Captive Product Pricing - Definition & Example
What is Captive Product Pricing?
Captive pricing is a pricing strategy in which a core product along with auxiliary products or accessories are priced together in a way that customers keeps buying accessories or captive products repeatedly optimizing the manufacturer's profits. 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 maximize its profits. 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. These ancillary products are called captive products as customers making repeat purchases are buying these again.
Captive Product Pricing Strategies
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 maximization of the firm.
Captive products experience repetitive purchase and are hence priced higher. It is a product mix pricing strategy for a low mark-up on accompanying product and a high mark-up on the captive product. The low price of the accompanying (generally the core product) attracts the customers. This product cannot be used without its supporting captive products which result in frequent purchases prices at a higher rate. However, care must be taken not to make the captive product so expensive that it makes the purchase of the core product unattractive.
Many times only the core product is charged and the captive or accessory product is given at a very low cost or for free. Special bundle packs are available for customers to try the core product. Once the customer likes the product, the manufacturer makes revenue and profit for every accessory sale thereafter.
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Captive Pricing Example
For example, a Razor handle and a blade costs 7$ . On the other hand, a pack of blades containing two cartridges costs around 12$. Considering the price of each cartridge to be 5$, the razor costs only 2$. Hence, the manufacturer enjoy greater profit margins when they sell the cartridge (which is the captive product) separately next time in multiple SKU options.
Similar example is of Automatic toothbrushes. Once a customer buys a brush, they need to replace the bristle heads every few weeks making it the captive product. Another popular example is the printer and cartridges.
Hence, this concludes the definition of Captive Product Pricing along with its overview.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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