Posted in Marketing and Strategy Terms, Total Reads: 854
Definition: Captive Pricing
Captive pricing or captive-product pricing is a classic example of product mix pricing. When a product is sold as a part of a product mix, a firm always seek for price ranges that will enable them to maximise its profits. One such pricing technique is Captive-product pricing. This pricing technique is used when the use of a product requires another ancillary product such as razors and razor blades, camera and camera films and so on and so forth. This ancillary product is called captive product.
The manufacturer often sets a low price on the main product and set high markups or high profit margin on the captive products. This premium pricing applied to the captive products enables the manufacturer to acquire a higher profit margin as a whole because the customer cannot avoid purchasing the ancillary part. Even if the customer wishes not to buy the captive product, he or she has to sacrifice the core product which the customer is not willing to do unless he or she wishes to switch to another brand. This results in profit maximisation of the firm.
For example, a Gillette Mach 3 razor and a blade (bundle) costs ₹144. On the other hand, a pack of blades containing two cartridges costs around ₹204. Considering the price of each cartridge to be ₹102, the razor costs only ₹42. Hence, the manufacturer enjoy greater profit margins when they sell the cartridge (which is the captive product) separately.