One of the most attractive pricing strategies for brands is finding a way to secure recurring revenue from customers. This is common in the world of software-as-a-service, where subscription fees are common—from music streaming services to workflow management apps. But if you sell bed sheets, it’s hard to say when a customer will buy a new set. If you sell kitchen appliances, it may be years before a customer returns for another purchase.
Fortunately, there’s another way for companies selling physical goods to create opportunities for regular, repeat sales: captive product pricing. By creating connected product ecosystems, companies can ensure steady sales and customer loyalty. In return, consumers enjoy guaranteed compatibility and a familiar user experience.
Read on to learn more about captive product pricing and how it can help you increase sales and keep customers coming back.
What is captive product pricing?
Captive product pricing is a strategy where a company sells a core product at a lower profit margin (or even a loss) while charging higher prices for complementary proprietary (or “captive”) add-on items that are needed for the product to work as intended. The goal is to attract customers with competitive pricing for a primary product and profit from ongoing sales of the additional captive products.
Consider an air filtration system requiring specific filters. The filtration system is the core product and the replaceable filter is the captive product, typically priced at a higher margin to ensure a steady revenue stream after the initial sale.
Examples of captive product pricing
You likely use products every day that follow the captive product pricing model. Think about your razor with replaceable blades, or your video game console with games sold separately. Here are a few specific companies using this model:
Bruvi
Bruvi manufactures and sells machines for brewing coffee, espresso, tea, and more. Its core product, the Bruvi brewer, costs a little over $300. The machine works with the company’s proprietary B-Pods that allow customers to make specific drinks—from espresso with notes of toffee to lightly sweetened matcha. The pods, the captive product, start at $22 for 20 but are discounted by 20% for customers who opt for auto delivery, further incentivizing a regular subscription.
Hydrow
Hydrow creates a sleek and modern rowing machine for at-home workouts. The purchase price of the core product, the machine itself, starts at $1,695. However, the real allure of the machine is a screen that lets you row along with over 5,000 on-demand workout classes in various destinations, making the experience more immersive. Access to these classes, the captive product, requires a $44 monthly membership.
SodaStream
SodaStream lets you make sparkling water and other fizzy beverages at home—a convenient, eco-friendly alternative to store-bought carbonated drinks. The sparkling water maker, the core product, starts at $99. However, you can’t use the machine without its CO2 cylinders, the captive product, which retail for $32 each, or $17 for a refill. Cylinders need replacement after making 60 liters of sparkling water—or around every six to eight weeks for a household of four. SodaStream also sells drink mixes for flavored drinks, another add-on that customers need to replenish frequently.
Benefits of captive product pricing
From consumer electronics to personal care products, captive product pricing has gained traction as companies seek to establish sustainable revenue streams and deepen customer relationships. Whether pairing two physical products or combining hardware with software, here’s why businesses are finding innovative ways to implement this strategy:
Regular revenue
Healthy, sustainable businesses have a steady cash flow, enabling them to plan ahead. This future-facing strategizing can be difficult when revenue is inconsistent and unpredictable. For a company selling a quality air fryer, it can be hard to get customers to buy more than once.
Captive product pricing adds a regular, predictable revenue stream from a captive product—whether that’s specialized cleaning solutions for a high-end coffee machine or premium content updates for a virtual reality headset.
Increased customer retention
If loyal customers love your core product, they’ll need to keep purchasing your captive product, helping you retain customers over the long term. They may only buy your core product once but consistently purchase the necessary add-ons. This can help you lower customer acquisition costs and reduce customer churn, enabling you to rely more on existing customers for steady revenue rather than solely chasing new ones.
For instance, a home security company might sell a basic alarm system as its core product while offering a subscription-based monitoring service as the captive product. Customers who invest in the system for home protection are likely to retain the monitoring service long term.
Enhanced functionality
In many cases, a captive product is not necessary for core product function but is a complementary add-on that enhances the user experience. For instance, Crocs, a shoe company, also sells Jibbitz, charms to customize and personalize your shoes. These add-ons can increase customer satisfaction and happiness with the core product.
Tips for implementing captive product pricing
Conduct market research
Consumers often accept or even embrace captive pricing, but it’s not always well-received. After all, the key word here is “captive,” and consumers generally prefer not to feel like prisoners. To avoid missteps, conduct market research and customer surveys before embarking on your captive pricing experiment. Here are a few questions to consider:
- How much value do customers perceive in the core and captive products?
- What price points are customers willing to accept for ongoing purchases?
- How frequently will customers need to buy the captive product?
- What alternatives exist in the market, and how does your offering compare?
- How might customers react to feeling “locked in” to your ecosystem?
Answers to these questions can help you determine the viability of your captive pricing strategy, set appropriate price points, and offer a value proposition that resonates with your target market. They can also help you implement value-based pricing if your product includes add-on features that your competitors don’t offer.
Run the numbers carefully
Implementing a captive product pricing strategy requires careful financial modeling and analysis; success hinges on finding the right balance between core product pricing and captive product margins.
For example, if you price a printer that costs $250 to manufacture at $200, you’ll take a $50 loss. However, if you priceink cartridges that cost $10 to produce at $60 each, you yield a $50 profit per cartridge. You’d only need to sell one cartridge to offset the loss. From there, will consumers buy ink often enough to sustain your business? You may want to offer more ways they can purchase accessories—like paper or labels—from your brand.
Get creative with bundling
It’s common for printers and ink cartridges to be sold together and for coffee machines to come with a selection of espresso pods you can try. Get creative with how you bundle your core and captive products.
For example, you might let buyers try the captive product before committing. Or, if you’re bundling hardware with software, offer a generous free trial period (e.g., three to six months). This idea is to introduce your products, establish buy-in before customers need to re-up, and increase the likelihood of continued engagement.
Consider offering different bundles for various customer segments. For instance, you might provide a digital art tablet where customers can choose between a basic package with the tablet and stylus or a premium bundle that includes additional features like digital brushes, exclusive online tutorials, and cloud storage for artwork. This is a form of product line pricing, combining the core product with various captive products, to meet the needs of both hobbyists and professional artists. This can lead to increased customer satisfaction and higher perceived value.
What is captive product pricing FAQ
What brands use captive product pricing?
Bruvi sells coffee brewing machines with proprietary coffee pods. Hydrow offers rowing machines with subscription-based workout content. SodaStream provides sparkling water makers that require specialized CO2 cylinders and flavoring syrups. Captive pricing is also a common pricing strategy for video game consoles, printer manufacturers, and companies selling alarm systems.
What are the disadvantages of captive product pricing?
A captive product pricing strategy requires buy-in from customers and the market, and can be challenging to price correctly to ensure profitability. It may also limit your customer base to those willing to commit to your product ecosystem.
When should you use captive product pricing?
Consider implementing captive product pricing when you want steadier and more predictable revenue streams. You can use it when you have the capacity to develop two or more complementary products, or operate in a market where customers value ongoing product support or consumables.
