Captive pricing, also known as captive product pricing, is a pricing strategy where the price of one product is tied to the price of another product. This approach relies on selling a primary product (often at a lower profit margin or even a loss) that requires associated, consumable products for its continued use.
Under this strategy, the company generates significant revenue and profit from the recurring sale of the secondary, or "captive," product. The price of the captive product is typically set higher than it might be if sold independently in a competitive market. Consumers become "captive" to the brand or manufacturer for these necessary follow-up purchases.
Understanding the Concept
The core idea is that once a customer buys the initial product, they are then required to purchase compatible, often proprietary, secondary products from the same company to continue using the primary item. This creates a dependency that allows the company to command a higher price for the captive goods.
Example of Captive Pricing
A classic example of captive pricing is the printer and ink cartridge model, as highlighted in the reference:
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.
In this scenario:
- Primary Product: The printer (often sold relatively cheaply).
- Captive Product: The ink cartridges (sold at a higher price per unit).
Customers buy the printer knowing they will need ink. Because the ink is usually brand-specific, they must purchase it from the printer manufacturer or a licensed third party, allowing the manufacturer to charge a premium for the ink.
Other Examples
Beyond printers and ink, captive pricing strategies can be seen in various industries:
- Gaming Consoles and Games: The console is the primary product, while games are the high-margin captive products.
- Razors and Blades: Razors handles are often inexpensive, with replacement blades being the profitable captive product.
- Coffee Machines and Pods: Many single-serve coffee machines require specific brand or compatible coffee pods.
- Mobile Phones and Data Plans: While less a physical product tie, the cost of a phone is often subsidized by the required data plan contract.
Why Companies Use Captive Pricing
Companies utilize captive pricing for several reasons:
- Recurring Revenue: It ensures ongoing sales after the initial purchase.
- Higher Profit Margins: The captive product often has significantly higher profit margins than the primary product.
- Customer Loyalty: It encourages customers to stay within the brand ecosystem.
- Market Entry: A low-cost primary product can attract customers who might be hesitant to invest in a high-cost system initially.
This strategy is effective when the captive product is essential for the primary product's function and when alternatives are either unavailable, incompatible, or significantly less convenient.
