What is Captive Product Pricing: Definition and Examples
What do video game consoles, cell phones, and PCs have in common?
They use all captive product pricing. Each of these core products requires you to make one or more additional purchases if you want to fully enjoy the product.
Businesses have been using the captive product pricing model for years. They sell a main product, but then they require you to buy accessory products to use or optimize it. But this strategy isn’t just for physical products.
How does this translate to SaaS exactly?
Technically, captive product pricing can be found across industries, verticals, and B2B/B2C markets. To help you decide if this model is right for your business, we’ve put together this complete guide to captive pricing. Keep reading to learn about the essentials of this powerful strategy.
What is captive product pricing?
Captive product pricing is a pricing strategy that includes a core product and an assortment of additional accessories or add-ons. The core product is typically something that is only purchased one time, often at a low price point, and which typically requires additional accessories to work.
Take home printers, for example. These days, a printer can be purchased for $50. However, to use the printer, the consumer must also buy ink on a recurring basis, with ink cartridges often ranging in price from 15% to 50% of the cost of the printer. This creates a significant long-term revenue stream for the seller of the main product.
Another good example comes from the gaming industry. Video game consoles can only be used if you purchase additional products like controllers or games to go along with them. In this case, the consoles are the core products, while the games are the captive products.
Similar to B2C markets, B2B SaaS companies often perform captive product pricing by offering free or low-cost entry-level access to a base product, with additional features or add-ons pitched and sold by account executives or customer success reps. Typically known as cross-selling and upselling, these activities are an essential part of a growing SaaS company's go-to-market activities.
Examples of captive product pricing in SaaS
Retailers use captive product pricing in a wide range of scenarios, and it’s very effective at building customer loyalty. However, this type of product line pricing doesn’t just apply to physical products. It also applies to cloud-based technologies. Here are a few captive product pricing examples from well-known SaaS companies
Like countless other SaaS companies, HubSpot uses captive product pricing to encourage users to sign up under a freemium model, then build revenue by introducing and encouraging the addition of paid features.
This strategy allows prospects to test out some of HubSpot’s capabilities with no financial obligation, creating a functioning solution for their needs. As users grow more familiar with the platform and its functionalities, they are presented with paid add-on features that provide added value, such as premium features in sales, marketing, customer service, social media management, and CMS tools.
QuickBooks Online’s offerings for accounting and bookkeeping professionals use captive product pricing in a few different ways. For example, users who purchase the core product for desktop have access to bookkeeping capabilities, but they need to pay extra to add payroll or other functionality. QuickBooks Pro Online takes this pricing strategy to a different level. Accountants can access the service for free, but then, each of their clients needs their own individual subscription to access QuickBooks online.
Semrush is a keyword research tool with various levels of service including pro, guru, and business. This is a tiered pricing strategy, but the company also uses captive product pricing. Regardless of which subscription you select, you can also select add-ons such as additional users and tools to help with local search and competitor analysis.
The logic behind captive pricing is that it allows you to capture more revenue from loyal customers. Once someone is using your product, they're a captive audience. Because of the core product, they know and trust you, and when they want additional features or capabilities, they turn to you.
Benefits of captive product pricing
There are many benefits of captive product pricing for businesses across industries from traditional retailers to e-commerce companies to SaaS. When you supplement the revenue of your core product with add-ons, you’ll gain the following advantages:
Diversified revenue: Selling a core product plus several add-ons lets you diversify your revenue stream, while still focusing on a core product offering.
Consistent revenue streams: Often with this pricing strategy, your customer's main investment will be the core product, but the purchase of additional features or service offerings typically leads to a greater CLTV and customer loyalty.
Fulfill multiple use cases: Offering multiple add-ons makes it easier to meet any and all use cases for your customers. In case your core product doesn’t resolve all of your users' pain points, captive product pricing is an effective strategy to meet their needs and earn more revenue.
Cross-selling opportunities: Cross-selling and upselling are built into this pricing strategy. When someone buys your core product, they’re more likely to invest further in your products and services.
Opportunity for future growth: Captive product pricing leaves the door open for the development of new products and additional accessories over time, expanding your revenue streams.
Despite its many advantages, this pricing strategy is not foolproof. You need to select the right price point for both your core product and your captive products. This involves running several pricing exercises for your core product and then using higher-price captive products to build up your revenue and profit margins. Once you come up with initial product pricing, you need to track financial metrics to ensure you’re getting the full value out of your chosen pricing model.
Accelerate revenue growth with a captive product pricing strategy
Captive product pricing can be a great way to boost sales. With this strategy, you draw in customers with your core product, then keep them hooked with captive products. If your pricing is on point and your user experience is otherwise great, then captive product pricing will naturally reduce customer churn rates, build loyalty, and increase customer retention
But how do you bring this all together, ensuring that you’re hitting the optimal price points for both your core and accessory products? And how do you make adjustments to your prices?
With a financial operations platform like Maxio, you can test dozens of different pricing and billing models to see which works best for your SaaS business. Schedule a demo to see how Maxio makes it easy to find the perfect price point for your SaaS.