?
Receive a hand picked list of the best reads on building products that matter every week. Curated by Anders Toxboe. Published every Tuesday.
No spam! Unsubscribe with a single click at any time.
Community events
Product Loop
Product Loop provides an opportunity for Product professionals and their peers to exchange ideas and experiences about Product Design, Development and Management, Business Modelling, Metrics, User Experience and all the other things that get us excited.
Join our communityMade with in Copenhagen, Denmark
Want to learn more about about good product development, then browse our product playbooks.
