Captive product pricing is used when the value of the main product is very low, but the value of the supporting product, which is necessary for working of main product is high.
Every time you buy a printer, you need ink in order to actually use the printer effectively. Every time you buy a razor, you need the blades in order to actually be able to shave. When you buy a car, after some time parts of it get broken and you have to change them in order to make the car function properly again. And in all these situations you realize how expensive all these components of the main products are. You realize actually that even the main product itself was not as expensive as the components themselves.
Well, these items designed specifically for use with another product are called captive products. Most of the captive products are considered as a necessity to the function of the core product.
Most of the times, the captive product pricing is higher than the core product. Companies tend to provide a lower price for the core product in order to attract the customers. At the same time, they provide a higher captive product pricing in order to increase their profits.
When deciding on the captive product pricing, companies generally follow a product mix pricing strategy that involves a lower price for the core product but place a higher mark up on captive products.
In these circumstances, companies make a profit margin off the captive products necessary to use the product, which represents a higher profit margin for the company.
When determining the price for captive products several factors should be taken into consideration such as
- The duration that the customer intends and actually can use the core product
- The number of units of captive products that may be sold during this time.
But again, the one who actually has the greatest impact upon the price is the customer and how much he is willing to pay. If the price is too high it may affect the sales of the core product itself.
When using the captive product pricing policy, you need to have a high brand loyalty. There have been examples where a company is using captive product price but the customers have found out that they can actually purchase the core product and then purchase the captive items at very lose cost from a Chinese competitor who might be available in the market. In this case, we can no longer speak about brand loyalty and the company has lost the customer. A company can avoid this kind of situations by manufacturing captive products that cannot be substituted by other captive products for the same core item.
While this strategy has the advantage of attracting a sizeable customer base because initial purchase is at a low price point, the same strategy can also result in customer frustration and negative feelings by finally giving up the use of the initial product and searching for cheaper substitutes.
The core product represents most of the times a one-time purchase compared to the captive product which is usually a frequent and repetitive purchase. As a repetitive venue, stable profit margins as well as potential customer loyalty can be expected.
The captive products also offer different opportunities to the companies to every time came up with new improved versions of the products in order to maintain the customers engaged and to keep up with the continuously technological development.
The best captive product pricing example is Gilette. Where in the Razor Mach 3 or Mach 4 cost almost equivalent to the captive items. The razor might be bought once a year but the blades have to be bought every quarter at the least.